Are you wondering what the average net worth is for a 40-year-old American? Look no further! As a 42-year-old father of two who has been writing about achieving financial independence since 2009, I’ve got the answer.
The short answer: the average 40-year-old has a net worth of roughly $80,000. But for the above average 40 year old, their net worth is closer to $660,000.
Everything is relative when it comes to money. If we all earn $1 million dollars a year and have $5 million in the bank at the age of 40, none of us are very wealthy given all our costs (housing, food, transportation, vacations) will be priced at levels that squeeze us to the very end. Real millionaires today have net worths of over $3 million, not one million.
As such, we must first get an idea of what the real average net worth is in our respective countries, and then figure out the average net worth of the above average person!
According to CNN Money 2020, the average net worth for the following ages are: $9,000 for ages 25-34, $52,000 for ages 35-44, $100,000 for ages 45-54, $180,000 for ages 55-64, and $232,000+ for 65+.
Seems low, but that’s because the age range is large and most Americans aren’t fiscally responsible with their money with only a ~6% savings rate as of 2020.
The Above Average Person is loosely defined as:
1) Someone who went to college and believes grades and a good work ethic do matter.
2) Does not irrationally spend more than they make.
3) Saves for the future because they realize at some point they no longer are willing or able to work.
4) Takes responsibility for their own actions when things go wrong and learns from the situation to make things better.
5) Takes action by leveraging free tools on the internet to track their net worth, minimize investment fees, manage their budget, and stay on top of their finances in general. Once you know where all your money is, it becomes much easier to optimize your wealth and make it grow.
6) Welcomes constructive criticism and is not overly sensitive from friends, loved ones, and strangers in order to keep improving. Keeping an open mind is critical.
7) Has a healthy amount of self-esteem to be able to lead change and believe in themselves.
8) Enjoys empowering themselves through learning, whether it be through books, personal finance blogs, magazines, seminars, continuing education and so forth.
9) Has little-to-no student loan debt due to scholarships, part-time work, or help from their parents. Our parents have saved and invested through the largest bull market in history. It’s understandable that parents want to help their children out.
Now that we have a rough definition of what “above average” means, we can take a look at the tables I’ve constructed based on the tens of thousands of past comments by you and posts I’ve written to highlight the average net worth of the above average person.
The Above Average Net Worth For A 40-Year-Old American
First, we must highlight what the average tax-deferred retirement savings plan is for those in America. We’ll focus on the simple 401K system we have here where one can contribute a maximum of $19,500 of their pre-tax income every year in 2020. The figure goes up by about $500 every couple of years.
This chart can be used as a rough estimate for those with the RRSP plan in Canada, and retirement plans in Europe and Australia as well. In fact, any country that has any sort of tax-deferred retirement plan and social safety net program for retirement that has a GDP/capita of $30,000 or more can use the below chart as an aspirational guide. Remember, we are talking about the “above average person.”
FINANCIAL SAMURAI TAX DEFERRED (401K) SAVINGS GUIDE
The assumption here is that the above average person is able to start maxing out their tax-deferred retirement plan every year after the second full year of work, and continue on without fail until 65. The low and high end account for a conservative 0% return to a more historical 7% – 8% constant rate of return. Of course you can lose money and make much more if you are good and lucky.
Given the 401k maximum contribution limits have increased over time, the three columns from left to right can also be used as guidance for older savers over 45 years old, middle aged savers between 30 – 45, and younger savers under 30 who get to contribute $18,000 a year at the minimum for the majority of their careers.
For example, when I started contributing to my 401k in 1999, the maximum contribution limit was only $10,000. As a 39 year old, I’ll focus on the Mid End column as a guidance.
This chart does not take into consideration any after-tax savings post 401K contribution or 401k company matching either to remain conservative. It’s always good to end up with too much money than too little.
FINANCIAL SAMURAI POST-TAX SAVINGS GUIDE
The above chart assumes on the low end that one saves about $5,000 a year in after-tax income and around $10,000-$15,000 a year in after-tax income on the high-end after maxing out their tax-deferred retirement vehicle. I’ve tried to keep things as simple as possible, assuming no inflation and no investment returns. I also believe saving $5,000-$15,000 a year in after-tax income is very realistic for the above average person, and probably very easy for many who earn more than $85,000 per person. Finally, the chart should show you the power of consistency.
THE IMPORTANCE OF REAL ESTATE
A 2010 study showed that the average net worth of a homeowner is roughly $200,000, or 40X greater than the average renter’s net worth of $5,000. We can debate the merits of this study (done by a real estate association of course) all day long (demographic sampling, housing price changes, etc), but the point is, “above average” people generally all own homes and are wealthier, be it 2X wealthier or 40X wealthier than the average renter.
The return on rent is always -100%. You get a place to live and that’s that. There is never a positive return on an asset after a month, or 30 years of renting. A renter cannot pass on her paid off house to her kids or grandchildren. There is no asset accumulation at all. There is a reason why some 97% of millionaires are property owners.
The value of real estate varies across all the land and the world. It is very hard to make an assumption of what should be inputted as a result. According to the US Census bureau, the median home price in America is $221,800 while the average home price is $272,900. You can’t get anything livable in San Francisco, New York City, Los Angeles, and maybe even Washington DC and Boston for $250,000. But, you sure can in the Midwest for $250,000.
I’m personally investing heavily in the heartland of America to take advantage of demographic trends towards lower cost areas of the country. The future of work is remote work thanks to technology and the months of shelter-in-place in 2020 due to the coronavirus.
Hence, let’s construct an equity value chart of something based on a range of $250,000-$500,000, with the assumption that upon retirement, you have your house paid off and can attribute this amount into your net worth, or the capitalized value of all rents you would pay if you did not own.
FINANCIAL SAMURAI HOME EQUITY ACCUMULATION GUIDE
I assume that the above average person buys a $250,000-$500,000 piece of property at 27. By the time they turn 28, they will have owned the property for 1 year and have paid down $3,500-$7,500 in principal on a $250,000-$400,000 loan. I conservatively assume a $250,000 no money down loan for the low end house, even though after 5 years of working, the low-end above average person should have around $25,000-$30,000 saved up in cash based on the after-tax savings charts above.
By the time a 27 year old pays off his or her mortgage in 30 years, s/he will be 57 years old with a place to live rent from for the rest of his/her life. That is the true value of the property, the rent saved for the remainder of the owner’s life. It can be calculated as the present value of those future rental payments, or simply the market value of the home. I assume zero price appreciation on the home to keep things conservative and no extra payments to accelerate the payoff either.
Home prices have historically returned just a bit above inflation every year e.g. 2-3%. But given the above average person puts down about 20%, the 2-3% returns suddenly turns into a 10%-15% cash-on-cash per year. 10-15% compares favorably to the average S&P 500 return of roughly 8%. Add on the tax benefits for mortgage interest deduction and owning a home through a mortgage becomes very beneficial for higher income earners.
One of the best ways to invest in real estate is through Fundrise and CrowdStreet, my favorite real estate crowdfunding platforms that are free to sign up and explore. I’ve personally invested $810,000 in real estate crowdfunding to diversify my real estate assets that are heavily concentrated in expensive San Francisco, Lake Tahoe, and Honolulu.
The X Factor For Building Wealth: You!
So far, we’ve touched upon pre-tax savings, after-tax savings, investment returns of 0 for those savings to remain conservative, and real estate. You need to spend less than you earn for that inevitable day you no longer have an income. You also need to live somewhere, hence, you should own your property if you know you will be there for much longer than 5-10 years.
There’s something missing in all of this, and that something is what I call the X Factor. Above average people seem to always be thinking of new ways to build wealth. There is an optimism about them that no matter what happens, they can always find ways to make more money. It’s hard to quantify what that X Factor is for the average above average person, but it’s there somehow through music, writing, athletics, communication, entrepreneurship, hustling, and so much more.
The great thing about savings and real estate is that the process is highly automatic. If you implement the plan and wake up 10 years later, you will inevitably be worth much more provided you keep your job and your home. Given savings and building equity in your home over the next several decades is largely automatic, the X Factor comes out because you have so much more free time to do something else!
My X Factor was starting Financial Samurai in 2009 during the last global financial crisis. Thanks to just starting, Financial Samurai gave me the courage to negotiate a severance and leave corporate America for good in 2012. In a way, writing a severance negotiate strategy book is an X factor because the book now generates $40,000 – $50,000 in passive income.
Financial Samurai is now my greatest asset. I highly encourage you to start your own website given how cheap and easy it is. Everyone should plant their flag online and get rich off themselves.
With Financial Samurai, I’m able to raise my two young children full-time and get daily satisfaction I’m helping others achieve financial freedom as well.
The Above Average Net Worth For A 40 Year Old
I have gone ahead and averaged the averages for pre-tax savings, post-tax savings, and real estate equity progress in the spreadsheet below. The pre and post tax savings can be invested however you see fit and is a topic of another post.
Another thing to note is taxation, given pre-tax savings have to eventually be withdrawn and taxed. Again, these are rough estimates to give you an idea of the average net worth of the above average person.
There you have it! Based on my assumptions above, the average net worth of the above average 40 year old is around $660,250. By the time this person is 60, his/her net worth should climb to around $2,180,000.
The key is to stay disciplined with your savings and investing routine. With a proper asset or net worth allocation, you’ll be amazed at how far your net worth will grow over time. There is NO REWIND button in life. With a continued low interest rate environment, it’s more important than ever to save until it hurts each month. You won’t regret it when you no longer want to work!
Recommendation To Build Wealth
The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts on their Dashboard so you can see where you can optimize.
Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going. You also get your net worth amount sent to your inbox weekly.
One of their best tools is the 401K Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. You just click on the Investment Tab and run your portfolio through their fee analyzer with one click of the button.
They’ve also come out with their incredible Retirement Planning Calculator that uses your linked accounts to run a Monte Carlo simulation to figure out your financial future. You can input various income and expense variables to see the outcomes. Definitely check to see how your finances are shaping up as it’s free.
There is no rewind button in life. Your 40s is a wonderful decade, but it can come with major responsibilities like caring for aging parents and young children. Your own health might start to decline as well. Stay on top of your finances so you don’t have to worry as much!
About the Author: Sam worked in investing banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income boosted by his investments in real estate crowdfunding. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.