You’ve got one live to live. You can have the average net worth in America, which is pretty low. Or, you can shoot to have an average net worth for the above average person.
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. With this level of wealth, all our living costs (housing, food, transportation, vacations) will be priced at levels that squeeze us to the very end.
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 for the above average person!
According to the Federal Reserve’s Triennial Consumer Finance Survey, the average net worth for the following ages are:
Under 35: $76,200
35-44: $288,700
45-54: $727,500
55-64: $1,167,400
65-74: $1,066,000
75+: $1,067,000
Not bad. But these average net worth numbers are skewed by the super rich who have generated an enormous amount of wealth since the financial crisis.
Although the average net worth for all Americans is roughly $692,100, the median net worth is a more pedestrian $97,300 as of 2020.
Let’s look at the average net worth for above average people. It’s much more rewarding to shoot for stretch goals and achieve the.
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.
10) Does not confuse brains with a bull market.
11) Has a diversified net worth, which includes stocks, bonds, real estate, and alternative investments.
The Above Average Net Worth Deconstructed
Now that we have a rough definition of what “above average” means, we can take a look at the tables I’ve constructed.
The tables are based on the tens of thousands of past comments by you. They are also based on the posts I’ve written since 2009 to highlight the average net worth of the above average person.
First, we’ll focus on the simple 401(k) retirement savings system. For 2020, one can contribute a maximum of $19,500 in pre-tax dollars. The maximum contribution amount will likely go up by $500 every couple years if history is any guide.
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.” Given not everyone can contribute the maximum 401(k) amount, I’ve used the average contribution of $18,000 instead.
Financial Samurai 401(k) 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. He or she will continue on without fail until 65.
The low and high end account for a conservative 0% return to a more historical 7% – 9% constant rate of return. Of course you can lose money if you are unlucky and make much more if you are good and lucky.
Given the 401k maximum contribution limits have increased over time, the left column can also be used as guidance for older savers over 45 years old. The middle column can be used for middle aged savers between 30 – 45. Th right column can be used by younger savers under 30 who get to max out at $19,500 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. If you are a 40 year old, it’s best to focus on the Mid End column.
This chart does not take into consideration any after-tax savings post 401K contributions. However, the high end does include 401k company contributions, as this is common for those with seniority and those who work at profitable, generous companies.
For example, for the last five years, my company paid out more than $20,000 a year in profit sharing.
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.
If you want to achieve financial independence sooner rather than later, it’s your accessible post-tax savings and investments that matters more than your tax-advantageous retirement accounts like your 401(k), IRA, Roth IRA, and so forth. Why? Because your post-tax savings guide is what will spit out passive income to pay for your lifestyle.
Finally, the chart should show you the power of consistency. Every person who wants to be above average financially should target a 20% savings rate after maxing out their 401(k) contribution.
The Importance Of Real Estate
The Federal Reserve study showed that the average net worth of a homeowner is roughly $1,034,000 or 11X greater than the average renter’s net worth of $91,000. Some studies show the average net worth for homeowners is 40X higher.
We can debate the merits of this study all day long (demographic sampling, housing price changes, etc), but the point is: “above average” people generally all own homes and are wealthier.
The return on rent is always negative 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 roughly $320,000 as of 2020.
Real Estate Arbitrage
You can’t get anything livable in San Francisco, New York City, Los Angeles, Washington DC and Boston for $320. But, you sure can in the Midwest where I’m aggressively investing money through real estate crowdfunding platforms like Fundrise and CrowdStreet.
Valuations are so much cheaper and the net rental yields are so much higher in non-coastal cities compared to the coastal cities. With companies like Google investing $13 billion in heartland real estate to expand operations, you know other companies and investors will follow.
Further, with tens of millions of people experiencing months of sheltering-in-place due to the coronavirus, companies are going to whole-heartedly adopt flexible work from home policies.
As a result, I believe there will be a multi-decade migration away from densely populated and more expensive cities to cheaper cities with more space. CrowdStreet specifically focuses on real estate opportunities in 18-hour cities like Charleston, South Carolina vs. 24-hour cities like Los Angeles, California.
I personally sold a San Francisco rental property for 30X annual gross rent and a 2.5% cap rate in 2017. Then, I reinvested $550,000 of the proceeds in real estate crowdfunding with a target 10% cap rate. It feels good to diversify into no-coastal city real estate and earn income passively. My total investment is $810,000 in the space.
Financial Samurai Home Equity Guide
Let’s now construct an equity value chart of something based on a range of $250,000-$500,000. Let’s assume that upon retirement, you have your house paid off and can attribute this amount into your net worth.
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.
I assume zero price appreciation on the home. It’s always best to keep things conservative. There are 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 5.6% from 1999-2018 and 8% – 10% since 1926.
Add on the tax benefits for mortgage interest deduction and owning a home through a mortgage becomes very beneficial for higher income earners.
Mortgage interest rates are currently at or near all-time lows in 2020. As a result, housing affordability has increased. Homeowners should take advantage of low mortgage rates by refinancing.
Refinance Your Mortgage Today
I recommend checking out Credible, one of the leading mortgage lending platforms today. You can get competitive mortgage quotes for free in a matter of minutes. Mortgage rates are at or close to all-time lows in 2020. Low mortgage rates is one of main reasons why the real estate market has held up so well.
I refinanced my mortgage to a 7/1 ARM at 2.625% for no fees. As a result, I’m now paying $1,000 a month less and saving about $350 a month in interest. In 2020, I was able to get preapproved for another 7/1 ARM for only 2.125%. Take advantage!
The Average Net Worth For The Above Average Person
I have gone ahead and averaged the averages for pre-tax savings, post-tax savings, and real estate equity progress in the spreadsheet below.
Another thing to note is taxation, given pre-tax savings have to eventually be withdrawn and taxed. Again, these are rough estimates. The goal is to give you a general idea of the average net worth of the above average person.
There you have it! The average net worth for the above average person by age is as follows:
$250,000 by 30
$429,000 by 35
$660,000 by 40
$914,000 by 45
$1,240,250 by 50
$1,684,000 by 55
$2,180,250 by 60
Somewhere in their mid-40s, the above average person becomes a millionaire. In comparison, the average American only becomes a millionaire between 55-64. This is 10-15 years later according to the Federal Reserve.
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.
Stay On Top Of Your Finances
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. This way you can see where you can optimize your finances.
They’ve also come out with their incredible Retirement Planning Calculator. The calculator uses your linked accounts to run a Monte Carlo simulation to figure out your financial future.
There’s no rewind button in life. It’s better to end up with a little too much than a little too little.
How do you treat HSA and contribution to 529?
Is HSA a component of pre-tax saving?
Is 529 a component of post-tax saving?
HSA is actually pre-tax AND post-tax if you spend it on healthcare costs. 529 depends on the plan. It’s post-tax for the gains if you spend on education. Some states give pre-tax benefits to their 529 plans as well. Georgia I know does this.
Great post – thanks for the content and direction. I am 25 y/o and working hard to accumulate wealth now so I don’t need to worry about in down the road.
Forunate enough to have a six figure income and live below my means with no debt (GOD BLESS). Current assets as follows:
– $50K in an S&P 500 Vanguard Fund (VTSAX) at the market lows of this COVID-19 dip. Contributing $18K annually to this fund I am expecting to have $150K by 30, $325K by 35, and $1,000,000 by age 45. (assuming 8%-10% return)
– $75K in Roth 401K with a 15% annual contribution and an 11% company match (highest match I’ve ever heard of) (estimated $25K total annual contributions) (currently all equities)
– Actively growing the checking account ($30K estimated now) with plans to buy my house with this and not touch my Vanguard fund.
I feel like I’m on the right track and plan to increase my income over the years (management, director, etc.). I REALLY do not want to work until I am 60 y/o.
Any tips/feedback for accumulating some serious wealth would be appreciated
Thanks!
I think that you have already accumulated SOME SERIOUS WEALTH.
You definitely will not have to work until age 60!
I retired at age 55 after 30 years of barely a five figure annual income but I do consider myself to be NON-MATERIALISTIC.
Look at my comments below.
Good Job! For the money you’re saving for a property, I suggest a Money Market Account with higher interest rates, such as Ally or Capital One 360 Performance Account? It’s liquid but still earns some interest (used to be 2.0% but now around 1.5% because the Fed).
The major cause of “failure” for the above average person is at some point declaring victory and quitting the game. This can be done as early as your age 30 numbers, although many would consider 40 more comfortable. After 40… unless you’re job is genuinely your hobby and passion, there’s little reason for most to keep working just to accumulate at such a rate.
My total life gross income (self employment, employment insurance, pension and regular jobs) from age 25 to age 65 will be about $400,000.
That is right ($10,000 a year).
I still expect to be worth $1,000.000 by age 65.
LESSON: start early with a good financial adviser!!
Inspiring – Great to see someone coming out on top on even if you aren’t raking it in.
Thanks Eric.
For the record, I plan on doubling my net worth every 10 years. THE PLAN:
$125,000 in my mid 30s, $250,000 in my mid 40s, $500.000 in my mid 50s (where I am now and solely leaving on a pension), $1,000,000 in my mid 60s AND ASSUMING I LIVE THIS LONG: $2,000.000- mid 70s $ 4,000.000-mid 80s and $8,000.000-mid 90s.
I can keep doubling in my older years because I am expecting to live off some inheritance money and of course the addition of OAS at age 65.
Sorry folks. I meant “and solely LIVING on a pension”.
Great advice, having a good financial advisor is key!
No it’s not. NOT Having a financial advisor and being financially savvy is key.
I think that you can have it both ways.
I applied what I learned from my financial advisor and have my own small online account (buy and hold forever and enjoying smaller common class MERS with my ETFs) in ADDITION to my account with my advisor (buy and hold with occasional tweaking).
I personally don’t have the time to research as intensely as my advisor.
With my current situation, I still plan on being worth $2,000.000 by age 75 ( I should live at least this long) even though I shall only have a lifetime gross income of $500,000 ( a small+) for 50 years.
True. My self-employed hourly income as a self-employed (mostly jazz bassist and guitarist) was above average (15-30 dollars an hour) but it was a VERY minor part of my total income.
JOBS: A 5 dollar an hour carpet and upholstery cleaner and salesman.
A 7 dollar an hour factory worker
A 8+ and hour janitor and flyer inserter.
A 8.50+ 9+ and 10+ an hour flyer inserter
An 11, 13 and 13.50 an hour janitor.
You should note that minimum wage in ONTARIO IS 14 DOLLARS AN HOUR AS OF MAY, 2020!!
Sorry folks. I meant AN 8+ AN hour janitor and flyer inserter.
AN 8.50+, 9+ ect…….
Sorry folks. I meant “an 8,50+, 9+ etc…..”
After reading many of your articles, I am genuinely curious how an average person is supposed MAX out their 401k and some how magically save up for invest in RE and still figure out to pay rent and live some what of a life. Could someone please explain to me how this would even work ? I feel like something needs to be sacrificed, Im not a doctor nor lawyer nor someone that makes over $100k.
Any advice would be appreciated.
You have to start somewhere. Not everything is going to happen at once. Start with maxing out your 401k. As your income, experience, and net worth grows, then start to save more and more in your taxable investment accounts. Then you should consider taking on side jobs to boost your income to save and invest even more.
How old are you and how much do you think? How many hours a week are you working?
If the amount of money you are saving and investing each month doesn’t hurt, you are not saving and investing enough.
You have to get your housing,
Food, and transportation cost to a minimum eg 30% total of gross, so you can save and invest the rest.
If you are interested, you can join my group of folks who wake up at 5 am to work until 7:30 am each morning before work or our children wake up. After one year, you will have worked ~ 1,000 more hours than someone who doesn’t. If you do, I’m SURE you will get beyond the average net worth.
Related: https://www.financialsamurai.com/achieving-financial-independence-on-a-modest-income/
You will find the older you are the less money means. Go spend $100,000.00. You can afford it. You’ll never miss the money. You won’t be able to do it. The money means nothing and yet you will not be able to spend it.
Where do I sign up for 5am to 730am work each morning you mention in your post?
The part that left me genuinely stumped was the assumption that the “above average” 40 year old had 125k saved (on the low end) in addition to maxing out retirement accounts for 20+ years.
Just found the site and have enjoyed some of the articles, but some of them appear to just be humble-brags without much real advice.
I would love to see a breakdown of your budget while saving up for retirement, or even just example budgets for given areas of the country.
I thought this wasn’t true and made a point to prove otherwise, because I really want it to be true:
“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.”
Unless expenses are high, this is true!
I’ve attempted to make my own tax withholding estimator to no avail to help me budget and figure this out. In case anyone is interested in seeing how changing your 401K or IRA contributions affect your paycheck, here is the link:
https://apps.irs.gov/app/tax-withholding-estimator-2019/results
As it turns out, a large 401K contribution means the potential of many more exemptions and you can try to break even by using the calculator (not owe or receive a refund). I also consulted a gross paycheck calculator as I wanted several independent sources before coming to a conclusion.
Now, I’m not convinced renting is throwing money away. I think it depends on the circumstances. I agree with much of the guidance from this link : affordanything.com/is-renting-better-than-buying-should-i-rent-or-buy/
Basically, price to rent ratio:
If a house costs $500,000
And rent is $2000 a month
$24,000 annual rent/$500,000
This equates to 20.83 P to R
“If the P/R ratio is greater than 20, hesitate before buying the house.
If the P/R ratio is greater than 25, don’t buy the house unless you have strong non-financial reasons.
If the P/R ratio is greater than 30, run screaming in the other direction.”
In my area, houses cost around 900,000 and my rent is under $2,000. I will stick with rent and invest the difference. While you can buy for less than 900,000 it is the sweet spot where there are great public schools, realistic commutes and decent sized homes. Factors for great resale value.
Unfortunately my income doesn’t enable me to purchase a 900K house at this time (even with a 200K down payment my mortgage would still be close to $4000).
May I ask what general area jt is that you stay in
State? Town? Providence? Zip code? Neighborhood? The closer the better but I dont mean to pry so whatever your comfort level is…
Thank you
52 years old. Considering a buyout from employer that would give me about $484K in taxable savings plus about $960K in 401K. Can start a pension right away at $52K annually. No debt at all including home. Need to have about $90K to spend and would like an additional $25K available on top of that. Am I delusional to think I might be able to take it and retire early? Wife earns $30K and will continue working until probably 60 or so.
My musings / thoughts – the big ticket item is healthcare – can you get on your wife’s plan? Otherwise, you’ll have to factor in a nice 5 figure annual expense for yourself, double it if your wife doesn’t have group insurance….. Big question – do you want to “spend it all” or leave an estate? That will determine how much you can withdraw annually from your retirement accounts. If you start withdrawing 3% from your nest egg, that’s $43K on top of your $52K pension – That gets you to $95K; are you including your wife’s salary into your equation as well? If you haven’t done a detailed income and expense analysis that plots out every year’s income sources and expenses for both of you until death, you need to start there – down to every last dry cleaner ticket, driver’s license fee, and cat food bill. Anyway, sounds like it’s possible, but tight – factor in a cushion – maybe start a side gig or part time at Home Depot…. …and do you have a plan as to what you want to do? Hobbies, travel, golf? I can state from experience that all the house projects get done pretty quickly….. Best of luck – look at it this way; you’re in a good position regardless…. count your blessings….
Very useful.
If you spend your time comparing yourself to the average, many people will be quite content with where they are at.
If you spend your time comparing yourself to where you *could* be (if you put in the effort), then not only are you not competing with others, but you have raised the bar drastically.
Good rough estimates but room for improvement
1. Real estate equity should factor in selling costs as they are substantial @ 5-7%
2. While 30’s are often your peak income growth period, it is generally not viewed as an accumulation post-tax period due to Child care & family costs. Most savings occurs in the 40’s and not your 30s. 30-35 having a savings of 50k while 40-45 only 25k should likely be reversed.
3. Also, is post-tax accounting for market appreciation? anything over a buffer of (10-20k) should be invested and appreciate.
4. There are issues in your rate of change for your retirement. Since retirement is capped the high end earner shouldn’t be receiving a higher percentage than mid or low.. for example, age 40-45. Low increases +50%, mid +45% and high +67% –> High should be much less –> by 40’s everyone should be maxing out, this would imply that the tier’s have a different rate of return
DQYDJ also has a good calculator to see where people stand up to others nationally.
Can you please clarify in your net worth calculation if you are including real estate owned? I assume you are. So in order to calculate the true net worth you would take how much the property is worth and subtract what you owe on the property? For example I own a property worth $370,000 but owe $136,000. So that is $234,000 I can use towards my net worth. Thank you.
Your calculation is correct on using real estate equity as part of your net worth. Probably best to be conservative as well with the equity calculation.
The average net worth was for a household.
In the modification to above average it refers to a “person”.
Do you mean for this to refer to a household as well? Or do you believe a married couple should have double the amount you calculated?
Person. But if the person has a partner, that’s fine too.
Check out: The Average Net Worth For The Above Average Couple
I am 64 years old and retired. I have a pension that pays me, after taxes, currently $3155 a month, and a monthly social security payment that pays me, after taxes, approximately $1600 a
month. If I lived to 85, which I believe I will (if not longer, with my family history and health habits), I believe my pension is worth at least $795,060, and my social security is worth at least $403,200. Should these be counted as part of my net worth? Seems like they should be…
First of all, congrats on retirement – I’m jealous. In regards to net worth, it’s normally calculated as a current snapshot in time and does not include future potential income or benefits. For example, if you applied for a business loan or a commercial property loan, “net worth” is captured as current assets minus current liabilities – they would not allow you to include those future sources of income. So by definition, no. But from your perspective, as long as you are alive and kicking, that’s your minimum net worth over your life span assuming you make it to 85 – if you save some of that income and invest it annually until you pass away your net worth could be considerably more! My 2 cents…..
Thank you for your input, Jeff. As you pointed out, I am kind of looking at it from the perspective of “how much of an investment/nest egg would I have to have currently to give me that kind of monthly income for 21 years? So, for me, it’s sort of a part of my “net worth,” Although I know that, technically, it’s doesn’t meet the classic definition of net worth. I am very lucky to have what I mentioned be a significant part of my retirement income/assets.
Michael, one way to capture the solid (hopefully) SS payments is to spreadsheet out to age 85 (probably age 92 would be best for you), assume a 1% increase annually, and then do a Present Value. Add this to your current net worth. I know this is not in the classical way of figuring NW but it would give you a good marker.
I just saw this. I disagree with the replies above. I would say yes, The present value of the payments you are receiving should definitely be considered as a part of your net worth. I just use my safe withdrawal percentage and use that to come up with a value. The entire point of figuring out net worth is to determine how much you can safely withdraw without running out of money. So if you use the traditional 4% withdrawal rate, 946,500 dollars. 3,155 / .04. Would be the amount your pensions are worth. Your calculations give it a 4.8% withdrawal rate which is fine. I would do the same with social security as you have done. When you have streams of income, it allows you to take on more risk with your other assets. They represent your phantom net worth, and certainly have value.
Just as some people don’t include primary residence in their net worth because you can’t withdraw from a primary residence (unless you downsize) some people may decide not to include the value of pensions or social security. If you take 500,000 dollars and buy an immediate annuity, do you not include the 500,000 dollars in your net worth. Of course you do, you just bought a stream of income that has value to it.