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
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.