People like to throw around random net worth figures all the time when asked how much is considered rich or how much they would need to never work again. Often, the figures just sound nice, like saying “one meeeeleon dollars” without any mathematical justification.
This post puts some numbers behind ascertaining how much wealth one needs to be in the top 1%. Remember, having a large net worth is better than having a high income. The government goes after income more than it goes after wealth. For example, you can live in a $8 million mansion and get Universal Healthcare subsidies if you make less than ~$94,000 a year with a family of four.
So what do we know?
Based on my Top 1% Income Earners post, we know that in order to be in the top 1%, you’ve got to earn at least $380,000 in gross income a year. The data comes from the all-knowing IRS.
Based on my Net Worth For The Upper Middle Class post, we learn that the net worth range for the top 15% of all Americans between the ages of 45 – 74 is around $700,000 – $830,000.
Finally, I’ve shown numerous examples as to why earning roughly $200,000 – $250,000 gross a year per person and $300,000 a year per couple is the ideal income for maximum happiness. Being rich is sometimes a state of mind, and I’ll use these income figures in my analysis as well.
Given these data points, I’d like to construct two simple models to demonstrate what I think should be considered top 1% rich. All wealth and no income is not ideal. Similarly, all income and no wealth is not ideal either. There needs to be a balance.
THE TOP 1% WEALTH AMOUNT
Instead of going through stale Federal Reserve data about wealth and population stats, I’d rather create logical assumptions based on the existing current top 1% income data. We know the constant variable X (top 1% income). All we have to do is solve for Y (top 1% net worth) based on Z, an agreed upon income multiplier determined by yours truly.
At the age of 35, one should have about 4X gross income as a net worth. At the age of 45, one should have about 9X gross income as a net worth. By the time one turns 60, the net worth figure should be closer to 20X gross income. Don’t believe me? Read the source: How Much Should My Net Worth Be By Income. Making money means nothing if you have nothing to show for it!
One can therefore conclude that a top 1% income-earning 35 year old should have $1,520,000 in net worth to coincide with her $380,0000 a year income if she wants to be in the top 1% net worth echelon. To be clear, the $3.42 million/$380K ratio should be considered the minimum combo for a 35 year old.
A 45 year old top 1% income earner should therefore have roughly $3,420,000 in net worth. While a 60 year old should have a net worth of roughly $7,620,000. Have a look at the chart below to get a good snapshot of top 1% net worth starting at age 25. I’ll then share some further analysis after you digest the chart.
* Top 1% net worth is relative to our ages. It’s unfair to compare a 60 year old’s net worth with 35 more years to accumulate wealth to a 25 year old’s net worth.
* Younger people in this chart will logically have a tougher time getting to the top 1% income figure of $380,000 compared to older people. At the same time, the multiplier younger people have to hit to get into the top 1% net worth is also lower. I start at age 25 as a result, because so few people will make $380,000 within a couple years out of college.
* If you have around $380,000 in net worth at age 25, you’re in the top 1% probably due to some savvy investments made right out of college. Income alone isn’t going to cut it. You may have just started making a top 1% income of $380,000 as a highly coveted software engineer or finance whiz, but thanks to taxes and general living expenses, accumulating $380,000 in net worth by age 25 still isn’t that easy.
* The minimum income multiplier peaks at the traditional retirement age 65 because it’s pointless to accumulate so much more money when you’ve got less than 35 years to live. Social Security is available at 65, adding another million to your net worth if you capitalize its annual payments.
* The minimum income multiplier stays steady at 14 after age 80 in order to maintain a $5.3 million net worth figure. $5.3 million is the limit per individual one can pass on before the Death Tax kicks in and takes half. You might as well spend every single last penny above $5.3 million on yourself, loved ones, or charities instead of giving it to an inefficient government.
* The top 1% net worth figures in the chart are for individuals. But, feel free to use the net worth figures as targets to shoot for if you are a married couple as well since you are a unit. Just know that the Death Tax income limit logically doubles to $10.3 million, unlike the highest income threshold for our progressive tax system ($400,000 + $400,000 = $450,000).
REPLICATING TOP 1% WEALTH BY LIFESTYLE AND SAVINGS RATE
The definition of “rich” can be someone who no longer has to work for a living, while maintaining a top 1% income earning lifestyle. This is where things get a little tricky, because many people spend $380,000+ differently.
When I was making the big bucks, I would always save at least 50% of everything I earned after maxing out my 401k. I knew the income wouldn’t last forever because the job was not sustainable. Given my 50% savings rate, a $380,000+ gross income lifestyle could be matched by someone spending 100% of his $180,000 gross income.
On the other hand, many of my colleagues easily spent 90% – 100% of their $380,000+ gross incomes. One close colleague told me, if he didn’t make at least $500,000 a year, he couldn’t save any money! He required at least $300,000 a year after-taxes to support his family of four. Talk about a high burn rate.
Given the risk-free rate is currently at around 2.5% +/- 0.5%, one needs a net worth of roughly $15,000,000 ($380,000 / 2.5%) to be able to generate $380,000 a year in top 1% income. $15 million can therefore be considered the upper band for the definition of rich in today’s environment using this methodology.
If we assume that earning $200,000 gross income per person is considered rich because it’s the ideal income for maximum happiness, then one needs a net worth of roughly $10,000,000 ($200,000 / 2.5%) to be in the top 1% of net worth. A $200,000 gross income is equivalent to a $380,000 income earner saving 48% of their gross income.
Finally, if we assume the $380,000 income earner only lives off 25% of their gross salary (75% savings rate), then we can assume the $95,000 a year spender requires $3,800,000 in net worth to feel rich.
Here’s a chart that shows what one needs to accumulate based on a 2.5% risk free rate and various savings rates. The risk free rate will obviously adjust over time, but I don’t think it’ll get over 3% for a long while.
RICH BY NUMBERS AND RICH BY MIND
Only the poor or super wealthy say money can’t buy happiness. For most of us middle class citizens, becoming rich is a nice goal to have. Now you’ve got some concrete figures to shoot for by age. And if you’ve ever wondered whether you’re already rich, now you can know for sure!
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Updated for 2018 and beyond. The bull market should be making a lot of people wealthier if they’ve been continuously investing all this time! Further, tax cuts and the raising of the estate tax threshold to $11M per person and $22M per couple will also boost wealth as people get more motivated.