Why $5 Million Is Barely Enough To Retire Early With A Family
Unfortunately, $5 million is barely enough to retire early with a family in a large city. It might sound ridiculous to you. But I assure you that thanks to inflation and a drop in interest rates, retiring early is now tougher than ever before.
Half the United States population living in expensive coastal cities and other high-cost areas of the country. Yet, there is somehow disbelief and even outrage a family might need multiple millions, let alone $5 million dollars, in order to retire early comfortably.
I recognize the attractiveness of lower cost areas, hence why I’ve aggressively invested in the heartland of America. Migration to the heartland is a multi-decade trend I want to be a part of. The global pandemic has really accelerated the work from home trend as well. There is clearly a “fanning out” of America.
However, I hope more folks can also recognize some of the reasons why half the United States population lives in higher cost areas as well. Some of the reasons include: higher pay, more job opportunities, greater diversity, sometimes better weather, amazing food selection, and family to name a few.
An Average Retirement Life With $5 Million
In my after-tax investment amounts by age for a comfortable retirement, I included a more aggressive after-tax investment chart for those who want to retire in an expensive city like San Francisco, New York, Los Angeles, Washington DC, Boston, San Diego, Seattle, Miami, or now Denver.
Again, not everybody wants to or can relocate to Des Moines and leave their friends and family behind. As a refresher, let’s review the high cost of living retirement chart.
If you retire at 40 with $2,500,000 in after-tax investments, you’ll only be able to generate $100,000 a year in gross income or $75,000 in after-tax income based on a 4% rate of return.
Is this enough? Not according to the Department of Housing and Urban Development, which considers $100,000 a year “low income” for a family of three living in San Francisco, for example.
Yes, you could potentially earn a higher rate of return than 4%, but when you’re counting on only your investments to support a family, it’s better to have a more conservative portfolio.
Private grade schools and private universities give financial aid to families who make $100,000 a year or less per child. Why is that? Because they agree with the Department of Housing and Urban Development.
Living Off $5 Million In Retirement
Based on simple math, $5,000,000 in after-tax investments at a 4% annual return will generate $200,000 a year in gross income. The reality is, getting a 4% yield today is much more difficult with the 10-year bond yield at ~1.65%. A more conservative yield or appropriate withdrawal rate is 3%. But let’s go with 4% anyway.
To give you an idea of what $200,000 a year in passive income can cover, let’s profile Jerry, a Financial Samurai reader’s budget. Jerry is 45 years old, has a 8-month-old daughter and a non-working spouse named Linda, 38. They’ve lived in Los Angeles for the past 20 years.
Both have decided to retire early in order to spend as much time as possible with their daughter. After both negotiated severance packages equal to $100,000 for Jerry and $60,000 for Linda, they have a combined net worth of roughly $6,300,000 if you include the $600,000 in equity they have in their primary residence, and $700,000 in their combined pre-tax retirement accounts.
Their goal is to never go back to full-time work again and perhaps do some part-time consulting once their daughter goes to kindergarten in five years. Neither parent is doing any sort of side hustling at the moment, contrary to most early retirees I know, including myself.
I’ve cross-referenced all the numbers based on my family’s own household expenses over the past year since we have a 18-month-old toddler and also live in California. All the expense line-items are realistic, if not a little conservative.
Please review J&L’s expenses below.
Retirement Income Analysis
One of the biggest benefits of earning passive investment income versus job income is a lower federal marginal income tax rate.
J&L’s $200,000 in investment income is taxed at a 10% effective federal long term capital gains rate (15% marginal) versus 21% effective (25% marginal) if it had been earned through employment.
After paying an effective 7% (9.3% marginal) in California state income tax, Jerry and Linda’s effective federal + state effective tax rate is only ~17% versus ~27% if they were W2 employees. Further, they don’t have to pay the 6.2% FICA tax on the first $128,700 in income per person either.
Due to the State And Local Tax (SALT) deduction being capped at $10,000, they’re losing out on at least $3,000 in tax refunds they would have received before Trump’s Tax Reform Act was passed. It is unclear how much the $25,100 standard deduction (2021) will offset HCOL homeowners until taxes are done.
Because Jerry and Linda want to be completely present parents, they’ve promised not to do any activity to generate money at least before their daughter goes to pre-school. They’re burnt out anyway. As a result, they must be disciplined and stick to their budget if they want to remain retired.
Related: Surviving Off $400,000 A Year President Biden Deems Rich Enough To Raise Taxes
Retirement Budget Analysis
Kids Are Expensive (~$36,000/year)
The 10 hours a week of childcare assistance is extremely important so J&L can keep their sanity. Sometimes they use that time to go on dates, other times they use those hours to have “me time” to get away from each other. Being stay at home parents 24/7 is no joke. But it’s getting a little easier every month as their daughter sleeps a little better through the night.
J&L take their daughter to swim class twice a week and gym class once a week. Drowning is one of the leading causes of accidental deaths for children under 5.
On the other days, they go to the local science museum, where they have an annual family membership for $150. They also go to the zoo, where have a $150 annual family membership.
Despite being able to each contribute $15,000 a year to their daughter’s 529 plan, they can really only afford to contribute $11,000 each if they want to maintain their lifestyle.
They don’t believe making their daughter a 529 millionaire is a particularly wise move given the possible lack of motivation so much money might cause. Although, sending their daughter to public school in order to have the option to make her a millionaire sounds brilliant.
J&L will start their daughter off in public school to save money and see how she does. If they find she needs a smaller environment with a different style to thrive, then they will consider paying for private grade school.
Their #1 goal is give their daughter a wonderful foundation so she can be a strong and independent woman.
Having a gross monthly property cost of around $4,794 for a single family home in West LA is reasonable believe it or not. J&L live in a modest 1,600 sqft, 3 bedroom, 2 bathroom home at the edge of Santa Monica.
Their house is assessed at around $1.3M, or $400,000 below the median priced home in the area since they are further inland.
J&L have been thinking about upgrading to a remodeled house closer to 2,500 sqft. But such a house in their neighborhood would cost around $2M. They read my Buy Utility, Rent Luxury strategy for real estate investors.
As a result, they have decided to keep costs low and earn a higher rental yield in other parts of the country through real estate crowdfunding and aristocrat dividend stocks instead.
Healthcare Premiums ($1,650/month for a platinum plan)
According to the Kaiser Family Foundation, the average annual premium for employer-based family coverage is $19,616 or $1,635 a month. You can see the breakdown of what the average employer and worker pay in the chart below.
Given J&L no longer have jobs, they bear the entire cost of health insurance. With an 8-month-old daughter, they’ve decided not to mess around and maintain a gold health insurance plan.
Their daughter not only sees a pediatrician every three months, but also an ophthalmologist every three months. She has ocular albinism and strabismus (intermittent exotropia like Da Vinci).
They need to make sure their daughter’s prescription is correct to help her eyes align properly during development. After about age five, the neural pathways that go from the brain to the eyes tend to hardwire.
Health insurance is clearly one of the largest and most necessary expenses early retirees must consider. You could get Affordable Care Act subsidies if your household income is below a certain threshold. However, J&L need the income to live and don’t want to draw down principal so early.
For reference, my family of four is paying $2,250/month for a Gold Plan in 2021. I expect our health insurance rate to go up at least 5% a year, forever.
J&L value their time more than anything. As a result, they are happy to pay $5 for food delivery and save 1-2 hours cooking in order to spend more time with their daughter. Los Angeles does have some of the best food variety in the country. They also want to eat healthy, which costs more.
Finally, J&L supplement their grocery shopping with Amazon Prime about once a month as well. They still prefer doing their own grocery shopping because they’re better at picking out fruit than the delivery guys.
If there’s one thing we’ve learned during the global pandemic, it’s that overweight/obese people are more susceptible to the virus. Therefore, spending more money on quality food is worthwhile.
Another thing worthwhile is getting affordable term-life insurance to protect your loved ones and dependents. Check out PolicyGenius for the best life insurance rates. There is no obligation and it is free to check.
If there’s one thing we’ve all learned during the pandemic, it’s the importance and appreciation of life.
With PolicyGenius, my wife was able to double her life insurance coverage and pay less. All these years, she thought she was getting best rate with USAA. However, life insurance rates are so opaque. PolicyGenius helps shine a light on the best rates.
J&L hardly ever buy new clothing for themselves. They have no need since they don’t have to look good in front of anybody for work. If they need to look fancy, they’ll wear their old work clothes that still fit 10+ years later because they have maintained their same sizes.
J&L feel their $330 sports club expense is well worth it. Los Angeles has a huge fitness culture. The club provides a physical and social outlet three times a week. They’ve made many friends from the club. Without their health, their wealth is meaningless.
Finally, they’ve decided to stay local for the first two to three years of their daughter’s life. They have so much of Los Angeles, Newport Beach, Big Bear, and San Diego left to explore as a family. Besides, they agree with me that extensive travel before the age of three is a waste of time since their daughter won’t remember a thing when she’s older.
Budget Adjustments If Necessary
J&L could cut their expenses by contributing less to their daughter’s 529 plan. They could order less food delivery. If they spend less money on childcare, they’d free up an extra $5,000 – $10,000 a year. But they’re not sure the additional savings would outweigh the decline in their lifestyle.
They could move to a lower cost area of the country, but they’d rather stay warm all year round, rather than face brutal Midwest winters.
Further, as a Latino (Jerry) and Asian (Linda) family with a mixed-race daughter, they prefer the diversity of LA that can only be matched by even more expensive places like New York City or San Francisco.
This feeling of comfort is underestimated by the majority. Diversity is one of the reasons why people are migrating to California from the heartland. See: Main Financial Blindspots On The Road To Financial Independence
Instead, it seems better to just continue sticking to their budget. Then earn supplemental income if they need more money or want to spend more money.
Jerry worked in management consulting for 23 years and Linda worked in digital marketing for 15 years. Prior to retiring, Jerry was earning a base salary of $300,000 + $100,000 – $200,000 in bonus. Linda was earning a $180,000 base salary + $50,000 in stock compensation.
Every $10,000 of supplemental income earned equates to $250,000 in after-tax capital earning a 4% rate of return. J&L could easily consult part-time for a combined 10 hours a week at $100/hour. He would earn $52,000 a year if one of the following concerns come true.
J&L’s financial concerns in early retirement include:
1) What if they want and have another child? They will need to reallocate or earn at least another $20,000 a year for basic expenses, college savings, and childcare help.
2) What if the stock market and real estate market roll over? Their $5 million after-tax portfolio could easily shrink by 10% – 20%. This would leav them with passive income of only $160,000 – $180,000. That’s not enough to fund their existing lifestyle with one daughter.
3) What if their daughter has future unknown medical issues? Nobody really tells new parents this, but it may take years before you know all the issues that need addressing. For example, autism usually only starts showing signs between 18 – 36 months old.
4) What if one or all of their parents get sick and need to move in with them? All parents are still alive, but not all have long-term care insurance. Housing one or two parents will require extra funds.
Related: How About Retiring On $2 Million In An Expensive City?
Can Always Go Back To Work
Worst case, either Jerry or Linda can go back to work full-time, or they can start eating into their after-tax retirement principal until their daughter goes to kindergarten.
Again, please be aware the vast majority of people who espouse FIRE are working hard to make extra income or have a working spouse.
Even though my wife and I are also stay-at-home parents, I continue to publish 2-3X a week on Financial Samurai partly because I enjoy writing, partly out of habit for the past 10 years, but also because this site makes a healthy amount of revenue.
While J&L have settled on $5 million in after-tax investments to raise their family, we’re shooting for more just in case our boy doesn’t win the SF public school lottery. My fingers and mind still work, so I might as well keep going until they don’t.
Different Strokes For Different Folks
Despite detailing the numbers and providing context around J&L’s financial situation, I’m sure there will continue to be disbelievers that $5 million or more in after-tax investments is what’s required to live a comfortable, but not extravagant lifestyle in a high cost location.
It’s also become a national pastime to hate the rich, no matter how hard or long they studied in school, no matter how many hours they’ve worked a day, no matter how many risks they’ve taken to provide a better life for their family, and no matter how much in taxes they pay.
Like how more international travel and the mastery of a second language can help to create more harmony, hopefully, this article can help lead to more understanding by those who do not.
$5 million is a lot of money. But the composition of a $5 million net worth matters as well. If the $5 million is all tied up in your primary residence, then you certainly won’t have enough capital to generate enough passive income for retirement.
If you want to retire early with a couple kids, please shoot to have at least $5 million in invested capital. This is excludes your primary residence. Interest rates are at rock bottom levels. Returns might not be as good as they have been.
If you can’t get to $5 million before retiring with kids, then at last find ways to generate supplemental retirement income. Find something you will enjoy doing that makes some extra money. This way, you can cover the gap and do something meaningful in retirement.
Recommendations For Retiring Early
1) Stay on top of your finances like a hawk.
Track your finances for free with Personal Capital. Run your numbers through their Retirement Planner. Check your investments for excessive fees. Make sure your net worth is properly allocated.
You can do all this for free with Personal Capital. Don’t be one of the millions of Americans winging it on their road to financial freedom.
2) Refinance your home before retiring.
If you have a mortgage, definitely refinance before retiring. Once you lose your steady W2 paycheck, you become dead to banks. You will need at least two years of 1099 income to be considered for a refinance.
Take advantage of all-time low interest rates by refinancing with Credible. Credible is an online mortgage marketplace where qualified lenders compete for your business. You will receive free, no-obligation mortgage quotes in minutes. I refinanced to a 2.25% 7/1 ARM with no fees and couldn’t be happier!
3) Invest in real estate to benefit from inflation.
It’s hard to become a millionaire simply by saving your income. Income growth has simply not caught up to housing costs, college education costs, and health care costs. See the inflation chart above again as evidence. Therefore, in order to benefit from such rising costs, you should invest in real estate.
My favorite way to invest in real estate is through real estate crowdfunding. I’ve invested $810,000 in real estate across the heartland of America. It’s great to take advantage of faster growth, lower valuations, and potentially higher returns. Once I became a dad in 2017, I wanted to dramatically simplify my life.
My favorite real estate crowdfunding platform is Fundrise. They are one of the largest and oldest platforms having bee found in 2012. Fundrise smartly created private real estate funds to earn income 100% passively. For most people, investing in a diversified eREIT from Fundrise is the smart way to go. Fundrise is free to sign up and explore. .
If you are an accredited investor, take a look at CrowdStreet. CrowdStreet enables you to invest in individual commercial real estate deals mostly in 18-hour cities. 18-hour cities are faster growing cities with lower valuations. If you have a lot of capital, you can build your own select real estate fund with CrowdStreet.
Due to the rise of the work from home trend thanks to technology and the pandemic, there will likely be a multi-decade trend to lower cost areas of the country. CrowdStreet is also free to sign up and explore.
Everybody I know with $5 millionaire or more in net worth invest in real estate. I’ve personally invested $810,000 in real estate crowdfunding to diversify ad earn income 100% passively.
Filed Under: RetirementSours: https://www.financialsamurai.com/why-5-million-dollars-is-barely-enough-to-retire-early-with-a-family/
Here's the net worth Americans say you need to be considered wealthy
The drop in the net worth expectations could be due to the Covid-19 pandemic, according to Schwab. Over half of Schwab's 1,000 survey respondents, 53%, reported that they were financially impacted in some way by the pandemic. About 1 in 5 say they were laid off or furloughed, while about 26% report their salary was cut or their hours were reduced.
A drop in income can impact net worth, which is essentially a calculation of all of a person's assets — including cash in checking and savings accounts, financial investments and the value of any real estate or vehicles owned — minus all their debt, including credit card balances, student loans and mortgages.
Still, even before the pandemic affected employment, most Americans had nowhere near a net worth of $1.9 million. Prior to the pandemic, U.S. households had an average net worth of $748,800, according to The Federal Reserve's 2019 Survey of Consumer Finances. The median, or midpoint, net worth of all U.S. households was much lower, just $121,700 in 2019.
It's also worth noting that to be considered part of the top 1%, households need a net worth of over $11 million.
Not everyone's finances were negatively impacted by the global health and economic crisis. Thanks to stimulus payments and reduced spending, some Americans actually increased their savings levels during the pandemic.
More from Invest In You
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Regardless of how your own net worth changed over the past year, it's likely worth taking the time to evaluate where you're at right now and starting to plan for the future, says Rob Williams, vice president of financial planning at Charles Schwab.
"At Schwab, we talk about the importance of having a plan at times of significant change or transition in life, like getting married, changing careers or losing a loved one," Williams says. "With the pandemic, we have all collectively experienced a major life event, so it's particularly important to take the time to create a plan to help ensure your finances are on track and be ready for whatever comes next in your life."
Those who create a written financial plan typically have more savings and financial stability, as well as less credit card debt and late loan payments, Scwab's survey found.
"We have spent so much of the last year focusing on getting through today, but we're now seeing an opportunity to look ahead and plan for tomorrow," Williams says.
Editor's note: This story has been updated to include additional information.
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Can you retire with 5 million dollars? For most people, the answer would be: Heck yes! I’d retire in a heartbeat! Using the 4% safe withdrawal rate as a guideline, the annual income will be around $200,000. That’s more than most people make every year and it should fund a very comfortable lifestyle.
However, accumulating $5,000,000 isn’t exactly easy. You’d probably need to be in the top 1% to reach $5M in net worth. That’s about $420,000 per year in household income. Here are some of the top income earners:
- Executives of large companies and public institutions. Eric Barron, the president of Penn State University, made over $800,000 last year.
- Highly paid professionals such as surgeons, lawyers, and investment bankers. A highly experienced anesthesiologist can make $500,000 per year.
- Business owners.
- Entertainers, sports stars, and other celebrities. Floyd Mayweather topped the list in 2018 with $285 million of income. George Clooney came in second with $239 million. Most of that is from the sale of his tequila company, not bad at all.
These people tend to be very successful and $5 million isn’t out of reach for them. I did a little internet research and it seems people who reached “pentamillionaire” status aren’t quite as ready for retirement as you’d think. By the way, nearly three million households are worth over $5 million in the United State. That’s a lot of rich folks.
Take my poll at the end of this post. 40% of voters don’t think $5 million enough to retire on. That’s over 5,000 people which is much more than I expected. Wow, please leave a comment and let us know you need more.
*Updated for 2019.
A Spending Problem
One issue with earning the top 1% is that you spend like you’re rich. Which you are, but it probably isn’t sustainable. You can’t make that much income forever. Last time, I used a profile of a Canadian couple who was having a rough time after the main breadwinner was laid off from his $300,000/year job. This time, I’ll use an example from Financial Samurai. Sam published a post about how much it costs to live in an expensive city – Why households need to earn $300,000 a year to live a middle-class lifestyle today. Here is the expense spreadsheet.
This family barely has anything left after tax, deduction, and expenses. The only significant savings they have is their retirement and home equity. They are maxing out their 401k contributions every month. Nice job on that front. However, this family will be in huge trouble if one of them loses their job. It is unbelievable how close to the edge this family is living. Unfortunately, $300,000 doesn’t go very far in San Francisco, New York, and other expensive cities. At this level of expense, this family will need at least $5 million to retire. I don’t see how they’ll get there with this saving rate.
Personally, I think this family can reduce their monthly expenses tremendously. If they set their sights on FIRE (financial independence retire early), then I’m sure they can get rid of the Volvo XC90 and drive a cheaper car. Their food expense also seems very high to me. Lastly, they are spending a lot of money on their kids. Kids aren’t that expensive if you’re a little frugal. There is a lot of room to cut back on this budget. However, regular people are living for today and they aren’t thinking about financial independence. That’s why I’m trying to spread the word about FIRE through Retire by 40.
Okay, that’s enough about rich people and their first world problems. If these wealthy households can’t figure out how to live like normal people, then they will have to deal with the consequences. For the rest of us, we need much less than 5 million dollars to retire. Here is how to calculate your ballpark target for early retirement.
- Track your expenses
- Take your annual expense and multiply it by 25
- Add some margin if you have expected expenses such as college expense or long-term care.
RB40 household example
- Our annual expense is about $55,000.
- $55,000 multiplied by 25 = $1,375,000
- Margin: $125,000 for college
So we’d need about $1,500,000 of investable assets to have a good chance of a successful retirement. You probably shouldn’t include your primary residence in this calculation.
Currently, we have over $2 million invested so I’m pretty comfortable with my early retirement. However, this isn’t quite enough security for Mrs. RB40. She needs a bit more margin and that’s one of the reasons why she isn’t quite ready to retire yet. (Besides, she likes her job). Here is my opinion on our early retirement based on the current expense.
- $1.5 million – Barely enough to FIRE. We’ll probably be okay, but we need to have some backup plans. I’ll continue to blog and hustle to make some income. At this level, Mrs. RB40 won’t feel financially secure.
- $3 million – Comfortably FIRE. This gives us some margin for errors. I wouldn’t have to worry much about generating active income. Mrs. RB40 will feel financially secure enough to pull the cord and retire early. We could withdraw 3% and that’s pretty much foolproof. As long as our spending stays at this level, we’ll be fine. You can see the analysis below.
- $5 million – We’re rich! $5 million is more than enough. If we can keep our lifestyle inflation reasonable, we will have a good base to build wealth for future generations or donate it to a good cause.
RB40 household with $3 million
I logged on to my Personal Capital account and used the Retirement Planner to see how we’d do with $3 million in savings and spend $90,000 per year. There is a new feature where you can see how you’d do with different savings and income. It’s pretty neat. I created a new scenario with these parameters.
- Savings: $3,000,000
- Social Security: $25,000/year at 67
- Social Security (Spouse): $25,000/year at 67
- Blogging: $30,000 per year for 10 years. I made $65,388 from blogging last year, but the blog income is unstable. I’m pretty sure this income will crater as soon as we see a recession.
- Retirement Spending: $90,000 per year starting this year.
- College: $40,000 per year from 2029 to 2032.
Here is the result – You’re in very good shape for retirement. We forecast a 95% chance your portfolio will support your goals, including $90,000 per year in basic retirement spending.
I also ran this scenario through FireCalc and other retirement calculators. They all agree that $3 million is plenty for us. Withdrawing 3% is very conservative and the portfolio should last indefinitely.
Sign up with Personal Capital if you don’t have an account yet. The Retirement Planner is a fantastic tool that use your real data to help you plan for retirement. I highly recommend it for DIY investors.
Can you retire with 5 million dollars?
Lastly, the problem with money is that you always think you need more. I figured we’d feel wealthy if we ever reached $5 million in net worth, but maybe that’s just because we’re not there yet. It’s easy to say $5 million is plenty to retire on. However, I might change my mind once we get there. I’ll update this post when we reach $5 million and let you know what we think then. It will probably take me a decade to get there, though.
It seems people who have $5 million also think more is better. I read some discussions in various forums and people hesitate to retire even when their expenses are under control. It’s tough to find “enough.” That’s the one more year syndrome. Or is it one more million bucks syndrome? You can’t buy time. You have to take that into account when it comes to retirement. Don’t wait too long if you can retire comfortably. You need to enjoy life while you’re young and healthy.
Do you think you can retire with 5 million dollars?
*Sign up with Personal Capital if you don’t have an account yet. The Retirement Planner is a fantastic tool that use your real data to help you plan for retirement. I highly recommend it for DIY investors.
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The Top 1% Net Worth Amounts By Age
Getting to the top 1% net worth by age is a very impressive goal. But how much money do you need to get there? Overall, to have a top 1% net worth in 2021 requires having at least $10 million. $10 million is also the ideal net worth amount for retirement.
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. Yet, you can also get Universal Healthcare subsidies if you make less than ~$94,000 a year with a family of four.
Ways To Construction A Top Net Worth Calculation
Based on my older 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 back in 2016.
However, in 2021, the top 1% income earner is closer to $470,000 a year due to inflation and a continued bull market until recently. That’s right. Inflation has boosted the income threshold to be a top 1% income earner by 23.7% in just several years!
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 a top 1% net worth. 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% Net Worth Amounts By Age
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 5X gross income as a net worth. At the age of 45, one should have about 13X 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 $2,000,000 in net worth. This coincides with her $400,0000+ a year income if she wants to be in the top 1% net worth echelon.
A 45 year old top 1% income earner should therefore have roughly $6,000,000 in net worth. While a 60 year old should have a net worth of roughly $9,400,000.
Have a look at the chart below. It’s a good snapshot of top 1% net worth starting at age 25. I’ll then share some further analysis after you digest the chart.
More Notes About The Top 1% Net Worth 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 $470,000 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 $470,000 within a couple years out of college.
- If you have around a $235,000 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 $470,000+ as a highly coveted software engineer or finance whiz. However, thanks to taxes and general living expenses, accumulating $235,000 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 25 after age 80 in order to maintain a $11+ million net worth figure. In 2021, $11.7 million is the limit per individual one can pass on before the Death Tax kicks in. Therefore, you might as well spend every single last penny above $11.7 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 $23.4 million.
Replicating Top 1% Net Worth 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 $470,000+ differently.
When I was making 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 $470,000+ gross income lifestyle could be matched by someone spending 100% of his $235,000 gross income.
On the other hand, many of my colleagues easily spent 90% – 100% of their $470,000+ 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.
Related: How To Make $200,000 A Year And Not Feel Rich
More Definitions Of Rich
The risk-free rate (10-year bond yield) is currently around 1.6%. Therefore, one needs a net worth of roughly $29,375,000 ($470,000 / 1.6%) to be able to generate $470,000 a year in top 1% income!
As a result, I highly recommend people reconsider the 4% Rule and reduce their safe withdrawal rate in retirement. The 4% rule is outdated and dangerous to follow in this permanently low interest rate environment.
$29.3 million can therefore be considered the upper band for the definition of rich in today’s environment using this methodology. Given a top 1% net worth is at least $10 million, $29.3 million can be used as a top 1% net worth for a couple.
Another calculation is using the ideal income for maximum happiness. I think that ideal income is $200,000 per individual and $300,000 per couple. Therefore, using the same 1.6% divisor, we can get $12.5 million and $18.7 million. In other words, a top one percent net worth amount based on happiness can be between $12.5-$18.7 million.
Finally, even if you can’t reach a top 1% net worth amount, you can most certainly feel rich. There are always ways to feel rich even if you can’t get rich.
Data From The Federal Reserve
Take a look at some data from the Survey Of Consumer Finances. The median net worth for the top 1% is $10.7 million, which jives well with my calculations.
Here’s an older chart when the top 1% gross income was roughly $380,000 back in 2010. In just 11 years, a top 1% income amount has grown by about $100,000, or 26%!
The chart 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. The top 1% income levels differ by age.
Getting To The Top 1% Net Worth Is Possible
The sad part about being in the top 1% of net worth is that it’s getting harder and harder to achieve. The reasons are due to inflation, globalization, and continued low interest rates. Inflation expectations are picking up post-pandemic.
However, overall, interest rats are still very low. It takes more and more capital to achieve the same income as it did 10 years ago. Everyday citizens are now required to take more risk to make a return. Is there any wonder why capital is flowing to more risky assets like stocks and real estate?
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.
Stocks and real estate really are my two favorite ways to build and earn passive income today. Time to start building!
Invest In Real Estate Like The Top 1%
If you want to get a top 1% net worth, I highly encourage you to invest in real estate. Real estate is a core asset class that has proven to build long-term wealth for Americans.
Real estate is a tangible asset that provides utility and a steady stream of income if you own rental properties. Further, the wealthiest Americans own tremendous real estate portfolios.
Given interest rates have come way down, the value of rental income has gone way up. The reason is because it now takes a lot more capital to generate the same amount of risk-adjusted income.
My favorite two real estate crowdfunding platforms are:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. Growth is likely higher as well due to strong demographic trends.
Both platforms are free to sign up and explore.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects. My goal is to take advantage of lower valuations in the heartland of America. There is a strong demographic shift towards lower cost areas of the country thanks to technology and the pandemic.
Manage Your Finances In One Place
One of the best way to build your net worth is by signing up with Personal Capital. They are a free online tool that aggregates all your financial accounts in one place. This way, you can see where you can optimize your money. People with a top 1% net worth are vigilant at tracking their money.
Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts. Now, I can just log into Personal Capital to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.
The best feature is their Portfolio Fee Analyzer. It runs your investment portfolio(s) through its software in a click of a button to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was hemorrhaging!
There is no better financial tool online that has helped me more to achieve financial freedom. It only takes a minute to sign up.
Filed Under: RetirementSours: https://www.financialsamurai.com/top-one-percent-net-worth-amounts-by-age/
Net worth million dollars 5
High-Net-Worth Individual (HNWI)
What Is a High-Net-Worth Individual (HNWI)?
The term high-net-worth individual (HWNI) refers to a financial industry classification denoting an individual with liquid assets above a certain figure. People who fall into this category generally have at least $1 million in liquid financial assets.
The assets held by these individuals must be easily liquidated and cannot include things like property or fine art. HNWIs often seek the assistance of financial professionals in order to manage their money. Their high net worth often qualifies these individuals for additional benefits and opportunities.
- A high-net-worth individual is somebody with at least $1 million in liquid financial assets.
- HNWIs are in high demand by private wealth managers because it takes more work to maintain and preserve those assets.
- These individuals also qualify for increased and better benefits.
- The United States had the most HNWIs in the world in 2020, with more than 6.5 million people.
- A very-high-net-worth individual has a net worth of at least $5 million while an ultra-high-net-worth individual is defined as having at least $30 million in assets.
High Net Worth Individuals
Understanding High-Net-Worth Individuals (HNWIs)
Individuals are measured by their net worth in the financial industry. Although there is no precise definition of how wealthy someone must be to fit into this category, high net worth is generally quoted in terms of having liquid assets of a particular number.
The exact amount differs by financial institution and region but usually refers to people with a net wealth of seven figures or more. As noted above, people who fall into this category have more than $1 million in liquid assets, including cash and cash equivalents. These assets do not include things like personal assets and property such as primary residences, collectibles, and consumer durables.
HNWIs are in high demand by private wealth managers. The more money a person has, the more work it takes to maintain and preserve those assets. These individuals generally demand (and can justify) personalized services in investment management, estate planning, tax planning, and so on.
As such, a high-net-worth individual classification generally qualifies people for separately managed investment accounts instead of regular mutual funds. This is where the fact that different financial institutions maintain varying standards for HNWI classification comes into play. Most banks require that a customer have a certain amount in liquid assets and/or a certain amount in depository accounts with the bank to qualify for special HNWI treatment.
HNWIs are also given more benefits than those whose net worth falls under $1 million. They may qualify for:
- Services with reduced fees
- Discounts and special rates
- Access to special events
Almost 63% of the world's HNWI population lives in the United States, Japan, Germany, and China, according to the Capgemini World Wealth Report. The U.S. had about 6.6 million HNWIs in 2020, up 11.3% from the year before.
As a group, the HNWI population saw its assets grow 7.6% in 2020, reaching $79.6 trillion in wealth. North America led the world's HNWI wealth with $24.3 trillion, followed by Asia with $24 trillion. HNWI wealth in Europe was at $17.5 trillion, followed by Latin America with $8.8 trillion, the Middle East with $3.2 trillion, and Africa with $1.7 trillion.
Capgemini separates the HNWI population into three wealth bands:
- Millionaires next door, who have $1 million to $5 million in investable wealth
- Mid-tier millionaires with $5 million to $30 million
- Ultra-HNWIs, which includes those with more than $30 million
Globally, the ultra-HNWI population numbered 200,900 in 2020. Mid-tier millionaires numbered 1.89 million, while the millionaires next door category made up the largest group at 18.7 million.
|Top 10 Countries for High Net Worth Individuals, 2020|
|Country||HNWI population||YoY growth|
Source: Capgemini World Wealth Report.
Types of High-Net-Worth Individuals (HNWIs)
An investor with less than $1 million but more than $100,000 is considered to be a sub-HNWI. The upper end of HNWI is around $5 million, at which point the client is then referred to as a very-HNWI. More than $30 million in wealth classifies a person as an ultra-HNWI.
The very-high-net-worth individual (VHNWI) classification can refer to someone with a net worth of at least $5 million. Ultra-high-net-worth individuals (UHNWIs) are defined as people with investable assets of at least $30 million. This, of course, excludes personal assets and property, collectibles, and consumer durables.
How Are HNWIs Categorized?
The most commonly quoted figure for qualification as a high-net-worth individual is at least $1 million in liquid financial assets, excluding personal assets such as a primary residence. Investors with less than $1 million but more than $100,000 liquid assets are considered sub-HNWIs. Very-high-net-worth individuals have a net worth of at least $5 million, while ultra-high-net-worth individuals are worth at least $30 million.
What Benefits Do HNWIs Get?
HNWIs generally qualify for separately managed investment accounts instead of regular mutual funds. They are also in high demand by private wealth managers. These individuals generally require personalized services in investment management, estate planning, tax planning, and other areas.
Which Countries Have the Most High-Net-Worth Individuals?
The countries with the most HNWIs are the United States, Japan, Germany, then China, in that order. These countries make up approximately 63% of the world's HNWI population. In 2020, the U.S. had roughly 6.58 million HNWIs; Japan had 3.54 million; Germany, 1.53 million; and China, 1.46 million.
What Are High-Net-Worth Individuals?
Once upon a time, being called a millionaire meant you were wealthy. Today, millionaire sounds almost quaint. The term of art for wealth now is high-net-worth individual, or HWNI. This clinical-sounding acronym is thrown around frequently in the financial industry to denote a person or a household with a substantial amount of wealth.
What Is a High Net Worth Individual?
A high-net-worth individual is a person who owns liquid assets valued at $1 million or more. There is no official or legal definition of HNWI, and the threshold for high net worth is generally understood to include liquid assets only—money held in bank or brokerage accounts—excluding assets like a primary residence, collectibles or durable goods.
Financial professionals break down the category into three classifications of wealth:
• High-net-worth individuals (HNWIs): People or households who own liquid assets valued between $1 million and $5 million.
• Very-high-net-worth individuals (VHNWIs): People or households who hold liquid assets valued between $5 million and $30 million.
• Ultra-high-net-worth individuals (UHNWIs): People or households who own more than $30 million in liquid assets.
Given their substantial assets, high-net-worth households require additional services from financial advisors and wealth managers. Financial services for HNWIs include investment management and tax advice as well as help with trusts and estates and access to hedge funds and private equity firms.
The more liquid assets held by an individual or household, the more appealing the HNWI becomes to wealth managers, given they usually earn fees equal to a percentage of the total assets they manage. In addition, banks and investment management firms typically specify account minimums that make HNWIs eligible for more personal, specialized client services.
How to Calculate Net Worth
Want to see if you fall into the high-net-worth category? Calculating your net worth is pretty simple. The formula is simply the total value of your assets minus all of your liabilities. The figure you end up with is your net worth.
Net Worth = Assets – Liabilities
For example, consider a household with assets totalling $1 million, including home equity, vehicles, bank account balances, collectibles and investment accounts. The household’s liabilities include its unpaid mortgage balance, outstanding vehicle loan balances, student loan debt, credit card debt and alimony, totalling $250,000. Our example household’s net worth, then, is $750,000.
Just remember, when determining if someone is a high-net-worth individual, generally only their liquid assets are considered.
Benefits of High Net Worth
The number one benefit of being a high-net-worth individual is the advantages that come from being wealthy.
You’re treated like royalty by different types of financial advisors. The larger the amount of wealth that is being managed, the more complicated the situation—and thus the more attention the HNWI receives.
“Additional concierge-level services can be justified for a higher-net-worth investor that would not be price effective or relevant at lower levels of wealth,” says Mark Bonnett, chief executive officer at Core Path Wealth, in Scottsdale, Ariz.
Valuable client benefits. Many financial investment firms take a page out of airlines’ book and “tier” their customers based on assets under management, instead of flight activity. While perks vary, money managers may offer HNWIs a dedicated wealth advisor, reduced fees, access to conferences and events, and tickets to sporting, theatrical and entertainment events, in addition to other benefits.
High net worth opens doors. HNWI individuals get more account attention, but they also have access to many opportunities that Main Street investors do not. “For example, last month, Morgan Stanley became the first major American bank with plans to allow clients to invest into one of three Bitcoin funds it would be offering,” says Richard Gardner, CEO at Modulus, a financial technology services company in Scottsdale, Ariz. “However, only individuals with over $2 million in assets under management will be given access to the offering.”
HNWI Statistics at a Glance
There’s no doubt that the HNWI trend is in full swing as Americans continue to grow their assets. These statistics bear that sentiment out.
• In 2019, the U.S., Japan, Germany, China and France were the top five countries by total HNWIs, according to CapGemini’s World Wealth Report. The U.S. claims the most HWNIs, and 62% of the world’s HWNIs live in the U.S., Japan, Germany and China.
• According to Spectrem Group, in 2020 11.6 million American households held a net worth between $1 million and $5 million (excluding the value of their primary residence). That figure was up 5.5% over the prior year.
• Spectrum also found that the number of U.S. ultra-high-net-worth individuals—they count UHNWIs as owning between $5 million and $25 million (excluding the value of their primary residence)—grew 21.3% in 2020 to a total of 1.8 million households.
How to Become a High Net Worth Individual
The formula for becoming an HNWI requires a hearty dose of financial discipline. By and large, an individual attains high-net-worth status due primarily to continuously investing and minimizing household debt.
“Most clients that I see that are in the high or ultra-high category have sold a business and had a large liquid event in their life,” says McClain Culver, a wealth strategy specialist at UBS in Atlanta.
If you haven’t had a large liquid event in your life, don’t worry. With discipline and the right investing strategy, you can build a high net worth even if you don’t have significant resources right now. The key is following these two approaches:
Use Time to Your Advantage
The sooner you start investing and the longer you remain invested, the higher the potential for return—thanks to the magic of compounding returns.
This phenomenon, more commonly called compound interest, enables you to grow exponentially larger sums over long periods of time. That’s because each time you earn interest or returns, it raises the base amount your future interest or returns are calculated from. This results in an ever larger engine of wealth creation.
While the stock market may look pretty volatile over the near term, it has consistently delivered impressive returns on investment over the long haul. Take the benchmark S&P 500 index, which has provided average annual returns of about 10% over the past 100 years, despite wars, pandemics, recessions and the Great Depression.
Become a Disciplined Investor
Setting up a systematic investment strategy and putting in money every month can provide a highly positive investment outcome over time.
For example, a 25-year-old needs only save $158 per month to have $1 million at age 65—assuming a 10% annual return on investment.
“At 35 the number is $442 per month, so the benefits of investing early matters,” says Bonnett. “Saving in a 401(k) or Roth IRA each and every month is a perfect example of achieving HNWI status slowly and steadily.”
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How to Invest 5 Million Dollars and Retire Early
*** Class dismissed ***
Your Annual Budget
A withdrawal rate of 2.5% gives you an annual budget of $125,000 in year one or $10,000 per month.
Congratulations you won the game. You’re a smart cookie and an intentional spender. That’s more than enough. In fact, if you’ll probably end of cash flow positive and invest the difference. Your kids will thank you as your inheritance grows with each passing year.
Your portfolio is likely to grow each decade as you withdrawal approximately 50% of the long-term real returns of the portfolio. It’s reasonable to expect this equity heavy portfolio to generate 5% real returns over the long run. Isn’t the stock market grand?
The FIRE community often touts a “spend half strategy” during the accumulation years. I love that recommendation and support it. I’ve also lived it and then sum over the past 5 years. I also support doing the same during early retirement.
You need to practice early retirement. The same way you practiced living your FIRE lifestyle while working. You’ll be clumsy at first and get better at it with time. Reduce your risk and live intentionally during the beginning of early retirement. You can adjust with time and you hone your skills and become wiser.
Protect the portfolio from yourself
You don’t need to over-complicate this. You don’t need to invest for income. You don’t need a yield shield or an annuity or anything like that. As you add complexity to your portfolio you also add execution risk. Making mistakes can wipe out any incremental gain vs the stupid simple 70/30 portfolio.
Here’s a list of things that can go wrong:
errors in rebalancing
poorly calculated tax implications
overweighting underperforming asset classes
individual stock picking
breaking the rules due to emotional feelings
It all works against you. You are your own worst enemy. Don’t be lured by income-producing assets.
Real Estate Stocks or REITs
Embrace the zen of the 70/30 portfolio. The problem with this strategy is that it’s too simple. In fact, it’s too boring! Life is all about excitement, adventure, and dopamine.
This approach lacks all those things. And for that very reason, it will be ignored by 99.99% of investors. Be different and choose to simplify your financial strategy. Spend all those beautiful brain cells on creating a positive change in the world. If you worry about your portfolio, you don’t reduce the volatility or increase the returns. Worry brings no joy and happiness into your world. What if I see an opportunity and cash in?!
Guess what. Your family doesn't care if your 5% overweight to emerging markets worked well last year. You’re still you, you still have more money than you’ll ever need.
Also, do not pay some dipshit wealth manager 1% to 2% of your portfolio to figure this out for you. They’re out playing golf while the market does its thing. That should be you. This strategy works for 5 million, 10 million, or 25 million… you get the point.
Build a better future
I don’t have proof, yet, but it’s in Wall Street’s best interest to make investing complicated. Management fees pay for all those fancy jobs, fancy cars, and lavish lifestyles. These people have no incentive to provide practical and easy to follow strategies. More fear equals more dollars for wall street.
The world needs more teachers, educators, coaches, nurses, and doctors. It needs more environmentalists, engineers, and advocates for positive social change.
Spend your life doing something else besides micromanaging your portfolio. No one gives a shit about you bragging about stocks picks at the next back yard BBQ. Actually, it’s obnoxious, please do that to your friends and family. Stick with sports, Netflix, or the weather.
There are many ways to get to a net worth of 5 million dollars. Some are easier and faster than others. It’s a journey and a difficult one in the majority of cases.
If you’re on this website, you’re a high achiever and FIRE is yours for the taking. Explore the site, reach out to me if you have any questions, and never stop learning. Earn, save, invest with intention, and resolve. You’ll get to Financial Freedom soon enough. Your second act is calling your name. It’s time to separate your work from your mission here in this crazy place called earth.