Am I Rich: How Much Do You Need

Am I Rich: How Much Do You Need

Am I Rich

Am I rich? Most investors invariably ask that question at some point, especially if they have more than $1 million for retirement. It is a natural question. You earned money, paid off debt, saved, invested well, and built wealth. You want to know, am I rich? Surprisingly, it takes less money than you think to be considered affluent or wealthy. Although it partly depends on how you define it.

The Very Rich

The very rich have wealth beyond ordinary people. These people are not in the top 10% but in the top 0.1% or higher. You will likely not achieve this amount of net worth. This group currently includes people like Elon Musk, Warren Buffett, Jeff Bezos, Bill Gates, Michael Bloomberg, MacKenzie Scott, Bernard Arnault, etc.

It even includes family money like the Rockefellers, Mars, Waltons, and heirs to other industrialists. However, the group also has people who are not worth tens of billions of dollars but even lower at tens to hundreds of millions.

However, this cohort does not make a good benchmark for answering the question, am I rich, because of their extreme wealth.

Am I Rich Based on Net Worth

The most common way to look at the “am I rich” question is based on net worth. Net worth is not the same as income. Instead, it is the difference between assets and liabilities. Many people define rich as having a minimum of $1 million. Alternatively, they want to be in the top 1%.

Is $1 Million Rich?

According to the Credit Suisse Global Wealth Report, having a net worth of $1 million puts you in the top 1.2% globally. There are approximately 62.5 million people in this group. How can so many people be in this group? Many people have a modest income but qualify as wealthy based on net worth. For example, Ronald Read was a janitor for most of his life but was worth roughly $8 million at the time of his death. Many other similar secret millionaires exist in this world.

But this category includes people from around the world. It is harder to enter the top 1% in the United States, and you need a net worth of at least $10.3 million in 2019—even a wealth of $1 million places you outside the top 10%. In 2019, one needed at least $1.182 million to enter the top 10%. In 2022, the numbers were likely down comparted to 2021 because of the bear market and declining real estate prices.

So, even though $1 million is a lot of money, it only makes you rich in some places, but not in the United States and many other nations. That said, $1 million is more than most people in most countries. This is because the mean wealth and median wealth per adult are lower. Thus, $1 million of net assets will place you in the top half in almost all countries. In addition, nations with lower medians than means indicate that extremely well-off people are pulling the average up. Wealth is more equally distributed when the mean and median wealth is closer in value.

American Expectations

American expectations about being rich have changed with time. An excellent source about this topic is the Charles Schwab Modern Wealth Survey. The amount people want to be financially comfortable or wealthy has trended down from 2018 to 2021 before ticking up again in 2022. In 2022, on average, Americans felt they needed $2.2 million to be wealthy and only $774k to be financially comfortable.

But the quantities differ depending on where people live. It takes less to attain a sense of wealth in some cities but more in others. The table below illustrates the disparities.

The bottom line is that $1 million in net worth does not make you rich, although it may make you financially comfortable. You need a few million to feel wealthy and others to consider you rich.

Am I Rich Based on Income

Another way to answer the question “am I rich” is based on income. It is probably easier to qualify as rich based on income. Unfortunately, data from many countries is difficult to come by, so we will focus on the United States.

The Very Rich Again

To get into the top 0.1%, you need about $2.37 million in annual income. This value is not really attainable for the average person. Doctors, lawyers, engineers, scientists, financial advisors, managers, etc., do not earn that much for the most part. You usually need to start a business to get to that level. Alternatively, you need to reach the C-suite or a high-level position in large coporation.

How about the top 1%? According to the Tax Foundation, based on 2017 tax data, an annual income of $515,371 is needed to enter the top 1%. Another similar analysis by the Economic Policy Institute indicates earnings of $421,926 is required, and yet another study gives an amount of $401,622. The differences are caused by the datasets and periods analyzed.

However, the income level for the top 1% varies based on geography. For example, in states like Connecticut, New York, California, Massachusetts, New Jersey, etc., an income above $500k is needed for the top 1% of earners. But in other states, roughly $300k is sufficient.

Again, this group does not make a good benchmark for answering the question, am I rich, because of their high incomes.

Is $100k Income Enough?

Let’s define being rich as someone in the top 10% of income. This value is more easily attainable for most Americans. The critical point is that a $100k income does not qualify for this level. According to the Tax Foundation, based on 2017 tax data, a person requires an income of $145,135 to be in the top 10%, as seen in the chart below. More recent data suggests an individual needs earnings of $132,676 to enter the top 10%.

What about family or household income? In 2019, according to the latest U.S. Federal Reserve Survey of Consumer Finances, the median family income was $58,600, while the mean was $106,500. But the top 10% of families earn significantly more. In 2019, the top 10% median family income was $283k, and the mean was $487.6k. The difference is caused by millionaires and billionaires whose over-the-top incomes pull up the averages. 

However, the lesson is that a $100k income is insufficient to be considered rich in the United States. That said, it would be in many other countries.

Am I Rich? It Depends

Whether you are rich or not depends on how it is measured. Jeff Bezos is rich whether you measure it by net worth or income. Many people can qualify based on one of the two metrics and less on both. Notably, Americans have a dollar amount they feel makes them financially comfortable and a higher amount that makes them feel wealthy. Next, the location a person resides influences the dollar value.

As a final thought, many people feel rich if they have more than their neighbors or family members. However, the feeling is relative because of its comparative nature.

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Published at Tue, 09 May 2023 04:00:00 -0700