I absolutely can and will call $1M wealthy. Anyone who thinks it isn't is absolutely living in a bubble.
Of course this depends on location and cost of living. I am referring to someone in the US.
Edit: Specifically, does anyone (in the US) consider a $40k year income to qualify as "Wealthy"? Since that's what's being discussed here.
In other words, at some point you underwent lifestyle inflation and didn't realize it. And now you're unwilling to give it up.
> Of course this depends on location and cost of living. I am referring to someone in the US.
Millions of people raise families on 40k/year in the United States. These are your fellow citizens. Perhaps you can ask them how they do it and whether they are "satisfied" with that level of income and lifestyle.
Not only do millions of people raise families on $40k, they also do so while still living in NYC, SF, Seattle, and other expensive cities.
With mortgage paid off and grown kids and social security supplement, $40k is plenty of money.
Yeah totally, $40k is plenty. You just need to not have kids, have a paid off house, no loans, live in LCOL area, get grandma's inheritance, have it come from a retirement account with minimal taxes, hope inflation doesn't kill your $40k over time, hope healthcare costs don't continue to rise, etc....
I have. They are not satisfied.
$40k
Taxes - $5000/year.
Monthly budget: $35k/12 = ~$2900/month
Rent - $1200
Utilities (incl. tv + internet + phone + gas + elec) - $300
Car payment - $300
Car insurance - $90
Food - $300
Gas - $80
Health insurance - $500
Oops we're already at $2770. Hope you don't need your tires changed or have kids. Maybe you can just go without health insurance for a while. After all, having health insurance is really just the result of lifestyle inflation.
What about laundry? You have a free in-unit machine? Otherwise that's like $40/mon. You also better not have any other loans. Fell behind during Covid and took on CC debit? Good luck paying that off for 10 years. Went to school? Hope Biden cancels some of your debt, because that's the only way you're paying that off. Also, Trump era tax changes mean you now have surprise tax bills every year because less is being taken out of your paycheck. Now you have $80 in fees and counting on top of the tax bill that you still owe.
I'm not making any of that up. That's real. Why don't you talk to people instead of pretending like $40k is enough to be "satisfied"?
> Car payment - $300
Is way too high. I know it's "common", but it's also entirely unnecessary to pay that much. If I add up the cost of owning a car (purchase price + maintenance, but not gas), it has never been that high for any of the cars I've owned in the last 20 years. Not even close.
Buy old reliable cars. Even if one of them ends up being a bad deal you'll easily average out to less than $300/mo.
> Health insurance - $500
If your income is $40K/year, you'll pay less than that (if you're single).
> Rent - $1200
Assumption would be that you've paid for the place. Otherwise, this number is highly variable.
> Taxes - $5000/year.
I doubt it. Will highly depend on the state. You have various deductions, etc that will bring your MAGI down quite significantly.
I lived on the equivalent of today's $32K/year for many years very comfortably. Had hobbies, bought pricey electronics, and traveled cross country often - always staying at motels (so not camping or sleeping in the car).
> I'm not making any of that up. That's real. Why don't you talk to people instead of pretending like $40k is enough to be "satisfied"?
As noted above, I lived on less for years. I didn't even try to be frugal. I won't claim everyone will have it as easy as me, but I can assure you that I was not an extreme outlier. I hung around those with similar income, and their experiences matched mine.
Maybe in Europe.
No, in the US. Not even close. Even with a paid-off house. Certainly not before "retirement age".
Health care is the reason.
My out of pocket maximum is something like $7000/year. That would be painful on $40k/year, but we're talking about someone with a $1M nest egg, so unless you hit the maximum every single year, its not impossible to cover. Spending $47k/year for a couple years instead of $40k isnt going to financially ruin someone with $1M.
And sure, you may not be missing payments thanks to the $1m in the bank, but if you start eating that principle too early (=before you're 60ish years old, at a minimum) you might find yourself needing to get a job after being out of the work force for (say) 10 years and while possibly dealing with serious, chronic health problems. I'm not sure how disability works when you haven't worked for a few years due to retiring, and have six-plus figures in the bank still, but my guess would be "it doesn't", until you are, in fact, ruined.
So do your mega-backdoor ROTH conversion and take out of that and it doesn't count against the insurance-company subsidy.
Even in VHCOL areas, $40K/year is fine if you own your own home and your kids are out of childcare years. VHCOL areas are typically VHCOL because of housing prices and their effect on service-provider wagss. If you take them out of the equation and only need to pay for food, gas, entertainment, utilities, insurance, and depreciation on your car, $40K/year (= $3.3K/month) is plenty.
Are you considering "childcare years" to include college? Also, in CA/IL/NJ you could easily spend $15k/yr in property taxes alone. That would leave $25k for everything else. Lastly, the average price of a new car sold in the US is $40k. You can buy used, sure, but these days even those are getting more expensive.
Somewhat. Personally I think college will be obsolete by the time kids today reach college age. It was a bubble in the early 2000s when I graduated (a significant number of my classmates did not get jobs that make back the debt they took out for it), it's certainly a bubble now, and I think the bubble will have burst in 18 years and people will realize that it's stupid to go to college.
But even if you don't believe quite so extreme predictions - the advantage of thinking in balance-sheet terms is that you set aside funds for these expenses and let them compound until you need it. I just ran a NPV calculation on 4 years of college @ $37K/year starting in 18 years with a 7% discount rate, and it's about $40K. [Note that the effect of inflation on this applies to both college tuition and the discount rate; 7% is average real (after inflation) returns to stocks, but if college tuition rises faster than inflation (say an extra 3%, which is consistent with the last 2 decades), you'd subtract that from the discount rate, and the number comes out to about $70K.] So you'd set aside an extra $40K per child when you retire, target $1.08M instead of $1M, and then you have your kids' college funds.
"Also, in CA/IL/NJ you could easily spend $15k/yr in property taxes alone."
Yup property taxes in VHCOL areas are a big issue. The math still works out though - if you take the budget yupper32 posted down-thread and subtract out taxes and rent, you're spending $1570/month on necessities and have about $1800/month for everything else, more than enough for property taxes. Or just don't live in CA/IL/NJ.
"Lastly, the average price of a new car sold in the US is $40k."
Amortized over 10 years, that's $4K/year or about $333/month, probably a little less because of time-valued discounting. That's already in the budget below - they list $300/month as car payment.
I consider $40k/year pretty good, and definitely enough for me to live comfortably on here in Austin TX (Source: I've lived here for 13 years now, and I'm only just now getting close to spending+taxes [retirement+charity excluded] exceeding $40k as I've started spending more liberally.) I've got friends here getting by on half that.
So no, earning $40k/year as an individual is pretty good. It's only slightly over the 50%ile (but nearly double the 25%ile). Not wealthy.
However, having enough money in savings that you get $40k/year without having to work is something else entirely. A 65-year-old with that nest egg is borderline-wealthy. A 40-year-old with that level of savings is solidly wealthy.
If you can retire by age 40 and still have a higher income than half the country in your retirement, that's wealthy. Sure, you don't have a private jet, but you do have forty hours extra free time each week.
> However, having enough money in savings that you get $40k/year without having to work is something else entirely. A 65-year-old with that nest egg is borderline-wealthy. A 40-year-old with that level of savings is solidly wealthy.
Why the difference? The 65 year old is going to be able to actually draw down some of the nest egg much sooner than the 40 year old. The 40 year old will be 65 some day. Could you explain what you mean? Is it just that the 40 year may still earn/save even more money, despite not actually needing to?
It's the same a 20-year-old owning a house vs. a 40-year-old owning a house. Same assets, but the former stands out as exceptionally well-off.
Looking around, a lot of places[0][1][2] are using 10% growth - 3% inflation, so I guess the 4% is the more conservative estimate.
[0] https://www.nerdwallet.com/article/investing/average-stock-m... [1] https://www.sofi.com/learn/content/average-stock-market-retu... [2] https://www.fool.com/investing/how-to-invest/stocks/average-...
One minor downturn for that last just a few months, and you have zero income.
IMO, "US$1M nest egg, live on proceeds" requires guaranteed income, and more or less excludes speculative investment.
I appreciate that others opinions on this may vary.
I've lived through multiple major crashes that lasted a lot longer than a few months and it had no catastrophic impact on my (theoretical) ability to safely generate an income from public equities. I am having a hard time coming up with a realistic scenario where a responsible person would become insolvent investing in public equities with an expected return of 4% (inflation adjusted). And in practice, most people doing this have a hedge of some type against a protracted downturn -- the cost of the hedge is already baked into the 4% expected return.
There is no such thing as guaranteed income no matter how much money you have. The only return that can be guaranteed is a total loss since the value of all assets can go to zero. Picking a different selection of assets, including cash, is just rearranging the set of ways you can lose everything.
Most of the retirement risk is a byproduct of having inelastic expenses that run right up against the reasonably sustainable withdrawal rate. That might happen more often with only $1M in the US, but even then it depends on your lifestyle.
The fiscally conservative mindset is that in a downturn, dividends shrink. At the same time, being forced to sell securities to cover living expenses means "losing" money from your nest egg, not living off of gains. Someone with this view would be balancing their portfolio to have enough cash and/or bonds to support them through some unknown future, and only expect to sell stocks when the market is doing well, to realize gains. Then, one needs to consider the rate of return of such a safe portfolio...
state bonds (free of federal tax) backed by an insurance policy are pretty close to guaranteeed income. At least that's where I put my first (and only) half-million (for a while).
> And in practice, most people doing this have a hedge of some type against a protracted downturn -- the cost of the hedge is already baked into the 4% expected return.
All true if your goal is to generate a 4% return over the long haul. Not so easy if your goal is to generate a reliable 4% income stream. The 4% return, reinvested, will be smoothed out over time, and if things are planned well, achieving that over the long haul should be fine. Pulling 4% out of the investment every year, on the other hand, is much harder to cover with hedging.
Remember, the goal in this case is not to generate a 4% average return over the lifetime of the investor. It's too generate an annual income of 4% of the investment value, without ever depleting the investment value. These are not the same goals.
For example it it is not enough to retire when older and live a moderate lifestyle in New Zealand.
Firstly, you need to own an average home in the city you live in. Don’t move away from your friends. Don’t live in a dangerous suburb. I live in Christchurch where I was born, median house price: $693,000 (Wellington and Auckland are a lot more expensive).
Secondly, you need residual income from investments. New Zealand pays superannuation to everyone that reaches retirement age*, but it is not enough to keep your home warm or go to a café every day.
The figure I aim for is NZD2M. $1M buys a median home in a desirable suburb (7 suburbs in Christchurch have a median price over 1M), and $1M is left to invest. I am middle aged: the amount you need to aim for goes up drastically if: you are younger, you live in an expensive city, you live in an expensive country.
NZD2M gets a comfortable retirement at present. It definitely doesn’t get a “wealthy” retirement (no holiday homes, no wealthy holidays, no flash yacht).
* retirement age is currently 65, but is likely to be increased because that is unaffordable for the country as it currently is economically.
I am, for example, a native of British Columbia. My home town, a humble one, now has an average home cost of $1M CAD. $1M will certainly not furnish retirement in any above-average Quality Of Life situation. "Wealthy" isn't living an average first-world lifestyle...
Average isn't great, I wish they reported median, but anyway that's about 6% of a million, which is a pretty aggressive number.