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How much money does it take to be wealthy? As I've pointed out in previous columns, this is basically an unanswerable question. It depends on too many variables, such as social norms, personal circumstances, accounting methods, lifestyle, and financial standards.
Most significantly, it depends on whether you're considering net worth or income.
An annual wealth survey by Charles Schwab focuses on net worth, asking what level of personal net worth would constitute wealth, what level would result in financial happiness, and what level would be considered financially comfortable. Interestingly, this year's respondents answered all three questions with significantly lower numbers than those from last year. The difference, I suspect, is due to the impact of the pandemic.
The average net worth considered "wealth" was $1.9 million this year, down from $2.6 million in January 2020. The average net worth for "happiness" was $1.1 million, down from last year's $1.75 million. The amount for "financially comfortable" was $624,000, down from $934,000 last year.
I wish the survey had asked participants their estimates of the annual income to make people wealthy, happy, or comfortable. My hunch is that the answers would have been higher numbers than the income each of these net worth amounts could sustainably produce.
Let's consider how much income each of the net worth averages would produce, in today's dollars, for the lifetime of someone retiring at age 66 with a high probability of never running out of money. That amount from the "wealthy" net worth of $1.9 million would be around $76,000 a year. The "financially happy" net worth of $1.1 million would provide an income of $44,000 a year, and the "financially comfortable" net worth would produce $25,000 a year.
You may be surprised at how low the sustainable income is for each of these amounts. Most folks over-project the income a sum of money will sustainably generate. For example, it wouldn’t be unusual to assume a nominal 8% return (which is historically what stocks have produced), apply that to $1.9 million, and conclude that an annual income of $152,000 was possible, almost double the $76,000 I suggest.
