Top_1_Income_And_Net_Worth
00:00:00.000 | This Financial Samurai podcast episode is proudly sponsored by Danielson Legal, a boutique
00:00:05.920 | law firm helping technology companies with their intellectual property, corporate matters,
00:00:11.820 | technology law transactions, and litigation since 2008.
00:00:15.240 | Hello, everybody.
00:00:16.480 | It's Sam from the Financial Samurai podcast.
00:00:19.840 | In this episode, I want to talk about what it takes to earn a top 1% income because as
00:00:24.840 | I was updating my post on the top 1% net worth amounts by age, I realized as of 2023, a top
00:00:33.360 | 1% income is now $650,000 and above.
00:00:38.500 | That sounds like a lot because back in 2015 or 2016, a top 1% income was closer to about
00:00:46.600 | $380,000 to $400,000.
00:00:50.120 | And then in 2019, when I had last updated this post, a top 1% income was about $470,000.
00:00:58.720 | So to go from $470,000 just in 2018 and 2019 to now $650,000 in 2023, that really shows
00:01:09.660 | that this mountain has turned into Mount Everest if you want to get to a top 1% income.
00:01:16.360 | So it feels almost defeating in the sense that if you wanted to get there through a
00:01:20.800 | day job, to get to $650,000 plus, man, that's going to be really, really hard.
00:01:25.560 | Because I remember back in my day, a managing director for example had a base salary of
00:01:31.600 | $400,000 and managing director is the top of the food chain in banking.
00:01:36.520 | Then the managing director would get a zero bonus if it's a bad year or maybe a bonus
00:01:41.360 | of $600,000 to a million.
00:01:44.960 | So those folks would get to a top 1% income but fewer than 1% of employees would ever
00:01:52.160 | get to managing director level.
00:01:53.720 | It would be more like 0.1%.
00:01:56.240 | So it does seem like the goalpost just keeps on moving and it demonstrates the power of
00:02:02.240 | inflation, the good and the bad.
00:02:05.680 | Now where am I getting this data and how do I know whether this data is true?
00:02:10.080 | Well, we don't really know for sure what is exactly true just like we don't know exactly
00:02:14.920 | how many millions of Americans there are living in America.
00:02:19.600 | But we have data from the IRS and the Federal Reserve Consumer Finance Survey report.
00:02:25.080 | So we take the data as given and even if that data is manipulated, so long as it is manipulated
00:02:30.520 | consistently, we can identify a trend.
00:02:34.480 | The trend is it's taking a greater amount of income every single year to be a top 1%
00:02:41.560 | income earner.
00:02:43.000 | What I wanted to do with this data is to figure out what a proper net worth should be by age
00:02:50.240 | if you made a top 1% income.
00:02:53.640 | So basically we know a variable X which is a top 1% income and we can solve for Y which
00:03:00.840 | is a top 1% net worth amount by age and we can do some logical analysis about how to
00:03:08.600 | get there.
00:03:10.200 | Based on the data, a top 1% net worth is about $13 million.
00:03:16.320 | That's household net worth and a household can be an individual or a couple.
00:03:21.160 | We know this data is probably true because the government in all its infinite wisdom
00:03:26.680 | wants to tax the top 1% the most.
00:03:30.440 | We know that the estate tax threshold per person in 2023 is $12.92 million and $25.84
00:03:40.280 | million.
00:03:41.520 | So $12.92 million, very close to $13 million.
00:03:45.480 | That's the level where the government wants to impose a 40% death tax on you so it can
00:03:50.760 | take more of your money after you're gone.
00:03:53.040 | So estate planning is very wise especially for folks who reach that threshold or who
00:03:58.100 | plan to reach and surpass that threshold in their lifetimes.
00:04:02.480 | So based on my experience trying to achieve financial independence, achieving financial
00:04:08.040 | independence in 2012 and also talking about the fears, the worries, the hopes, the blind
00:04:16.240 | spots, I believe a true level of financial independence where you don't really worry
00:04:22.120 | too much about money anymore, you feel like, "Ah, I am actually financially independent.
00:04:27.360 | I don't have to take side jobs or consulting jobs.
00:04:30.840 | I don't have to push my husband or wife to work so that I can feel financially independent."
00:04:38.160 | That multiple of gross income, average gross income is 20.
00:04:42.720 | So in other words, if you have a $100,000 gross income, if you can achieve a net worth
00:04:47.980 | equal to 20 times that average gross income, that's $2 million.
00:04:53.480 | If you can get to $2 million, I feel that you will finally truly feel financially independent.
00:05:00.360 | You don't have to worry as much about money.
00:05:02.400 | You have enough passive investment income to pay for your desired lifestyle and you're
00:05:07.520 | going to have future income in terms of social security.
00:05:11.400 | Now I don't believe everybody needs to get to 20 times their average gross income in
00:05:15.600 | terms of net worth to feel financially independent.
00:05:18.920 | This is just based on my experience and carefully looking within, talking to other people about
00:05:26.640 | how they felt about being financially free or independent at various multiples.
00:05:32.200 | The multiple where you start feeling financially independent is about a net worth equal to
00:05:36.360 | 10 times your average gross income.
00:05:40.040 | There is the inverse of the 4% rule which is to use 25 times your average expenses to
00:05:46.480 | feel or be financially free.
00:05:48.320 | I don't believe in that rule because expenses are too easy to manipulate.
00:05:53.080 | You can say, "Oh, I have $100,000 a year in expenses so I need $2.5 million," right?
00:05:58.480 | But you can say, "Well, I'm going to live on ramen noodles and water so I can cut my
00:06:02.080 | expenses down to $40,000."
00:06:05.080 | So suddenly, all you need is a million-dollar net worth.
00:06:08.120 | That's fine but I think using a multiple of gross income is more honest and it's harder
00:06:14.040 | and it keeps you more disciplined because for most people, as they gain experience,
00:06:20.480 | they tend to earn more money.
00:06:22.400 | As we know, a lot of people tend to earn more money and then they end up blowing their money.
00:06:27.800 | This is why using a multiple of gross income is a much better way to figure out what your
00:06:34.760 | target net worth should be.
00:06:36.960 | We have all these variables.
00:06:38.240 | 20X is the promised land number.
00:06:40.720 | 650,000 is the top 1% income threshold.
00:06:43.600 | We also can assume that as you get older, you're going to save more and invest more
00:06:50.440 | because your ideal target is 20X.
00:06:54.300 | So you're trying to get to a 20X multiple as soon as you can.
00:07:00.280 | This multiple increases as you get older.
00:07:04.160 | So if you click over to the post, you look at this chart that I've created.
00:07:08.520 | I start with the age 25 with a top 1% income of 650,000.
00:07:13.740 | I keep that income consistent from ages 25 to 80+.
00:07:18.520 | Now obviously, it's way harder to earn a top 1% national income of 650,000 at 25 versus
00:07:25.200 | 65 or 70.
00:07:28.040 | But I can't play around with this variable because I want to solve for the Y variable
00:07:32.880 | of the top 1% net worth by age.
00:07:35.340 | So what I've done is I've manipulated the ideal income multiple and I've started at
00:07:39.560 | age 25 an ideal income multiple of 0.5.
00:07:44.100 | So a top 1% net worth for a 25-year-old is about 325,000.
00:07:49.180 | At age 30, the ideal income multiple for net worth is 2.
00:07:55.100 | So that's 1.3 million.
00:07:57.540 | At age 35, the multiple grows to 5.
00:08:00.280 | So that's 3.25 million.
00:08:02.540 | At age 40, the multiple grows to 10, 6.5 million.
00:08:07.320 | So think about it.
00:08:08.420 | At age 40, you've worked for let's say 20 years, maybe 18 years.
00:08:13.620 | It depends on when you graduated or what you did after high school.
00:08:16.780 | But you have that amount of time to save and invest.
00:08:19.980 | 10X multiple, that jives well with the multiple I think is when you start feeling financially
00:08:25.780 | independent no matter what your income.
00:08:28.820 | When the top 1% income is 650,000, we arrive at 6.5 million.
00:08:34.060 | At age 40, now 45, the multiple grows to 13.
00:08:37.980 | So the top 1% net worth is 8.45 million.
00:08:41.700 | Age 50, the multiple grows to 15.
00:08:44.020 | We got 9.75 million.
00:08:46.620 | Age 55, the multiple grows to 18.
00:08:50.100 | Now we have 11.7 million.
00:08:53.020 | Then by age 60, the multiple finally gets to the ideal multiple of 20.
00:09:00.100 | With the ideal multiple, voila, you get 13 million as a top 1% net worth.
00:09:06.940 | That jives perfectly with what a top 1% net worth is in America today.
00:09:12.820 | 20 multiple, 13 million, 650,000, top 1% income.
00:09:17.860 | Then the subsequent ages, I raise it a little bit to 22 multiple when you're 65 because
00:09:23.340 | you're still maybe making more from your investments than you're spending.
00:09:27.420 | So that top 1% net worth goes to 14.3 million.
00:09:30.880 | But then the multiple goes back down to 20 because of the estate tax threshold of 12.92
00:09:37.980 | million per person.
00:09:39.180 | You don't want to have much more than 12.92 million per person because 40% of every dollar
00:09:44.640 | over that estate tax threshold gets taxed at a 40% rate.
00:09:48.420 | So that would be a waste.
00:09:49.700 | So you want to, as you come to the end of your life, spend more, give more, and ideally
00:09:56.780 | die with an estate value equal to the estate tax threshold.
00:10:02.340 | Now obviously that's very hard to do.
00:10:04.500 | It's probably better to just give the money away and spend it as you live.
00:10:08.280 | So if you're much under the estate tax threshold, that's fine.
00:10:11.080 | You live a good life and you consumption smooth more appropriately.
00:10:15.960 | Now I know some of you might be rolling your ears and thinking, "Well, this is not going
00:10:19.580 | to relate to me because I have a far, far way to go to get to a top 1% net worth or
00:10:24.940 | income."
00:10:25.940 | And that's fine.
00:10:26.940 | I think it's just good to know what these reach targets are.
00:10:30.440 | You don't have to get there to be happy.
00:10:32.900 | I think ideally you want a large enough net worth and income to be happy.
00:10:37.680 | You want to be happy to have the freedom to do what you want, to work with good people,
00:10:42.800 | to provide for your family, your parents and friends.
00:10:46.520 | These are the reasons why you are striving to earn more and build your net worth.
00:10:50.840 | Ultimately, you want to have the freedom to do what you want when you want to do it.
00:10:55.400 | But I'm telling you folks, you don't need a top 1% income or a top 1% net worth by age
00:11:01.340 | or overall to be happy.
00:11:03.960 | You can be happy way sooner.
00:11:06.800 | You just need to earn enough to take care of your basic living expenses and to provide
00:11:11.040 | for your family.
00:11:12.040 | Then after that's done, focus on purpose and meaning and community.
00:11:17.920 | You need those friends, folks, the people who will support you through those ups and
00:11:20.960 | downs because life is full of ups and downs.
00:11:24.200 | I have personally gone through the grind of working 70, 80 hours a week to try to get
00:11:30.200 | to a top 1% income.
00:11:31.880 | I got there for several years and I wasn't happier.
00:11:34.800 | In fact, I was more stressed.
00:11:37.200 | My lower back was killing me.
00:11:38.840 | I had sciatica.
00:11:40.400 | I had plantar fasciitis.
00:11:42.400 | I had TMJ where I couldn't really even speak for more than 15 minutes.
00:11:47.680 | I was grinding my teeth.
00:11:50.160 | My hair was falling out.
00:11:52.120 | My hair was turning gray.
00:11:54.280 | All this to try to earn a top 1% income and have a top 1% net worth.
00:11:59.920 | I'm not sure if it's worth it.
00:12:02.240 | If you do get there, make sure you figure out a way to keep that net worth figure.
00:12:10.040 | Protect it.
00:12:11.040 | Keep it diversified.
00:12:12.040 | That's why we've been talking about, "Wow, Treasury bonds at 5% plus risk-free.
00:12:17.080 | Not too shabby."
00:12:18.760 | People who invest in stocks and other risk assets think, "Oh, well, it's only 5% and
00:12:23.040 | you could have made 10+% of the stock market."
00:12:25.120 | I'm just saying once you get to that amount of wealth, you never want to go back because
00:12:31.120 | you know often how hard it took for you to get there.
00:12:36.000 | Thank you everyone for listening.
00:12:37.720 | This episode of Financial Samurai is proudly sponsored by Danielson Legal.
00:12:42.480 | Danielson Legal is a boutique law firm that has been helping tech companies since 2008.
00:12:48.000 | They pride themselves on prompt attention to their clients' day-to-day legal needs,
00:12:52.600 | including intellectual property, corporate matters, technology law and transactions,
00:12:57.760 | and litigation with pricing designed to provide value to their clients.
00:13:02.560 | You can find them on the web at www.danielsonlegal.com.
00:13:12.680 | Thanks so much everyone for listening.
00:13:14.280 | If you enjoyed this episode, please share, subscribe and review.
00:13:18.520 | It helps the podcast grow.
00:13:20.680 | Speak to you guys later.
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