This Financial Samurai podcast episode is proudly sponsored by Danielson Legal, a boutique law firm helping technology companies with their intellectual property, corporate matters, technology law transactions, and litigation since 2008. Hello, everybody. It's Sam from the Financial Samurai podcast. In this episode, I want to talk about what it takes to earn a top 1% income because as I was updating my post on the top 1% net worth amounts by age, I realized as of 2023, a top 1% income is now $650,000 and above.

That sounds like a lot because back in 2015 or 2016, a top 1% income was closer to about $380,000 to $400,000. And then in 2019, when I had last updated this post, a top 1% income was about $470,000. So to go from $470,000 just in 2018 and 2019 to now $650,000 in 2023, that really shows that this mountain has turned into Mount Everest if you want to get to a top 1% income.

So it feels almost defeating in the sense that if you wanted to get there through a day job, to get to $650,000 plus, man, that's going to be really, really hard. Because I remember back in my day, a managing director for example had a base salary of $400,000 and managing director is the top of the food chain in banking.

Then the managing director would get a zero bonus if it's a bad year or maybe a bonus of $600,000 to a million. So those folks would get to a top 1% income but fewer than 1% of employees would ever get to managing director level. It would be more like 0.1%.

So it does seem like the goalpost just keeps on moving and it demonstrates the power of inflation, the good and the bad. Now where am I getting this data and how do I know whether this data is true? Well, we don't really know for sure what is exactly true just like we don't know exactly how many millions of Americans there are living in America.

But we have data from the IRS and the Federal Reserve Consumer Finance Survey report. So we take the data as given and even if that data is manipulated, so long as it is manipulated consistently, we can identify a trend. The trend is it's taking a greater amount of income every single year to be a top 1% income earner.

What I wanted to do with this data is to figure out what a proper net worth should be by age if you made a top 1% income. So basically we know a variable X which is a top 1% income and we can solve for Y which is a top 1% net worth amount by age and we can do some logical analysis about how to get there.

Based on the data, a top 1% net worth is about $13 million. That's household net worth and a household can be an individual or a couple. We know this data is probably true because the government in all its infinite wisdom wants to tax the top 1% the most. We know that the estate tax threshold per person in 2023 is $12.92 million and $25.84 million.

So $12.92 million, very close to $13 million. That's the level where the government wants to impose a 40% death tax on you so it can take more of your money after you're gone. So estate planning is very wise especially for folks who reach that threshold or who plan to reach and surpass that threshold in their lifetimes.

So based on my experience trying to achieve financial independence, achieving financial independence in 2012 and also talking about the fears, the worries, the hopes, the blind spots, I believe a true level of financial independence where you don't really worry too much about money anymore, you feel like, "Ah, I am actually financially independent.

I don't have to take side jobs or consulting jobs. I don't have to push my husband or wife to work so that I can feel financially independent." That multiple of gross income, average gross income is 20. So in other words, if you have a $100,000 gross income, if you can achieve a net worth equal to 20 times that average gross income, that's $2 million.

If you can get to $2 million, I feel that you will finally truly feel financially independent. You don't have to worry as much about money. You have enough passive investment income to pay for your desired lifestyle and you're going to have future income in terms of social security. Now I don't believe everybody needs to get to 20 times their average gross income in terms of net worth to feel financially independent.

This is just based on my experience and carefully looking within, talking to other people about how they felt about being financially free or independent at various multiples. The multiple where you start feeling financially independent is about a net worth equal to 10 times your average gross income. There is the inverse of the 4% rule which is to use 25 times your average expenses to feel or be financially free.

I don't believe in that rule because expenses are too easy to manipulate. You can say, "Oh, I have $100,000 a year in expenses so I need $2.5 million," right? But you can say, "Well, I'm going to live on ramen noodles and water so I can cut my expenses down to $40,000." So suddenly, all you need is a million-dollar net worth.

That's fine but I think using a multiple of gross income is more honest and it's harder and it keeps you more disciplined because for most people, as they gain experience, they tend to earn more money. As we know, a lot of people tend to earn more money and then they end up blowing their money.

This is why using a multiple of gross income is a much better way to figure out what your target net worth should be. We have all these variables. 20X is the promised land number. 650,000 is the top 1% income threshold. We also can assume that as you get older, you're going to save more and invest more because your ideal target is 20X.

So you're trying to get to a 20X multiple as soon as you can. This multiple increases as you get older. So if you click over to the post, you look at this chart that I've created. I start with the age 25 with a top 1% income of 650,000. I keep that income consistent from ages 25 to 80+.

Now obviously, it's way harder to earn a top 1% national income of 650,000 at 25 versus 65 or 70. But I can't play around with this variable because I want to solve for the Y variable of the top 1% net worth by age. So what I've done is I've manipulated the ideal income multiple and I've started at age 25 an ideal income multiple of 0.5.

So a top 1% net worth for a 25-year-old is about 325,000. At age 30, the ideal income multiple for net worth is 2. So that's 1.3 million. At age 35, the multiple grows to 5. So that's 3.25 million. At age 40, the multiple grows to 10, 6.5 million. So think about it.

At age 40, you've worked for let's say 20 years, maybe 18 years. It depends on when you graduated or what you did after high school. But you have that amount of time to save and invest. 10X multiple, that jives well with the multiple I think is when you start feeling financially independent no matter what your income.

When the top 1% income is 650,000, we arrive at 6.5 million. At age 40, now 45, the multiple grows to 13. So the top 1% net worth is 8.45 million. Age 50, the multiple grows to 15. We got 9.75 million. Age 55, the multiple grows to 18. Now we have 11.7 million.

Then by age 60, the multiple finally gets to the ideal multiple of 20. With the ideal multiple, voila, you get 13 million as a top 1% net worth. That jives perfectly with what a top 1% net worth is in America today. 20 multiple, 13 million, 650,000, top 1% income.

Then the subsequent ages, I raise it a little bit to 22 multiple when you're 65 because you're still maybe making more from your investments than you're spending. So that top 1% net worth goes to 14.3 million. But then the multiple goes back down to 20 because of the estate tax threshold of 12.92 million per person.

You don't want to have much more than 12.92 million per person because 40% of every dollar over that estate tax threshold gets taxed at a 40% rate. So that would be a waste. So you want to, as you come to the end of your life, spend more, give more, and ideally die with an estate value equal to the estate tax threshold.

Now obviously that's very hard to do. It's probably better to just give the money away and spend it as you live. So if you're much under the estate tax threshold, that's fine. You live a good life and you consumption smooth more appropriately. Now I know some of you might be rolling your ears and thinking, "Well, this is not going to relate to me because I have a far, far way to go to get to a top 1% net worth or income." And that's fine.

I think it's just good to know what these reach targets are. You don't have to get there to be happy. I think ideally you want a large enough net worth and income to be happy. You want to be happy to have the freedom to do what you want, to work with good people, to provide for your family, your parents and friends.

These are the reasons why you are striving to earn more and build your net worth. Ultimately, you want to have the freedom to do what you want when you want to do it. But I'm telling you folks, you don't need a top 1% income or a top 1% net worth by age or overall to be happy.

You can be happy way sooner. You just need to earn enough to take care of your basic living expenses and to provide for your family. Then after that's done, focus on purpose and meaning and community. You need those friends, folks, the people who will support you through those ups and downs because life is full of ups and downs.

I have personally gone through the grind of working 70, 80 hours a week to try to get to a top 1% income. I got there for several years and I wasn't happier. In fact, I was more stressed. My lower back was killing me. I had sciatica. I had plantar fasciitis.

I had TMJ where I couldn't really even speak for more than 15 minutes. I was grinding my teeth. My hair was falling out. My hair was turning gray. All this to try to earn a top 1% income and have a top 1% net worth. I'm not sure if it's worth it.

If you do get there, make sure you figure out a way to keep that net worth figure. Protect it. Keep it diversified. That's why we've been talking about, "Wow, Treasury bonds at 5% plus risk-free. Not too shabby." People who invest in stocks and other risk assets think, "Oh, well, it's only 5% and you could have made 10+% of the stock market." I'm just saying once you get to that amount of wealth, you never want to go back because you know often how hard it took for you to get there.

Thank you everyone for listening. This episode of Financial Samurai is proudly sponsored by Danielson Legal. Danielson Legal is a boutique law firm that has been helping tech companies since 2008. They pride themselves on prompt attention to their clients' day-to-day legal needs, including intellectual property, corporate matters, technology law and transactions, and litigation with pricing designed to provide value to their clients.

You can find them on the web at www.danielsonlegal.com. Thanks so much everyone for listening. If you enjoyed this episode, please share, subscribe and review. It helps the podcast grow. Speak to you guys later.