If you had $1 Million in the bank you would be rich – right? That is what half of the respondents to a recent study by the Gallup Organization said. From the survey: “…Americans [were asked] how much net worth, or savings in cash, stocks, real estate, and other investments, they would need to consider themselves rich. The median figure Americans give is $1 million, the same as in Gallup’s 2003 poll asking the same question.
Currently, 26% of Americans say they would need in excess of $1 million in savings in order to consider themselves rich, including 14% who say $5 million or more. At the other end of the spectrum, 13% would consider themselves rich with less than $100,000 in savings. Estimates of the amount of savings a person needs to be rich are generally similar by subgroup, though college graduates report a median of $1 million and college nongraduates of $500,000.”
Of course, in today’s society, we are constantly bombarded with big numbers. Whether it is “The Millionaire Matchmaker” providing “relationship services” for millionaire’s to billions of dollars in corporate profits or trillions of dollars in government debt; it’s all just a digit or two with lots of zero’s behind them. Meanwhile, back at home, the average American is struggling to make ends meet in a weak economy. Therefore, it is not surprising that a dream of just ONE million dollars would go along way to solving their ills. However, being “rich” in terms of a total net worth number tells us very little. In reality what these individuals are trying to say is that I want enough money to “live the life that we have become accustomed to.” without have to stress myself just to get by.
How Much Income Do You Need To Be Rich?
The amount of INCOME you need at retirement is a much more important question. Income as a function of retirement is relative to the living standards to which you have become accustomed. Therefore, when it comes to “retirement” it all boils down to the income stream that is available from which to live. However, in order figure that out we need to determine what the annual income needs are for average Americans.
From the Gallup Survey: “Americans say they would need to earn a median of $150,000 a year to consider themselves rich. However, 30% say less than $100,000 would be enough, including 18% who would consider themselves rich if they made less than $60,000 a year. On the other hand, 15% say they would need to earn at least $1 million per year before thinking of themselves as rich.”
The Gallup Survey also stated that “According to the U.S. Census Bureau, the median annual household income in the United States is roughly $50,000 per year.” Therefore, it really isn’t surprising that those below that level feel that a doubling of their annual income would make them feel “rich”. However, those above that level feel that they would need to earn $200,000 a year to be rich.
The implications of the study come to this: “Americans generally would consider themselves rich if they made $150,000 per year or had $1 million in net worth. That seems to differ a bit from the federal government’s definition of rich. For example, the federal government’s top tax bracket of 35% begins with individuals and married couples earning $379,000 or more annually. Also, when Congress debated extending the 2001-2003 federal income tax cuts, the debate centered around whether to extend those for single Americans earning $200,000 and couples earning $250,000 or more per year.”
No wonder there is so much anger towards the top 1% in the country today. At least for the individuals surveyed the definition of being “rich” is far lower than even that of the Government. However, while we would all like much more income the real question is if you had $1 million in the bank could you retire?
$1 Million Ain’t Gonna Cut It
The biggest problem is still yet to come in the next few years as the impact of the “net worth to income” ratio becomes a hard and depressing reality.
If we look at the most current Federal Reserve study on consumer finances we find that the median household net worth in America is roughly $78,900 with the bottom 90% having only $50,300. This is a sad state of affairs facing the average American going into retirement. With 90% of Americans maintaining only $50,300 in net worth but needing on average roughly $50,000 in income. This means that most Americans will be faced with surviving only on social security and pension payments (if they are lucky enough to have one). For most, retirement is going to mean finding supplemental forms of income.
Let’s look at the situation this way. At $1 Million in net worth, excluding the home, Americans will still be very hard pressed to live the same lifestyle to which they have been accustomed to living. For the purpose of this simplistic mental exercise let’s make a few assumptions. Mary and John Jones are an average American couple that earned the median household income pre-retirement and are now ready to retire. According to the Social Security Administration they will be collecting $2354 a month in social security since both worked pre-retirement. Furthermore, they also amassed $1 million in liquid net worth which they have invested in U.S. Treasury Bonds (this allows for a constant income stream for illustration purposes) purchased with a 3.05% yield as of 12/12/11. These treasury bonds will yield an annual income stream for the next 30 years of $30,500 or $2541.66 per month.
In total Mary and John can rely on income of $4,895.66 a month which would give them a $58,748 annual income. The percentage of pre-retirement income needed during retirement varies from study to study and ranges from 80% to 90%. However, for the purposes of this analysis we will use the 80% factor.
Assuming that the income from the bond portfolio stays at $30,500 annually – their social security benefits will not being taxed. Furthermore, their social security payments will be adjusted for inflation (COLA) but the income from the Treasury Bonds will not. Therefore, if we assume that current tax rates remain the same in the future Mary and John would fall into the 15% tax bracket. Since we don’t know what inflation will be in the future we will round down the last COLA adjustment of 3.6% to 3.0% for calculation purposes.
As you can see in the chart the net deficit between their current income and 80% of Mary and John’s pre-retirement income grows to be rather substantial towards the end of their retirement years. So, while $1 Million dollars in net worth may make you “feel rich“; in reality you may just “feel poor” later on in life. The reality is that psychologically for individuals a million dollars is a nice round figure that has been elusive to most due to poor saving habits, excess spending, disproportionate debt to income levels and an attitude of “living for today” rather than “worrying about tomorrow.”
Most investors today are still betting on 8% annualized returns going into the future. The reality is that those returns may be closer to 5% and after inflation, taxes and expenses could be significantly less. This leaves the average American family woefully under-prepared for retirement. With personal savings rates on the decline, current net worth levels far too low and very little in retirement savings – the reality is that there simply are not enough “door greeter” jobs at Wal-Mart to fill the demand from the coming wave of “boomers.”
The income that will be needed as this mass of “boomers” move into their retirement years will began to drag on the financial markets as the flow of funds reverses from net savings to net withdrawals. As this demand by investors turns to income generation from asset growth this could in turn lead to lower market performance in the future. If inflationary pressures continue to rise while yields remain suppressed due to the fragile economic environment the deficit between income needs and generation make become far more serious. One thing is for certain – a million dollars sure ain’t what it used to be.