252: How To Become Wealthy

Welcome to Money For The Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode 252, it’s titled “How to Become Wealthy.”

Two wealth surveys

This past week I was sent two surveys. One is a Schwab Modern Wealth survey. The other is by Stash, which is an investing app where you can start investing with as little as $5. Typically, when surveys are sent to me, there’s a press release from their PR firm. Here’s what Schwab’s PR firm for this particular survey said, Edelman. The title of their email said, “National survey finds fear of missing out fuels consumer spending.” The first line, “Over a third of Americans admit that their spending habits have been influenced by what their friends share on social media.”

The next survey Stash their PR firm is Bossbar. The email said, “Millennials say they’d risk the lottery as their retirement plan.” The first line, “New data from Stash reveals that 18% of Americans are basing their retirement plans on winning the lottery, and nearly 60% of millennials think the lottery is a good plan for their retirement.” These surveys… you always have to step back and first see how they were constructed. And then how was the question asked? Particularly the fact that 60% of millennials are basing their retirement plans on the lottery. But if you actually look at the question and how it’s phrased, it’s “How do you plan to retire? Select all that apply.” So you get to choose multiple answers. So they add up to more than a hundred percent, and the choices are: “I hope to win the lottery, I expect my children to help, move to a new country where it’s cheaper, move in with family members, get a part-time job doing something I love, I’ll live off my social security, I’ll marry someone rich and live off their money, I’ll live off of the savings in my retirement account, I don’t have any retirement plans.”

22.8% don’t have any retirement plans according to this survey. Now, both of these surveys were online surveys. The Schwab survey was adjusted to essentially be demographically representative of the US population. This Stash, it looked close, but they didn’t mention that it was actually scaled to match the demographics of the US. They tried to, but didn’t say that. What’s the margin of error? Plus or minus 3% in terms of these percentages. We’ll use these surveys as well as some data from the Federal Reserve to look at what does it take to be wealthy. How does one become wealthy?

To start the Schwab survey said, “59% of those who responded consider themselves savers.” They like to save. 65% said they’re “willing to sacrifice spending to save for later.” Yet with nearly two-thirds being willing to sacrifice to save for later, 59% said they live paycheck to paycheck.

In 2016 the Federal Reserve’s survey of consumer finances showed that 15% of families report spending more than they receive in income, which I guess would be worse than paycheck to paycheck. Typically, they make up that gap by taking money out of savings or investments or borrowing. According to the Schwab survey, 44% usually carry a credit card balance or struggle to keep up with bills and payments. This will be important when we look at what does it take to be wealthy. Obviously, you’re not going to become wealthy if you can’t even meet your existing expenses, like 15% of the US population, and you’re never going to be wealthy if indeed you’re living paycheck to paycheck and not able to save. Now, this Stash survey said 65% of the respondents were living paycheck to paycheck, but then they had different granularity there in which some said they were living paycheck to paycheck, but we’re also saving, which in my mind if you’re saving then that’s not really paycheck to paycheck.

The Schwab survey asked, well how much money did you spend on non-essential items in a typical month? And they defined that as spending on things like eating out, entertainment, luxury items or vacations. In other words, apart from rent, mortgage, and basic necessities. The amount was $483, about $6,000 per year only about 10% of the average income reported by those that responded. So I actually thought that was fairly low. But we want to talk about what does it take to be wealthy. And so the logical question is how much does one need to be considered wealthy? Schwab asked that, and the answer was $2.27 million. That was the average response against those that responded. 60% of those that are responding are optimistic they will be wealthy someday. 8% already consider themselves wealthy, another 7% within a year, 17% in five years, 20% in 10 years, and 8% within 25 years.

How wealthy are US households?

How wealthy though are US households? The Federal Reserve does a comprehensive report every quarter, it’s called the Z1 report. They take the financial accounts in US, it’s transaction level data, asset and liability data, full balance sheets, including net worth for households and nonprofits. And so schedule 101.h of that particular report, I guess B.101.h shows the balance sheet of households. They had, this is as of year-end 2018 total in the US $113 trillion of assets, 15 billion in liabilities, and a net worth assets minus liabilities of $98 trillion. Now, that’s huge, but you have to recognize there’s 128 million households in the US, so the average net worth of households in the US is $768,000. The median, which means 50% have below this amount is $100,000. Now, that’s well short of what individuals in that Schwab surveys said, one needed to have financially to be wealthy.

They said it needed to be $2.27 million. Now certainly some people are that wealthy, the top 1%, the average is $10.3 million in net worth. The average of the 1% and greater is $30 million. The 90th percentile has $1.1 million, so they’re less than that $2.27 million. The vast majority of the US population is not wealthy according to the expectations set out in that survey. The average wealth of the bottom 90% in terms of net worth is $194,000 and the bottom 10th percentile has a negative $1,000 net worth.

Now, it isn’t all bad news because these net worth, or these balance sheet type studies, what they don’t include is the value of social security. This is a huge retirement benefit both in the US as well as other federally sponsored retirement plans in other countries.

A study by the Federal Reserve estimates that the median social security wealth for households in the bottom 50% is $172,000. That’s the sort of taking future benefits, putting them into today’s dollars, which is a huge component because the median retirement wealth, so defined contribution plans, defined benefit plans for the bottom 50% it’s only $6,500. Half the population is just that they haven’t saved hardly anything for retirement. The next 45%, so not the top 5%, but between 50 percentile and the 95th percentile, they have on average $288,000 in private retirement wealth. Again, defined benefit plans, defined contribution plans. Then their estimated security wealth is about $343,000 because the more you earn, the more potential benefit and social security. And then finally the top 5% according to the Federal Reserve, has $716,000 on average in private retirement wealth with an estimated value in terms of social security, $478,000.So that’s kind of where things are in terms of the level of wealth. Most are far short of that in terms of this $2.27 million amount.

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