When the pandemic hit, priorities changed overnight. Healthy and working became the litmus test of whether you were on the fortunate side of the COVID-19 coin.
This reduction in expectations has changed views on wealth. In its annual Modern Wealth Survey, Charles Schwab asked 1,000 people in the US to gauge their views on how much one would need to consider themselves wealthy. In only a year, the amount that people consider wealthy dropped from a net worth of $2.6 million in 2020 to $1.9 million now, according to the average cited by the respondents.
Similar trends played out in the amount needed to achieve ‘financial happiness,’ which fell from $1.75 million to $1.1 million, and to be financially comfortable – now at $624,000 from $934,000 last year.
The drop comes due to the impact the pandemic had on so many. More than half of the respondents were financially impacted by the pandemic, with 31% having strained finances, 26% experiencing reduced salaries or hours at work and 20% suffering layoffs or furloughs.
When evaluating your retirement number, though, it shouldn’t change much, unless you have drastically altered your lifestyle or spending, due to the pandemic. By calculating this number, you can determine your own definition of wealth.
Reality Check On Wealth
Wealth is a construct. Your view on how much you have and what you can spend will depend on who you’re around and the world you live in. The fact the level of wealth defined by a survey shifted so much in one year highlights that fact. And, based on the Wealth Survey, currently many Americans overestimate how much they need to truly consider themselves wealthy.
Part of the issue here is what do you consider wealthy? The top half of the country by net worth? Top 20%? Top 10%? Solely the 1%? Your opinion on the number will determine the net worth you need to call yourself wealthy.
If you pin it at the top 1%, well then Americans woefully underestimate how much they need. It would require a net worth of $11.1 million to qualify last year, according to analysis by DQYDJ (Don’t Quit Your Day Job). If, instead, you view the top 10% as the wealth marker, then people overestimate by $700,000; you would need $1.2 million in net worth to qualify.
But even the top 20% will likely feel flush, most of the time. To qualify in that range, you would need $558,000.
What Do You Need?
None of these numbers mean all that much, though. Someone with $1.2 million net worth that spends $300,000 a year on expenses and toys could have a very difficult time if they retire without reducing their spending. Someone with $500,000 and only spending $20,000 a year could see their net worth grow significantly in 30 years, even if they never work again.
Instead, evaluate your worth like someone in the financial independence, retire early (FIRE) movement might. By doing so, you can determine your retirement number. Whether that number reaches an indeterminate level of wealth, it will give you the freedom to step away from your job or take more vacations or whatever you wish, achieving financial independence.
To do so, calculate how much you need to spend each year. Include regular expenses that will remain even when you don’t work. If you have an emergency fund, then you don’t need to add wiggle room for unexpected surprises. When you’re considering retiring, this may or may not include your mortgage (if it’s paid off or will be before you step away from the job). Once you have that annual expense number, then divide by 0.03. In other words:
Annual Expenses ÷ 0.03 = Retirement number
Some estimate that you can multiply the number by 25 to get this retirement number goal. That’s based on a 30-year retirement and 4% withdrawal rate each year. For those looking for more security and the opportunity to leave work forever, then a 3% to 3.5% withdrawal rate has a greater chance of success over a 40- or 50-year retirement.
If you have $40,000 in expenses and divide by 0.03, then you need $1.3 million. The more you increase your expenses, the more you will need to consider yourself safe from a FIRE perspective. The more you decrease the expenses, the less you need. If you spend $30,000 a year, for example, then you would want $1 million using this formula. If you cut it to $20,000, then it becomes $670,000.
The world has experienced a lot of change, pressure and stress over the past year. Creating a way for you to understand what wealth means to you can ease that stress by finding a stable goal to reach no matter what happens globally.