When I was in high school, my high school quarterly report card always told me which decile I was in with respect to grades.
Every quarter – top 10%, 2nd half.
There were 495 students in my grade so that meant I was somewhere between 25th and 50th.
Every quarter – same result. Top 10%, 2nd half.
Was that good? Compared to 90%, yes. Compared to 5%, no.
Now that I'm easing into my late-30's, I realize that the rankings have largely disappeared but the comparisons remain.
I use median and average interchangeably. I recognize the two are not the same but for most people, they want to know the median even if they ask for the average. We always, technically, mean median even when we use the word average.
Much like your GPA in high school, if you were to point to one figure in your life that summed up how you were doing – it's probably your net worth.
It's really easy to see the people around you with new clothes, fancy cars, and enormous houses and think they're wealthy.
It's just as easy to overlook the janitor who drove a 2007 Toyota Yaris, kept his clothes together with safety pins and foraged for firewood. He's definitely poor… right?
But that ex-janitor donated six million to a local library and hospital.
Most of us are somewhere in-between.
Fortunately, the U.S. Census Bureau collects valuable data that can help give us guidance. With hard data.
Understanding Average Net Worth
The U.S. Census does more than count the number of people in the U.S. – they collect a lot of other data too.
We know the net worth of householders based on a variety of factors – including age. The data shown below was taken from the U.S. Census Bureau, Survey of Income and Program Participation, 2014 Panel, Wave 1 – released in 2017 and “dated” as 2013. I recognize that's a lot of dates but the data is solid and most up to date. Figures of net worth include home equity (it's not clear how home equity is determined).
Median Value of Assets for Households by Age
Average net worth by age:
|Age of Householder||Median Net Worth|
|Under 35 years old:||$6,900|
|35 to 44 years old:||$45,740|
|45 to 54 years old:||$100,404|
|55 to 64 years old:||$164,498|
|65 to 69 years old:||$193,833|
|70 to 74 years old:||$225,390|
|65+ years old:||$202,950|
|75+ years old:||$197,758|
Here it is in chart form with quintiles:
You can't even see the lowest quintile (red) anywhere on most of the bars. In fact, when you do, it's because it's negative!
The highest quintile, which represents the top 20%, is often the biggest jump in median net worth for a quintile. Remember, these are median values so the top 10% are literally off the charts.
How do things change if you're married?
Median Value of Assets for Households by Age and Type
|Age of Householder||Married-couple||Male householder||Female householder|
|35 – 54||$142,425||$30,365||$13,144|
|55 – 64:||$289,623||$58,840||$59,975|
Here these are in chart form (note: the X-axis scales are different!):
Overall, independent of age, the median net worth by quintile was:
- Lowest quintile – $3,600
- Second quintile – $24,443
- Third quintile – $65,712
- Fourth quintile – $142,688
- Highest quintile – $415,312
Median Income by Age
Before we start looking at the numbers and drawing conclusions, net worth is as much as inputs (income) as it is about outputs (expenses). For income, there are several data sources but I'm going to go with the U.S. Census again for continuity (BLS has great data too), data from 2015:
|Age of Householder||Median Income (estimate)|
|15 – 24:||$36,108|
|25 – 34:||$57,366|
|35 – 44||$71,417|
|45 – 54:||$73,857|
|55 – 64:||$62,802|
Ratio of Median Net Worth to Income by Age
The rows of the table don't overlap the net worth tables but we do have the total sample size of each group, so we can make a best guess “Under 35” and other groupings to get these ratios (median net worth divided by income by age):
|Age of Householder||Ratio (Net Worth / Income)|
|35 – 44||0.6405|
|45 – 54:||1.3594|
|55 – 64:||2.6193|
Net Worth with and without Home Equity
I added this after the initial publishing but here's something very eye-opening:
|Age of Householder||Median Net Worth||Median NW excl. Equity|
|35 – 44||$45,740||$18,197|
|45 – 54:||$100,404||$38,626|
|55 – 64:||$164,498||$66,547|
|65 – 69:||$193,833||$66,168|
|70 – 74:||$225,390||$68,716|
Ponder the differences in those columns, especially as you reach higher ages. One caveat is that they're both median figures, so the person with a net worth of $6,900 isn't necessarily the same person as the one with a median net worth excluding home equity of $4,138 – but this is good enough for our purposes.
As a percentage of total net worth, here's how home equity stacks up in each age group:
|Age of Householder||Home Equity||% of Total|
|35 – 44||$27,543||60.22%|
|45 – 54:||$61,778||61.53%|
|55 – 64:||$97,951||59.55%|
|65 – 69:||$127,665||65.86%|
|70 – 74:||$156,674||69.51%|
The median net worth of all Americans is $80,039. The median net worth excluding equity is $25,116 – which means equity is 68.62% of total net worth.
I have only one thing to say about that – that's incredible! When they say that real estate is a way to build wealth, this isn't what they mean! My guess is that home equity is essentially “forced savings,” which may not be mathematically optimal but it is effective.
Number of Accredited Investors
An accredited investor is someone who has a net worth greater than $1,000,000 or has income greater than $200,000 a year for each of the last two years ($300,000 of combined income for those who are married) and expects to make that much this year.
In 2014, at the Forum on Small Business Capital Formation, the SEC held a discussion about the rules for accredited investors. In this presentation, they showed that there were over 9 million households that would qualify based on net worth alone. If you include income rules, that number increases to over 12 million households.
My Personal Takeaways
We only looked at median net worth, income, and a few other demographic factors. We skipped a lot of factors, like geography, education, and many many more. You cannot look at these numbers and feel good or bad about where you are specifically.
These groupings are huge – 10 year periods – and net worth doesn't even start until 35. The lowest income range starts at 15! I made nothing (reported to the IRS!) when I was 15 and was working a full-time job when I was 23. That age range is hardly homogenous.
I recognize this is imperfect but so is making decisions based on what everyone else is doing. Remember that this data is a view of American's net worth, their income, etc. It's not meant to paint the picture of an ideal financial situation. The average credit card debt is still five figures and no one is arguing that's a good thing!
With that out of the way, is there anything interesting to tease out of this?
1. We tend to reach “peak net worth” in our mid to late 60's, otherwise known as our typical retirement age. Then we draw upon those assets because we stop working full-time. It's also when Social Security starts paying and that's an income stream not represented in your net worth.
2. We are woefully unprepared for retirement. If you have a net worth of $194,226 when you hit 65 and expect to spend only 4% a year, that gives you $7,769 a year or less than $650 a month. Even with the average monthly Social Security benefit at $1341 (2016 data), that's still less than $2,000 a month in retirement income. That's the median. Half get more, half get less.
3. In the past I've talked about financial gravity, you escape it when your passive income exceeds your expenses so it becomes an ever-growing balance. When you're young with low-income relative to expenses, it's hard to save. It's why the net worth ratio for those under 35 is 0.1278 – you've had neither the time nor the income to accumulate assets. Compare that to 55+, when the ratio is 2-4x.
4. If you save money, invest it wisely, then you will surely beat the average. In fact, the average is going to be too low. It will be misleadingly low. You may want to instead focus on the average net worth for the above average person, an idea I first read about on Financial Samurai.
Lastly, net worth is a valuable financial benchmark, but remember it's not everything.
How do the rich get richer?
One of the striking stats is how uneven wealth is in America. It's shocking how low the median net worth is but also how high the top end of the range is.
For more insight on the distribution of wealth, and how we got to where we are today, I posed a few questions to Professor Rishabh Kumar, Assistant Professor of Economics at California State University, San Bernardino – he has been studying this for many years:
The main reason appears to be slower national income growth in the US along with a long upswing in asset prices. With low growth, even a small asset price appreciation can increase the size of wealth relative to national income.
If asset prices increase by 2% in real terms while income grows at 2%, the effect is larger than (say) 4-5% national income growth (USA 1945-70). The implication is that asset owners become richer as GDP and national income slow down.
Q. What do the top 1% do differently than the rest of Americans?
One of the key differences is that the top 1% is a much more unequal growth than (say) the top 10-1%. At the level of the top 0.1%, the size of wealth is enormous, nearly 3 times the average wealth in the top 1%. This means returns to wealth are exceptionally large for the richest 0.1%.
Compared to their wealth and capital gains, their spending is almost too small to be noticed. For most Americans, savings are closer to 0-2% of their income while for the richest the saving rate is as high as 60%.
Not only are the rich holding sizeable wealth but they save more of their income too.
Q. What are some common misconceptions of how the wealth get where they are?
The most common misconception is the fraction of meritocratic rich in the US. While many such as Gates and Zuckerberg have made outstanding gains due to their entrepreneurship, the average wealthy family tends to inherit their position. There is very little chance of downward social mobility once an American is in the top 0.5-0.1%.
With access to better schooling, influential networks, and a sizeable inheritance, kids from these families are able to dedicate themselves to increasing their dynastic wealth as opposed to building it up from scratch.
To sum up: the core driver of wealth accumulation in USA is the difference between the growth of asset prices vs income; those who already own wealth grow it faster than those who build new wealth from wages and salaries.
This makes intuitive sense but it's one thing to think it and another to see it in the data.
How You Can Increase Your Net Worth
I started tracking my net worth when I started working – the perils of being a spreadsheet junkie!
Peter Drucker, famed management consultant, once said that “What gets measured gets improved.” While the simple act of tracking your net worth won't automatically raise it, it will start impacting your behavior. If you check in on your money ever month, you'll start caring if things go up or down.