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Are you on track to retire rich?
Yes, the typical household really can save $1 million to retire on, but most don't. Here's how your friends and neighbors are doing.
By Liz Pulliam Weston (As seen on CompuServe)
Given your age, your income and your spending habits, are you rich enough?
The last time I wrote about this topic was to discuss the flaws of the "Millionaire Next Door" formula. The authors of that best-selling tome suggested that those seeking wealth should have a net worth that equals one's age multiplied by one's annual income, with the result divided by 10.
Anyone who bothered to do the math, as many of my faithful readers did, quickly discovered that this formula is problematic, at best. It requires substantial savings of people in their 20s and 30s, and it understates what people in their 60s will probably need. More importantly, it's designed only for those who want to achieve significant wealth.
Benchmarks for the average Joe
You told me in no uncertain terms that what you really wanted were benchmarks that made sense for average people.
Most people aren't on a fast train to riches, but they could well be on track to achieve their goals -- or at least way ahead of most other people. And while it's not really important how well you're keeping up versus the Joneses, it's one of those things that's kind of fun to know.
So, for a benchmark, let's start with a nice round number: $1 million. That's the amount many financial experts say the average American should have saved to ensure a comfortable retirement. You, of course, may need a lot less or a lot more, depending on how much you plan to spend, any pensions you might get and how long you expect to live.
Is it even possible for someone with an average income to save that much? It is -- if you start early enough.
What a difference a decade makes
The average family of four in the United States earned $62,228 in 2002, according to estimates by the Department of Health and Human Services, so we decided to start with a newlywed couple, aged 25, earning about half that amount. We assumed:
- They would contribute 10% of their pretax pay each year to a 401(k) or similar account, starting at age 25.
- Their income would increase at a rate of 3% above inflation each year, as they
- gained experience and earned promotions at work.
- Their investments would earn 7% a year -- something a diversified portfolio of stocks, bonds and cash should be able to achieve over 40 years without too much difficulty.
The results (and where the Millionaire Next Door formula would put you):
| How a 25-year-old can build a net worth of $1 million |
| Age |
Salary |
10% annual
contribution |
Total savings |
Savings with 'Millionaire' formula |
| 25 |
$32,000 |
$3,200 |
$3,200 |
$80,000 |
| 30 |
$37,097 |
$3,710 |
$24,534 |
$111,290 |
| 35 |
$43,005 |
$4,301 |
$57,649 |
$150,519 |
| 40 |
$49,855 |
$4,985 |
$107,797 |
$199,420 |
| 45 |
$57,796 |
$5,780 |
$182,421 |
$260,080 |
| 50 |
$67,001 |
$6,700 |
$292,061 |
$335,004 |
| 55 |
$77,672 |
$7,767 |
$451,603 |
$427,198 |
| 60 |
$90,044 |
$9,004 |
$682,053 |
$540,262 |
| 65 |
$104,385 |
$10,439 |
$1,013,022 |
$678,504 |
MSN Money research
But if they wait to start saving until age 35, their total savings are reduced by almost half to $541,654. To get to $1 million, they either need to save 19% of their income each year (33% if they wait to start saving until age 45) or delay retirement to age 73.
But let's suppose, as happens to a lot of people in this era of downsizing, that this couple's income stops growing at age 45 and that for each of the last 20 years they earn just $57,796. Hitting a pay ceiling at 45 reduces total savings by about $70,000. But if they wait just one more year to retire, they can still retire as millionaires.
Now, on to the Joneses
These net worth figures are based on the Federal Reserve's Survey of Consumer Finances, a delightfully detailed and revealing study the Fed conducts every three years. The latest statistics are for 2001 and have been parsed for us by the kind folks at the VIP Forum, an organization that provides research to professionals who help the affluent with their money.
The Forum not only told us the median nest egg for Americans in various age categories, but also showed us how much it takes to get into the top 25%, 10%, 5% and 1% categories.
| "Nest egg savings" of American households, 2001 |
| Age |
Median |
Top 25% |
Top 10% |
Top 5% |
Top 1% |
| 20 to 29 yrs |
5,550 |
21,700 |
61,690 |
100,600 |
833,530 |
| 30 to 39 |
22,250 |
97,400 |
242,977 |
440,800 |
1,517,400 |
| 40 to 49 |
52,300 |
222,000 |
532,600 |
971,900 |
3,677,004 |
| 50 to 59 |
95,130 |
339,000 |
948,000 |
1,933,000 |
8,420,400 |
| 60 to 69 |
83,400 |
310,900 |
1,099,340 |
2,401,550 |
9,459,800 |
| 70 to 79 |
62,500 |
296,300 |
877,300 |
1,561,600 |
6,038,000 |
| 80 and over |
51,350 |
223,800 |
561,200 |
911,600 |
2,037,300 |
Source: Federal Reserve Survey of Consumer Finances, VIP Forum (The age range given typically reflects the maturity of the oldest person in the house. "Nest egg savings" refers to net worth, excluding home equity.)
Medians are the middle point: half the people surveyed have more, half have less. So if you're 35 and had $22,251 saved in 2001, you were doing better than 50% of the population in your age group.
As you can see, our super-saving 25-year-old couple would be among the top 10% of U.S. households, despite having an income near the middle, with their nest egg of $1 million.
Of course, for most Americans, home equity is a substantial chunk of net worth. Here's another table showing how much home equity factors into American households at various wealth levels:
| Home
equity as a percentage of net worth, 2001 |
| Age |
Median |
top 25% |
top 10% |
top 5% |
top 1% |
| 20 to 29 yrs |
29.2% |
42.6% |
34.7% |
38.3% |
5.9% |
| 30 to 39 |
42.3% |
34.2% |
31.0% |
17.3% |
17.2% |
| 40 to 49 |
51.1% |
31.6% |
21.4% |
19.4% |
11.6% |
| 50 to 59 |
46.8% |
25.7% |
17.9% |
20.6% |
7.0% |
| 60 to 69 |
50.4% |
32.9% |
22.0% |
16.1% |
2.7% |
| 70 to 79 |
64.0% |
39.1% |
18.6% |
16.3% |
14.2% |
| 80 and over |
64.1% |
35.3% |
29.2% |
21.8% |
12.3% |
Source: Federal Reserve Survey of Consumer Finances, VIP Forum
As you can see, the richer you are, the smaller the role home equity typically plays in your financial picture.
Don't necessarily get your knickers in a knot if home equity represents a lot more of your net worth than the figures shown here. People who live in fast-rising and expensive real estate markets likely will have a higher percentage of their wealth in their homes.
But don't rest on your home equity laurels, either. Just as some people didn't save enough during the bull market -- figuring high stock market returns would bail them out -- some people are also too dependent on increases in home equity. Real estate markets can't sustain double-digit increases forever, and sometimes home values drop. If you've been letting your home equity do all the heavy lifting in your wealth creation plans, you might want to think about increasing your other savings to make sure you're properly diversified.
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