How much money do you need to be wealthy? According to a poll conducted by Schwab last year, it's about $2.3 million. Unsurprisingly, that number varies depending on the age of the respondent. Gen Z-ers think $1.5 million is wealthy. Millennials think it's $2M, and Gen X and Boomers think it's up over $2.5 million. Interesting that all those numbers are pretty solid anchor points: one-and-a-half, two, two-and-a-half...psychologically speaking, it feels like the survey respondents just picked a random number out of thin air. The pre-k demographic wasn't surveyed, but one can assume their response would be along the lines of "one thousand thousand million hundred thousand and nine". Our answer: it depends.
First, a little semantics. What's the difference between rich and wealthy? They both involve lots of money and so often end up conflated (such as in the poll above), but we would argue there's a difference. Rich - as commonly used in the English language - has an association with transience. Tastes and sensations are described as "rich". Winning the lottery or getting a big bonus or stimulus check might elicit cries of "I'm rich!", but definitely not "I'm wealthy!". "Wealth'', on the other hand, is associated with a kind of vague, undefinable durability. "A wealth of knowledge" or "information" or "resources"...you get the idea.
So let's talk about being wealthy, about getting to the point where one has "durable money". One definition we like is that wealth is having passive income that exceeds your expenses. (Side note: "passive income" is money that comes in without you actively working for it; most commonly, dividends and interest from investments and real estate rentals.) If you have enough assets such that the return on those assets covers your cost of living, you are wealthy. You can choose to work, or not. You've got the kind of money John Goodman talks about in The Gambler.
Based on that definition, by the time retirement comes around, if you've paid off your house and are getting social security or some kind of pension, it doesn't take nearly as much money as you might think to be wealthy. Let's go to the numbers!
The median income of a Tybee Island resident is something like $55,000, according to the internet. For that income level, according to government data, average annual expenditures are $54,000 (way to budget America!) of which about $8,000 or so are housing costs that go away when your mortgage is paid off. That brings average annual expenditures down to $46,000. At $55,000 income, Social Security estimates your benefit at $1,600 per month, or $19,200 per year. So now, your passive income only needs to cover $26,800 per year. At a 3.5% return, that means you'd be wealthy with $765,000. About one-third of what people in the Schwab survey actually think you need.
To be clear, in the above example "wealthy" means that you never actually touch that $765,000. You just live off the returns it generates plus Social Security. That $765k is "durable".
Funny thing though - most people we work with don't actually care that much about durability. They want their money to last as long as they do, but aren't particularly concerned if that $765,000 is down to $200,000 by the time they go. And if you don't need the absolute durability of your money, then it is absolutely possible to have a comfortable retirement even without being "wealthy". $2.3 million will make you rich, but you can be wealthy with far less.
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