What's Your Net Worth?

By Michael J. Bennicelli, II, CFA

Maybe it’s because the algorithms know that I work in the financial services industry, but lately I’ve noticed my social media feeds littered with videos about the “average net worth by age." Watching these, I’m sure of a few things: 1) the numbers can be inaccurate or purposely misleading, 2) the posts are designed for likes and shares, so the “data” is either presented to make me feel better, or worse about myself, and 3) someone is probably trying to sell me something. Being a financial professional, I decided to do a bit of actual research on the topic and to offer an alternate perspective on how to beat the averages.

Real data!

First, let’s dispense with the “average” nonsense. If you’re not familiar with how averages work, big numbers can skew the results – a lot. And, in case you’re not familiar with America, there are loads of very wealthy people here. So when considering average net worth by age in the US, a more meaningful statistic would actually be the median, or the middle value in a data set. Let’s look at a quick example of why this is important.

Take a look at the table to the right which shows ten hypothetical individuals and their net worths. The average net worth amongst this group is over $12.5 million, while the median net worth is significantly lower at $72,500. Which one do you think is more representative of the typical person included in this data?

With the correct metric in hand, let’s find a respectable source to figure out the actual baseline numbers. The table to the left shows the median net worth by age range in the US, according to a Federal Reserve survey from 2020. This is a touch stale, and it is survey data, but it seems to be in line with several other sources.

Cool, I still feel bad about myself.

The next step is to determine the median net worth for your age range and figure out if you’re winning or not – right? [facepalm] Instead of falling into the social media benchmarking trap, let’s do something useful with this data.

Suppose you’re a 23-year-old fresh out of college with zero dollars, and you want to have saved $39k by the time you’re 35 to be the best median American you can be (yes, I know you have student loans and are broke, but let’s save that problem for another time). How much would you have to put away and how often? If you assume a modest 5% annual return, you will only have to save $200 each month to get there.

That same plan would result in $342k in the bank by the time you were 65, and nearly $600k by age 75 (from only $200 per month!) You’ll notice the graph to the right has this nice upward curve to it, where you seem to do better the longer you save and invest. This is due to the magic of compounding – reinvesting and making money from the money you already made. Pretty neat! Albert Einstein is quoted with saying “the most powerful force in the universe is compound interest.”² This, from a dude who knew a thing or two about the universe.

How much could you make at different savings rates and returns over different time periods? The two tables below show some possibilities. By employing a simple savings discipline (and at a reasonable rate of return), you could easily beat the averages (medians!)

So, about this median guy...

Let’s take another look at this data from a different perspective. Is this “median American” a good saver? Giving this hypothetical individual the benefit of the doubt, we’ll assume that they have been saving since they were 23 and have saved the median $39k by age 35. Based on our prior math, this would require putting away about $200 per month. The median salary for a 25- to 34-year-old American is $58,500 per year according to the Bureau of Labor Statistics³. That would impute just over a 4% savings rate, which is…not great.

Of course, everyone’s savings rate is different. For many people it’s ever changing; for many people it’s $0. It’s based on what it costs you to live, how disciplined you are in your discretionary spending, and a million other factors. What doesn’t change, however, is the math of saving. The longer you wait to start saving, the more you will have to save later in life to reach the same goal.

To illustrate the point, if your goal was to save $100,000 and you put away $200 a month like the median guy is doing at a 5% annual return starting at age 23, you’d hit your goal just past your 45^th birthday. If you waited until you were 35 to start saving, you’d need around an 18% annual return get to the same $100k at 45. Alternatively, at a 5% annual return, you would have to more than triple the amount you save per month. Oof.

Peer pressure

I find it interesting that social media is awash with people talking about net worth and benchmarking themselves against that data, and yet the savings rate in America has been declining for decades. Social media does a great job at making the masses feel inadequate, but a terrible job of guiding them to do the necessary things to actually build wealth.

The lesson in all of this? Ignore social media, particularly as a means of benchmarking yourself. Stop worrying about what your neighbors are doing. Whether you’re the “median American” or a fabulously wealthy individual, there will always be someone with more money than you. If you want to actually build wealth, focus on saving and start as early as you can. Heed Warren Buffett’s advice: “do not save what is left after spending, but spend what is left after saving.” Because when it comes to compounding, time is your friend.

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References

1) Federal Reserve – Federal Reserve Board’s triennial Survey of Consumer Finances (SCF) https://www.federalreserve.gov/publications/files/scf20.pdf 

2) This quote has been attributed to him, but there’s a lot of debate as to whether Einstein actually said it. It is fitting though.

3) Fidelity – “What is the average salary in the US?” – https://www.fidelity.com/learning-center/smart-money/average-salary-in-us 

Disclosures

*This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Actual investor results will vary.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Reveille Wealth Management, and not necessarily those of Raymond James.

All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Past performance is not a guarantee of future results. Individual investor's results will vary.

All investments are subject to risk, including loss. There is no assurance that any investment strategy will be successful. It is important to review the investment objectives, risk tolerance, tax objectives and liquidity needs before choosing an investment style or manager.