When the pandemic hit, priorities changed overnight. Health and work became the litmus test to see if he was on the lucky side of the COVID-19 coin.
This lowering of expectations has changed opinions about wealth. In its annual Modern wealth survey, Charles Schwab asked 1,000 people in the United States to rate their views on how much it would take to consider yourself rich. In just one year, the amount people consider rich fell from a net worth of $ 2.6 million in 2020 to $ 1.9 million now, based on the average cited by 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 feel financially comfortable, now to $ 624,000 from $ 934,000 last year.
The drop is due to the impact the pandemic had on so many. More than half of those surveyed were financially affected by the pandemic, with 31% experiencing financial difficulties, 26% experiencing reduced wages or hours of work, and 20% suffering layoffs or leave.
However, when evaluating your retirement number, it shouldn’t change much, unless you’ve drastically altered your lifestyle or spending due to the pandemic. By calculating this number, you can determine your own definition of wealth.
Wealth reality check
Wealth is a construction. Your opinion of how much you have and what you can spend will depend on who you are with and the world you live in. The fact that the level of wealth defined by a survey has changed so much in one year highlights that fact. And, according to the Wealth Survey, many Americans today overestimate how much they need to really consider themselves rich.
Part of the problem here is what do you consider rich? Top half of the country by net worth? 20% higher? The top 10%? Only 1%? Your opinion of the number will determine the net worth you need to call yourself rich.
If you put it in the top 1%, then Americans sadly 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 see the top 10% as the wealth marker, then people overestimate by $ 700,000; you’d need $ 1.2 million in net worth to qualify.
But even the top 20% will probably feel flushed, most of the time. To qualify in that range, you would need $ 558,000.
What do you need?
However, none of these numbers mean much. Someone with a net worth of $ 1.2 million who spends $ 300,000 a year on expenses and toys could have a very difficult time retiring without reducing their expenses. Someone with $ 500,000 and only spending $ 20,000 a year could see his net worth grow significantly in 30 yearseven if they never work again.
Instead, assess your worth as someone in the financial independence movement would, retiring early (FIRE). 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 walk away from your job or take more vacations or whatever you want, achieving financial independence.
To do this, calculate how much you need to spend each year. Include regular expenses that will continue even when you are not working. If you have an emergency fund, then you don’t need to add leeway for unexpected surprises. When you are considering retirement, this may or may not include your mortgage (whether it is paid or will be before you leave your job). Once you have that annual expense number, divide by 0.03. On other words:
Annual expenses ÷ 0.03 = Retirement number
Some estimate that you can multiply the number by 25 to get this target retirement number. That’s based on a 30-year retirement and a 4% retirement rate each year. For those seeking more security and the opportunity to leave work for good, a 3% to 3.5% retirement rate has a greater chance of success during a 40- or 50-year retirement.
If you have $ 40,000 in expenses and you divide it by 0.03, then you need $ 1.3 million. The more you increase your expenses, the more it should be considered safe from a FIRE perspective. The more you cut 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 reduce it to $ 20,000, then it becomes $ 670,000.
The world has experienced many changes, pressures and stress in the last year. Creating a way for you to understand what wealth means to you can alleviate that stress by finding a stable goal to achieve no matter what happens globally.