Over the years as I’ve built companies and have seen my income fluctuate and saved and invested, one question comes up continually: How much money is enough to be happy? What are we working toward? Should we always be hustling at the expense of other parts of our lives so we can collect more stuff to put in our storage sheds?
It comes down to answering the question: how much money is enough for what?
Before we get into that, let’s get some perspective. Our perspective on what a lot of money is has been grossly skewed by the over reporting of celebrity net worths. Whether it’s singers, actors, athletes or CEOs, the press loves to tell us how much money they make and what their net worths are.
Most of these figures are hugely misleading as the press very often confuses income with net worth and the salaries they report don’t account for agent fees, taxes, dues, etc. For example, when you hear that a celebrity got paid $5 Million to star in a movie, consider that 20% of that goes to their management and another 50%+ to taxes, especially if they live in California, and a few more percent to business expenses. That’s still a lot of money, but keep in mind it’s only a very select top 50 or so actors that get that kind of money. Perspective.
Even worse, Forbes recently reported that Kylie Jenner was a billionaire because her company did near a billion dollars in sales (I’m a bit reluctant to write her name on my website, but it’s a good example). Very sloppy reporting. Income and net worth aren’t the same thing. Sales of your company and net worth even more so!
are you The Top 1%?
The top 1% has become a popular phrase. People want to vilify them for having so much money and for not paying “their fair share in taxes.” So what does it take to be in the top 1%? Let’s look at the numbers by age group, since it makes more sense to compare stages of life. A 20-year-old wouldn’t be expected to make the same as a 50-year-old.
For a 40-year-old to be in the top 1%, he or she would need to earn $320,000 per year and have a net worth of $3.2 Million. The top 1% earnings top out at $470,000 for 50 and above. For the full breakdown, see this CNBC article.
Incidentally, to be in the top 10%, you need to earn $138,000. Also, contrary to what we hear in the news, the top 1% of tax payers account for more income taxes paid than the bottom 90% combined, while also paying at a higher rate (27.1%). 1
What about the top 1% worldwide?
Let’s move beyond just the U.S. What does it take to be in the top 1% of the world? A lot less! In fact, a lot of middle class Americans make that list since it requires only $32,400 per year in income or $770,000 in terms of net worth. 2
The reason millions of Americans are in the top 1% globally is because the U.S. is so rich and many parts of the world are very poor, even as billions of people have risen out of poverty in recent decades. Average U.S. household wealth in the U.S. is $403,974 and in Europe it’s $144,903, while in other countries it’s much less. In India it’s $7,024 and Africa it’s $4,138.
It’s true that the rich are getting richer, but the poor are getting richer too. So if you’re a middle class American or European, you’re in the top 1%!
What about the top 1% in the history of the world?
I couldn’t find any stats on this, but just think of it in terms of purchasing power and quality of life. Modern life is much more luxurious and affordable than in any other time in recent history. The richest kings didn’t even have running water or electricity for nearly all of history. Our grandparents didn’t have the purchasing power we do.
If you’re interested in the trends in progress and the decrease in world poverty, I suggest readying this incredible article (with lots of great graphs) and watching this video where the statistician Hans Rosling graphically shows what’s happened in the past century and why poverty will likely disappear.
The cost of most things has either steadily dropped or stayed the same as features have been added. For example, you can see in the graph below that over the last century you can buy a lot more food for the same hour or work. Wages have gone up and the price of most food has come down.
How much money is enough to be happy?
Now that we have some perspective, let’s look at how much money it takes for people to be happy. Then we can look at what financial goals are realistic to get there. Of course, money can’t buy happiness, but it makes a good down payment.
Science has answered the question and the answer is $75,000. A person’s happiness increases with income until $75,000, after which a person feels no more happy making $150,000 or $5 Million than they were making $75,000. This is according to a study done by 2 Nobel Prize winning Princeton professors. 3
The median household income in the U.S. in June 2018 was $62,175, so it looks like most people are near the level required for optimal happiness. 4
So why does everyone seem so unhappy?
First of all, they’re not. The data shows that people are generally happy and satisfied. The media portrays a different picture of deeply dissatisfied and upset people over a range of topics, from politics to what some celebrity said. Of course, the reason is drama sells. That’s why The Bachelor is so popular, despite being so stupid.
Second, as Theodore Roosevelt said, comparison is the thief of joy. It doesn’t matter at all to me if my neighbor has tens of millions or dollars and even less is the CEO of Whatever, Inc. is making $80 a year. What matters is how we’re taking care or ourselves and our families.
science says to Focus on people and achievement, not on stuff
What does this have to do with retirement savings? It changes how much you may need to save and puts our goals of wealth into perspective. No one needs a mansion or private jet to be happy. Don’t buy into the hype. Being successful is multifaceted and that feeling of success doesn’t come from just accumulating more stuff.
In fact, science shows it’s the opposite. Happiness comes from relationships, achievement and having enough money to cover the basics. Everything else is just more work. You don’t need to hustle 24 hours a day and lose your mind. The world is figuring this out and trending toward shorter workdays and people are happier as a result.
How much does it take?
If the goal is to live off income and dividends, then you only need 25 times your desired income. Many people live comfortably on much less than $75,000, but we can see that even that amount is enough to be happy.
Keep in mind these numbers when saving for retirement. You may find you can retire a lot sooner than you might have expected.
Using the 4% rule, would mean you’d need a nest egg of $1,875,000. This could be much less if you lived in an inexpensive state or country, you live on much less and you have other sources of income like social security or income streams from a business.
Many people in the Fire (financial independence retire early) movement shoot for $750,000 to $1 Million in retirement so they can retire on $40,000 a year. For a good saver, both saving that much and living on that much is entirely doable, especially given that dividends are taxes much less that ordinary income.
Whatever your number may be, the data shows that it takes a lot less than most people think to be happy and feel successful and to live a comfortable life. Let’s feel gratitude for what we have while striving to become financially independent.
For more on reaching Financial Independence, see this section.