Many people have touted the $850,000 mark in investment assets as the great tipping point in wealth creation. I wholeheartedly believe that the $100,000 mark in investments is the true tipping point. I believe this because $100,000 is the point for a lot of people in which their investment income becomes significant and may outpace their savings per year. Nonetheless, $850k is probably the next important milestone after reaching $100,000. You may be asking yourself just what is so special about $850k?
In the United States the real median household income in 2020 (the most updated figure I could find) was right around $68,500. A family may earn $68,500 by going to their jobs every day for at least 40 hours a week. They exchange their time for money. What would it take to generate $68,500 in investment income thrown off from a portfolio regardless of how many hours you worked? At a rate of 8% you will need right around $850,000. If you have a portfolio of $856,250 and you earn an 8% return, then you will have about $68,500 generated from these assets. The median household income fluctuates from year to year, so I have rounded to $850,000 to make it sound neater.
As you can see, once a family reaches the $850k mark in investment assets, they have the ability to generate their yearly income from investments alone. This gives families a lot of options. They can continue to work and use the generated income to supplement their standard of living by buying a big TV, taking yearly vacations, or whatever they please. If they are content with their standard of living, they could theoretically retire I suppose. Most likely though is that they continue to work and reinvest the money thrown off from their investments. A portfolio can really start to snowball into huge numbers if you are reinvesting $50,000+ every year! It wouldn’t take but a few years to reach the million-dollar mark.
I stated that I thought the $100k mark was important because it is the point at which the investment income can start to outpace an average person’s savings rate. Well, the $850k mark is important because it is the point at which the investment income may begin to outpace a median household’s income. In this regard $850k is a much bigger tipping point than 100k because your wealth really does start to snowball from continuous compounding. All of those years of saving to create a capital base and reinvesting your dividends and capital gains finally pays off. The power of compounding finally shows its beautiful face and becomes very noticeable as its effects become larger and larger.
Compounding may take many years to create its foothold, but once it does it is unstoppable. For many, this unstoppable force begins to be noticed at the $850k milestone. It is nice to know that every time you go to work during the day to earn money, your portfolio is going to work and making the same amount of money. Even if your yearly income is well above the median household income in the United States, it is nice to know that your portfolio is generating the same income as the median household in the US as if it were getting up and going to work every day. This milestone offers a financial peace of mind. That may be more important than anything for most families.
Money and Medicine for Millenials 