There was a graph from a Goldman Sachs survey making the rounds on my side of LinkedIn this past week.
Americans at varying income levels were asked how they would describe their financial situation. And these are the eye-opening results:
The dark blue bars show the percentage of each income cohort that lives paycheck to paycheck.
I don’t find it surprising that 57% of people making $50,000 or less would be living paycheck to paycheck. It also makes sense that the number drops to 36% for people making $50,000 to $100,000. The more money you make, the less likely you are to live paycheck to paycheck. And that tracks all the way up to $300,000 in annual income.
However, the right side of the graph is what had people up in arms. According to the survey, of households earning $500,000+ in income, 40% reported living paycheck to paycheck. Whoa!
Making $300,000 a year puts you in the top 3% of wage earners. If you make $500,000 a year, you’re in the top 1%. You’re telling me nearly half of those people have no money left over each month to save?!?
I personally know households that bring in half a million dollars a year who struggle to set aside money for their future. But 40% is a lot.
So let’s break this down. A household earning $500,000 a year would have to pay around $140,000 in total federal, state, and payroll taxes. That leaves $360,000 leftover to spend each year.
In general, to make work optional and retire comfortably, you’ll need to have around 25 to 30 times your annual spending built up in assets. At $360,000 of annual spending, you’d need $9,000,000 to sustain that lifestyle without working. If you’re not saving anything, it’s going to be quite an uphill climb to reach nearly eight figures in net worth.
For a household earning $50,000 a year, they’d pay around $7,000 in total federal, state, and payroll taxes. That leaves $43,000 leftover in annual spending. That household would only need a little over $1,000,000 to sustain their lifestyle. And frankly, Social Security benefits would cover the majority.
The person who makes $500,000 and has nothing saved is so much further behind on their way to financial independence than someone who makes $50,000 and has nothing saved.
The more money you make, the bigger the responsibility you have to save. Income alone does not determine your ability to build wealth.
Now, I did want to bring up one other point about the survey. The survey’s definition of living “paycheck to paycheck” was: “I find it tough to make progress on any long-term financial goals.”
That’s a very broad question and not the correct definition of living paycheck to paycheck.
Maybe some of the respondents’ long-term goals were to build a $15 million brokerage account. Or buy a vacation home. Or fully pay for their kids’ homes.
And often people think living paycheck to paycheck means not having money leftover after they’ve already maxed out their 401(k), their IRAs, and put some money into a brokerage account.
I think social media has tricked a lot of rich people into feeling like they’re not rich.
So do I really think 40% of households making half a million dollars a year aren’t saving a single penny?
No.
We shouldn’t trust every survey we read.
Thanks for reading!
Jake Elm, CFP® is a financial advisor at Dentist Advisors. Jake a graduate of Utah Valley University’s nationally ranked Personal Financial Planning program. As a financial advisor at Dentist Advisors, he provides dentists with fiduciary guidance related to investments, debt, savings, taxes, and insurance. Learn more about Jake.