Have you ever wondered how much money you’ve earned over the years? I mean, it’s gotta be a sizeable sum if you’ve been in the workforce for a while. I was thinking about this and then came up with a natural follow up question. Is our net worth more than what we’ve earned? After all, wealth is what you kept, not what you earned. We are doing quite well on the net worth front so I thought our answer would be yes. You might think you’ve got this one as well, but hold on…
This question is simple and the answer is relatively easy to figure out. However, you probably will be disappointed with the answer. It is extremely difficult to be worth more than you’ve earned, especially when you’re younger. It gets a little easier as you get older, but this is still impossible for most regular people. I’m sure only very few households can achieve this impressive feat. That’s because saving isn’t enough. You need a lot of time, too.
For most of us working stiffs, it is very unlikely to be worth more than we’ve earned. First, taxes take a sizable bite out of our paychecks. After that, we have to pay for housing, healthcare, transportation, food, clothing, entertainment, and all kinds of stuff. It’s tough to save when we have so many expenses which really add up. In addition, we need to invest those savings. It is mathematically impossible for your net worth to surpass your cumulative earnings if you simply save it. Even if you save 50%, your net worth will only be 50% of what you earned. You need to invest and grow those savings to even have a chance.
Financial advisors recommend saving 10% of your income for retirement. This might be fine if you plan to retire at 67, but 10% won’t cut it here. You’d need to save and invest at a much higher rate to win this one. Let’s look at our household as an example.
First, we’ll look at how much we’ve earned over the years. The easy way to figure this out is to head over to socialsecurity.gov and check your Social Security statement. Great news – we can login after hours now. Previously, you could only log on during working hours because the system went down for maintenance in the evening. That was silly because the internet is accessible 24/7. Anyway, here is a graph of our household earned income.
This graph is actually pretty neat to go over. My earnings increased rapidly when I graduated college and started working full time in 1996. It kept rising and peaked at $200k in 2012 when I quit working full time. The high blip in 2012 was an anomaly because I worked just 6 months and sold a bunch of stock options which counted as earned income. As expected, my earned income took a sharp dive after I retired from my engineering career. However, I still made some income from blogging. My online income was a bit low in 2016, but 2017 is looking much better.
Now, let’s see Mrs. RB40’s graph. She graduated at the same time and went off to Peace Corps for a few years. When she got back, she started working and made decent money. In 2005, she quit work to get her Master’s degree and interned for a few years. Her earnings shot up after that and it is still rising at a good clip.
All in all, our household income looks great and we’ve been able to save a sizeable amount every year. Here is what surprised me. Our total earning since 1991 is $2,752,734! Wow, that’s a ton of money. We saved and invested diligently over the years (mostly), but our net worth is short quite a bit.
Below is the chart of our net worth VS our cumulative earned income. We both started off at $0 in 1996 and I think we’ve done relatively well over the years. As you can see from the graph, our net worth is consistently below our cumulative earnings.
Unfortunately, I didn’t keep close track of our finance until about 2005, so we’re missing some data points. The interesting thing here is how much 2007 and 2008 set us back. Our net worth curve took a hit and it is taking a long time to make up ground.
So is it impossible for our net worth to surpass our earnings? It’s tough, but I’m pretty sure we will get there eventually. If our investments continue to do well, we should be there in 3-4 years, but I doubt the US stock market can keep gaining at this pace. However, Mrs. RB40 plans to retire in 2020. That will flatten out our cumulative earnings curve and give our net worth a chance to catch up. We’ll have to see how it goes. Anyway, I’m sure diligent savers who have invested consistently over a lifetime can do it.
Saving Rate and Compound Interest
In theory, the way to beat this is to increase your saving rate. I used our data to plot the 10% to 50% saving rates and assume a 10% annual gain on those savings. Check out the graph below.
If we invested 50% of all our earnings since we started working, our investment would have crossed over in 2013. With 40% saving rate, we would have surpassed our earnings in 2016.
We saved and invested when we were young, but not at that rate. It’s a lot easier to save when you make more money. When we were making $60,000 per year, we couldn’t save as much because most of our income went to basic necessities.
I’m not discouraged, though. Our investments are compounding at a good clip now and our net worth gain has been outpacing our income every year since 2012. Eventually, our net worth will be worth more than what we’ve earned. This is why I said it’s a bit less difficult as you get older. At some point, your investment gains and other passive income will outpace your earnings. This is especially true after retirement. Most of the income will be passive and the earnings curve will flatten out. You can see the bend point in our earning line in 2012. Once Mrs. RB40 retires in 2020, it will flatten out even more.
Why is this so hard?
Now please take my poll below.
I suspect we’ll only see a few affirmatives here. This one is very difficult because you have to be in a sweet spot to achieve this.
- Poor people can’t save because everything goes to cover the cost of living.
- High income earners pay a ton of taxes and their earnings curve rises too fast. Their net worth can’t catch up.
You’d need to be in a sweet spot where you can save and invest consistently over many years to have a chance. Another way to achieve this is to earn outsized returns on your investments early on. Earning big returns on your investment will push your net worth curve up fast. Investing in real estate might be another short cut because rental income doesn’t count as earned income. A big inheritance probably would help a lot as well.
Ultimately, this is just a thought exercise. It’s a huge bragging point if you’ve got this, but most people can probably retire comfortably without it. I’m very interested to know how people manage to do this, though.
Okay, if you answered yes, then please share your secrets with us. How did you do it?
*It was pointed out that I must have been inspired by J$ @ Budgets are $exy for this. He had a similar post 3 years ago – My Lifetime Earnings and The New Wealth Ratio. The subject must have made it onto my topic list and I finally wrote more about it. That’s a long time to percolate. 🙂
If you need help keeping track of your finances, try using Personal Capital to help manage your investment accounts. We have many accounts and Personal Capital shows me the big picture. Also, I’m a huge fan of their awesome retirement calculator. You can read my review here – The Best Free Retirement Calculator.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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