I absolutely can and will call $1M wealthy. Anyone who thinks it isn't is absolutely living in a bubble.

I once shared this outlook, but when one considers their own ideas about the lifestyle "wealthy" entails, and run some numbers, specifically determine the annual spend for that lifestyle, one will quickly realize the truth. A million can be blown in a year, or SWR'd (safe withdrawal rate) at $40k a year indefinitely. Can you retire on $40k a year? Would you want that level of income and lifestyle?

Of course this depends on location and cost of living. I am referring to someone in the US.

Edit: Specifically, does anyone (in the US) consider a $40k year income to qualify as "Wealthy"? Since that's what's being discussed here.

$40K is more than the median personal income in the U.S ($35K as of 2019). Plenty of people would consider $40K/year without having to work wealthy.

Even in VHCOL areas, $40K/year is fine if you own your own home and your kids are out of childcare years. VHCOL areas are typically VHCOL because of housing prices and their effect on service-provider wagss. If you take them out of the equation and only need to pay for food, gas, entertainment, utilities, insurance, and depreciation on your car, $40K/year (= $3.3K/month) is plenty.

> Even in VHCOL areas, $40K/year is fine if you own your own home and your kids are out of childcare years.

Are you considering "childcare years" to include college? Also, in CA/IL/NJ you could easily spend $15k/yr in property taxes alone. That would leave $25k for everything else. Lastly, the average price of a new car sold in the US is $40k. You can buy used, sure, but these days even those are getting more expensive.

"Are you considering "childcare years" to include college?"

Somewhat. Personally I think college will be obsolete by the time kids today reach college age. It was a bubble in the early 2000s when I graduated (a significant number of my classmates did not get jobs that make back the debt they took out for it), it's certainly a bubble now, and I think the bubble will have burst in 18 years and people will realize that it's stupid to go to college.

But even if you don't believe quite so extreme predictions - the advantage of thinking in balance-sheet terms is that you set aside funds for these expenses and let them compound until you need it. I just ran a NPV calculation on 4 years of college @ $37K/year starting in 18 years with a 7% discount rate, and it's about $40K. [Note that the effect of inflation on this applies to both college tuition and the discount rate; 7% is average real (after inflation) returns to stocks, but if college tuition rises faster than inflation (say an extra 3%, which is consistent with the last 2 decades), you'd subtract that from the discount rate, and the number comes out to about $70K.] So you'd set aside an extra $40K per child when you retire, target $1.08M instead of $1M, and then you have your kids' college funds.

"Also, in CA/IL/NJ you could easily spend $15k/yr in property taxes alone."

Yup property taxes in VHCOL areas are a big issue. The math still works out though - if you take the budget yupper32 posted down-thread and subtract out taxes and rent, you're spending $1570/month on necessities and have about $1800/month for everything else, more than enough for property taxes. Or just don't live in CA/IL/NJ.

"Lastly, the average price of a new car sold in the US is $40k."

Amortized over 10 years, that's $4K/year or about $333/month, probably a little less because of time-valued discounting. That's already in the budget below - they list $300/month as car payment.

So fine, US$40k/yr isn't comfortable living in some places. But it's very comfortable living (given the lack of any need to do paid work) in many others. Context is everything. If you really must live in an expensive part of the USA, then $1M in the bank is not going to cut it.

> I once shared this outlook, but when one considers their own ideas about the lifestyle "wealthy" entails, and run some numbers, specifically determine the annual spend for that lifestyle, one will quickly realize the truth.

In other words, at some point you underwent lifestyle inflation and didn't realize it. And now you're unwilling to give it up.

> Of course this depends on location and cost of living. I am referring to someone in the US.

Millions of people raise families on 40k/year in the United States. These are your fellow citizens. Perhaps you can ask them how they do it and whether they are "satisfied" with that level of income and lifestyle.

> Millions of people raise families on 40k/year in the United States. These are your fellow citizens. Perhaps you can ask them how they do it and whether they are "satisfied" with that level of income and lifestyle.

I have. They are not satisfied.

$40k

Taxes - $5000/year.

Monthly budget: $35k/12 = ~$2900/month

Rent - $1200

Utilities (incl. tv + internet + phone + gas + elec) - $300

Car payment - $300

Car insurance - $90

Food - $300

Gas - $80

Health insurance - $500

Oops we're already at $2770. Hope you don't need your tires changed or have kids. Maybe you can just go without health insurance for a while. After all, having health insurance is really just the result of lifestyle inflation.

What about laundry? You have a free in-unit machine? Otherwise that's like $40/mon. You also better not have any other loans. Fell behind during Covid and took on CC debit? Good luck paying that off for 10 years. Went to school? Hope Biden cancels some of your debt, because that's the only way you're paying that off. Also, Trump era tax changes mean you now have surprise tax bills every year because less is being taken out of your paycheck. Now you have $80 in fees and counting on top of the tax bill that you still owe.

I'm not making any of that up. That's real. Why don't you talk to people instead of pretending like $40k is enough to be "satisfied"?

Not going to argue with the larger point you're making, but to nitpick:

> Car payment - $300

Is way too high. I know it's "common", but it's also entirely unnecessary to pay that much. If I add up the cost of owning a car (purchase price + maintenance, but not gas), it has never been that high for any of the cars I've owned in the last 20 years. Not even close.

Buy old reliable cars. Even if one of them ends up being a bad deal you'll easily average out to less than $300/mo.

> Health insurance - $500

If your income is $40K/year, you'll pay less than that (if you're single).

> Rent - $1200

Assumption would be that you've paid for the place. Otherwise, this number is highly variable.

> Taxes - $5000/year.

I doubt it. Will highly depend on the state. You have various deductions, etc that will bring your MAGI down quite significantly.

I lived on the equivalent of today's $32K/year for many years very comfortably. Had hobbies, bought pricey electronics, and traveled cross country often - always staying at motels (so not camping or sleeping in the car).

> I'm not making any of that up. That's real. Why don't you talk to people instead of pretending like $40k is enough to be "satisfied"?

As noted above, I lived on less for years. I didn't even try to be frugal. I won't claim everyone will have it as easy as me, but I can assure you that I was not an extreme outlier. I hung around those with similar income, and their experiences matched mine.

$40K was the starting salary for new college grads, just out of school... 25 years ago. To think anyone with real expenses, like raising a family, would be "satisfied" with this is simply not believable.

Just adding to your point:

Not only do millions of people raise families on $40k, they also do so while still living in NYC, SF, Seattle, and other expensive cities.

Raising a family in NYC on $40k is what poverty looks like, not wealth.

Thousands of families in these cities still do this.

I think poster is saying $40k a year is fine in LCOL but not wealthy. And it's the yield of $1 mil.

$40k a year during retirement. That was the original argument.

With mortgage paid off and grown kids and social security supplement, $40k is plenty of money.

Adding in social security is really moving the goalposts. The discussed scenario is about working for less than ten years, which means much younger than 65-72.

They're also including a mortgage that's paid off lmao.

Yeah totally, $40k is plenty. You just need to not have kids, have a paid off house, no loans, live in LCOL area, get grandma's inheritance, have it come from a retirement account with minimal taxes, hope inflation doesn't kill your $40k over time, hope healthcare costs don't continue to rise, etc....

> Can you retire on $40k a year?

Maybe in Europe.

No, in the US. Not even close. Even with a paid-off house. Certainly not before "retirement age".

Health care is the reason.

You can still get ACA subsidies if you fall within the income level it's not means tested, they absolutely designed it this way to be gamed. Also qualified distributions from a ROTH IRA are not considered part of modified adjusted gross income.

So do your mega-backdoor ROTH conversion and take out of that and it doesn't count against the insurance-company subsidy.

The subsidies don't help with copays, deductibles, and co-insurance, right? Those can run into the five figures even on a "silver" plan, in a bad year. If someone on the plan gets cancer, congrats, now every year is a bad year.

that's partially true, but... 'retiring' on $100k year is still potentially disastrous if you have a major health issue.

Sure, yeah. My point is mainly that expenses for early retirement in the US have the potential to vary a lot compared to... well, basically any other OECD state, really, mostly due to healthcare. This makes the lower bound for a reasonably-safe early retirement quite a bit higher, such that merely generating enough safe-withdrawal income to live on in a good year isn't enough, even if the markets do exactly as well as you're counting on and that income's steady.

Obamacare subsidies are based on income. You are likely getting subsidies at this level of income. Will it exist for the next 40 years, who knows?

A couple years of serious illness for you or anyone you're responsible for (spouse, children) will still ruin your retirement plans, if you try to retire early on $40,000/yr in income. A "Silver" exchange plan, even if the premium were $0/m, would still expose you to so much financial risk ("max out-of-pocket") that you'd be rolling some not-very-friendly dice, trying to retire early.

What is the max out of pocket number that you are seeing that is so financially ruinous?

My out of pocket maximum is something like $7000/year. That would be painful on $40k/year, but we're talking about someone with a $1M nest egg, so unless you hit the maximum every single year, its not impossible to cover. Spending $47k/year for a couple years instead of $40k isnt going to financially ruin someone with $1M.

My assumption is that a couple (say) would be running with pretty thin margins, even assuming no mortgage interest or rent and modest living, on $40,000 a year and a fairly low CoL area, so losing another $7k (that's per person, right, not the max-out-of-pocket for the whole plan? Or maybe your exchange plans are way better than ours) would be be very painful, at best. A forever-alone hermit living in a rural trailer park might be another story—there are definitely some circumstances I can imagine in which it might be kinda OK to try to retire before Social Security and Medicare kick in on $1m savings, but not ones that involve anything like a normal life.

And sure, you may not be missing payments thanks to the $1m in the bank, but if you start eating that principle too early (=before you're 60ish years old, at a minimum) you might find yourself needing to get a job after being out of the work force for (say) 10 years and while possibly dealing with serious, chronic health problems. I'm not sure how disability works when you haven't worked for a few years due to retiring, and have six-plus figures in the bank still, but my guess would be "it doesn't", until you are, in fact, ruined.

Agreeing here, but to clarify, a million is probably more like $32,500/year indefinitely. The 4% rule is outdated and was designed for 30-year timeframes anyway.

I graduated during the Great Recession and got a job as a case worker for soldiers and families in need with a defense contractor that paid <$30,000/year. I lived in the DC area, which is notorious for its high cost of living. So you can definitely make things work on a shoestring budget, even in a pricey area. I guess the question is does that make you "wealthy" if you don't have to work to earn that $40k.

TL;DR: $40k/year in exchange for working full time = not wealthy. $40k/year without having to work = wealthy.

I consider $40k/year pretty good, and definitely enough for me to live comfortably on here in Austin TX (Source: I've lived here for 13 years now, and I'm only just now getting close to spending+taxes [retirement+charity excluded] exceeding $40k as I've started spending more liberally.) I've got friends here getting by on half that.

So no, earning $40k/year as an individual is pretty good. It's only slightly over the 50%ile (but nearly double the 25%ile). Not wealthy.

However, having enough money in savings that you get $40k/year without having to work is something else entirely. A 65-year-old with that nest egg is borderline-wealthy. A 40-year-old with that level of savings is solidly wealthy.

If you can retire by age 40 and still have a higher income than half the country in your retirement, that's wealthy. Sure, you don't have a private jet, but you do have forty hours extra free time each week.

I agree with everything you wrote here except this:

> However, having enough money in savings that you get $40k/year without having to work is something else entirely. A 65-year-old with that nest egg is borderline-wealthy. A 40-year-old with that level of savings is solidly wealthy.

Why the difference? The 65 year old is going to be able to actually draw down some of the nest egg much sooner than the 40 year old. The 40 year old will be 65 some day. Could you explain what you mean? Is it just that the 40 year may still earn/save even more money, despite not actually needing to?

Yeah, I don't have a great answer to that question, but it certainly feels like there's a tangible wealth difference between "I can retire at standard retirement age" vs. "I can retire 15 years early".

It's the same a 20-year-old owning a house vs. a 40-year-old owning a house. Same assets, but the former stands out as exceptionally well-off.

I think the statement makes the most sense if you assume the 40 year old could choose to retire but doesn't. If they do retire, there's at least a greater level of risk to get to 65 with sufficient principal to continue paying out $40K/year. (Alternatively, the market is such that the principal is higher by the time they're 65.)

$40k/yr on $1M is a 4% rate of return. Where are you seeing a guaranteed rate of 4% at this time?

It's not guaranteed, but based on historical average returns for the stock market we frequently assume ~7% growth - ~3% inflation = 4% as the amount you can take out each year indefinitely while your inflation-adjusted principle stays constant.

Looking around, a lot of places[0][1][2] are using 10% growth - 3% inflation, so I guess the 4% is the more conservative estimate.

[0] https://www.nerdwallet.com/article/investing/average-stock-m... [1] https://www.sofi.com/learn/content/average-stock-market-retu... [2] https://www.fool.com/investing/how-to-invest/stocks/average-...

If you're planning to live on your investments' income generation, and nothing else, putting them all (and arguably any) in the stock market could be catastrophic.

One minor downturn for that last just a few months, and you have zero income.

IMO, "US$1M nest egg, live on proceeds" requires guaranteed income, and more or less excludes speculative investment.

I appreciate that others opinions on this may vary.

Under what set of assumptions does a "minor downturn" lead to zero income?

I've lived through multiple major crashes that lasted a lot longer than a few months and it had no catastrophic impact on my (theoretical) ability to safely generate an income from public equities. I am having a hard time coming up with a realistic scenario where a responsible person would become insolvent investing in public equities with an expected return of 4% (inflation adjusted). And in practice, most people doing this have a hedge of some type against a protracted downturn -- the cost of the hedge is already baked into the 4% expected return.

There is no such thing as guaranteed income no matter how much money you have. The only return that can be guaranteed is a total loss since the value of all assets can go to zero. Picking a different selection of assets, including cash, is just rearranging the set of ways you can lose everything.

Most of the retirement risk is a byproduct of having inelastic expenses that run right up against the reasonably sustainable withdrawal rate. That might happen more often with only $1M in the US, but even then it depends on your lifestyle.

> There is no such thing as guaranteed income no matter how much money you have.

state bonds (free of federal tax) backed by an insurance policy are pretty close to guaranteeed income. At least that's where I put my first (and only) half-million (for a while).

> And in practice, most people doing this have a hedge of some type against a protracted downturn -- the cost of the hedge is already baked into the 4% expected return.

All true if your goal is to generate a 4% return over the long haul. Not so easy if your goal is to generate a reliable 4% income stream. The 4% return, reinvested, will be smoothed out over time, and if things are planned well, achieving that over the long haul should be fine. Pulling 4% out of the investment every year, on the other hand, is much harder to cover with hedging.

Remember, the goal in this case is not to generate a 4% average return over the lifetime of the investor. It's too generate an annual income of 4% of the investment value, without ever depleting the investment value. These are not the same goals.

I suspect the difference in outlook is in defining "income". Earlier, a goal of "living off the gains" was states, implying to me either dividends or profitable sale of securities when you rebalance a portfolio.

The fiscally conservative mindset is that in a downturn, dividends shrink. At the same time, being forced to sell securities to cover living expenses means "losing" money from your nest egg, not living off of gains. Someone with this view would be balancing their portfolio to have enough cash and/or bonds to support them through some unknown future, and only expect to sell stocks when the market is doing well, to realize gains. Then, one needs to consider the rate of return of such a safe portfolio...

$1M is certainly not wealthy in a first world country.

For example it it is not enough to retire when older and live a moderate lifestyle in New Zealand.

Firstly, you need to own an average home in the city you live in. Don’t move away from your friends. Don’t live in a dangerous suburb. I live in Christchurch where I was born, median house price: $693,000 (Wellington and Auckland are a lot more expensive).

Secondly, you need residual income from investments. New Zealand pays superannuation to everyone that reaches retirement age*, but it is not enough to keep your home warm or go to a café every day.

The figure I aim for is NZD2M. $1M buys a median home in a desirable suburb (7 suburbs in Christchurch have a median price over 1M), and $1M is left to invest. I am middle aged: the amount you need to aim for goes up drastically if: you are younger, you live in an expensive city, you live in an expensive country.

NZD2M gets a comfortable retirement at present. It definitely doesn’t get a “wealthy” retirement (no holiday homes, no wealthy holidays, no flash yacht).

* retirement age is currently 65, but is likely to be increased because that is unaffordable for the country as it currently is economically.

> Anyone who thinks it isn't is absolutely living in a bubble

I am, for example, a native of British Columbia. My home town, a humble one, now has an average home cost of $1M CAD. $1M will certainly not furnish retirement in any above-average Quality Of Life situation. "Wealthy" isn't living an average first-world lifestyle...

It's more free as in freedom than wealthy per say. You probably aren't going to go buy a Ferrari with $1 mil in the bank, but you also probably never worry about putting food on the table again. At least if we're talking wealthy in the "own a yacht" sort of sense.

Consumer expenditures, "Average annual expenditures for all consumer units in 2020 were $61,334", according to BLS.

Average isn't great, I wish they reported median, but anyway that's about 6% of a million, which is a pretty aggressive number.

You could get up to 10% on 1M investment annually (that is what my friend has). Sure he does not have private yacht but one can live quite comfy on 100K without lifting a finger and that is what he does.

> You could get up to 10% on 1M investment annually (that is what my friend has)

We have a hundred years of investment data in the United States that says this isn’t true.

A 10% withdrawal rate will lead to portfolio failure 50% of the time after about 14 years. You can calculate using historical data here: https://engaging-data.com/will-money-last-retire-early/

There are mountains of research showing the safe withdrawal rate for retirement is around 3.5-4%. A million dollars gets you $40K per year at most, not $100K per year.

Anyone expecting to live off of $100K/year with only $1m invested is in trouble in about a decade, even if they could get a mythical reliable 10% return.

Note that due to inflation and downturns, you cannot withdraw an amount equal to the interest you earn. You have to withdraw significantly less than the interest you accumulate.

>"We have a hundred years of investment data in the United States that says this isn’t true."

An average over extended period of time. Maybe my fried is lucky and it's only been 3-4 years of such return for him

The last 4 years have been outliers, and lucky for everyone (except those folks who sold at the bottom and moved to bonds in 2020.)

On average. But if you are lucky enough to invest your first few years with extraordinary returns (say the past two years with 40%+ in index funds) that can greatly skew the outcome due to compounding.

If your friend can reliably generate 10% (not just in the current insane bull market) he should open a hedge fund.

I think that if you tracked S&P 500 since inception years you made about 10-11% year on average.

https://www.investopedia.com/ask/answers/042415/what-average...

He had it for about 4 years I think. Also he does not manage the money. Somebody else does it for him.

Markets have been amazing the last 4 years. You can't use that short of a timeline to predict the next 40.

If your friend gave someone a million dollars and they promised to deliver $100K per year indefinitely, your friend is the victim of financial fraud.

Who said they've promised anything? He said that he was able go get about 10% in a last 3-4 years and that is all.

Returns for the past decade have been quite good even if you're just investing in a diversified equity portfolio. Drop 10% to 4%, which is the rate that most planners use, and you're down to $40K/year. Which isn't that below median US income but many people working in tech in the US would probably consider it fairly bare bones even for a single person.

Let me guess: your friend has only been investing for the past 10 to 12 years. The past 10 years were very good times. Yes, there were a couple rough patches (March 2020, anyone?), and years where things went nowhere (2014-2016?) but if you stayed the course, you were more than fine. If you literally did nothing except put your money in an S&P fund, reinvested all dividends, and waited, you'd be up 15% annually. It won't be like this forever...

Sure, I agree with you that even in a low cost, rural part of Italy (or the US) nobody is living like a tv rich guy on 25k-35k (probably what it would be safe to count on if you're young when you stop working). You're not flying private jets (or first class), not consuming the most expensive things, and you don't have an army of personal servants.

But... the real, foundational difference between being rich and not is not any particular consumption choice but the way one relates to wage labour. The difference in the daily, weekly, and annual rhythms of my life and that of someone making 2-3x as much but with a similar ratio of housing costs to income, savings, etc. are broadly the same. Similarly, someone making half what I do, probably also with a house they're ok with in a ok-ish area which is paid for with a mortgage, has basically the same life I do. Certainly within the broad spectrum of global and historical experience our lives are almost identical and it takes people who are highly attuned to differences in consumption markers (which all humans are within their own societies) to spot them.

The very poor and the very rich have different rhythms of life that put them outside of this mainstream but 75% of the population lives broadly similar lives.

We all get up at some point in the morning five-ish days a week, timed to meet a regular or externally constrained schedule (even freelancers have to be available within certain hours). We have clients or bosses who we have to please in some way or another. Some of us have very good relationships with these people, maybe we run our own businesses and have substantial independence from clients or shareholders. Some of us on the end have a rigid relationship with a boss who sets an hourly schedule.

We go on a thing called a "holiday" (or a "vacation" which is what I believe Americans call the thing they're not allowed to take). If we are lucky, this is to a warm/culturally interesting/snowy place and we do it two or three times a year. If we are less lucky we go on one a year.

Our continued ability to live in our homes and eat is dependent on this way of living.

The little labels on our possessions and how big they are vary, but imagine explaining the real differences to someone from 1,000 year ago. "This man wears wool clothes and goes to a place where he makes phone calls and does things on a glowing screen. This other man wears other similar looking clothes and he goes to a place where he makes phone calls and does other things on a glowing screen. Banker or call centre worker? The one that is high status can expect their boss to require them to work at a moment's notice in the middle of the night."

Compare that to someone who has a potentially substantially lower level of consumption and no longer engages in wage labour for their sustenance needs. Whether they spend their day reading, staring at the clouds, swimming, or flying their private plane is less important than the difference between them and someone who has to work.

Great post, but can I suggest a three-way distinction, instead of two-way:

1. People who need to engage in wage labor in order to survive.

2. People who can deploy resources essentially at will to meet essentially arbitrary goals. This means buying stuff, capital investment, etc. etc., with the limits significantly beyond what (say) a 10x median income person might be able to manage.

3. People for whom neither 1 nor 2 is true.

I don't think we have a great term to describe the third category. Simply by not needing to engage in wage labor, such people are in many ways "wealthy". But lots of the connotations of "wealthy" are related to the second category, and they don't have these abilities either.

This depends greatly on where you live.