Is $650,000 the Magic Tipping Point in Wealth Creation?

I think the major tipping point in terms of wealth creation and financial freedom probably comes somewhere around $650,000 in productive assets with little or no debt.  That isn’t an arbitrary amount of money.  It comes down to a function of economics.  That is an important distinction – your house, car, and furniture aren’t productive assets so it is more specific than assets less liabilities equalling net worth.

[mainbodyad]The median household in the United States earns $52,000 per year, which is achieved by someone having to sell their time to an employer in exchange for a paycheck.  If they stop working, they stop getting checks. But with $650,000 invested, it only takes an 8% rate of return to achieve the same income.  If the $650,000 is parked in tax-free retirement accounts or other tax-sheltered investment vehicles, it works out to considerably more money because the money that would have gone to the government instead gets reinvested to generate more dividends, interest, and capital gains.

In other words, $650,000 invested at 8% is the point at which the money earns as much as the average American family does working full-time.  If the money is held in tax-advantaged accounts, it is considerably more because a huge portion isn’t going to taxes.

I’m beginning to believe that for the average household, having $650,000 or more in investments is probably a major tipping point. The reason? The median household earns $52,000 per year in salaries and wages. If they had $650,000 in retirement accounts and that money earned 8%, they would be collecting more after-tax dollars from their investments than they did from their day jobs. They could spend their income on big screen televisions and trips around the world, but still watch their balance sheet grow and strengthen over time. Image © Thinkstock

For most people, who have the desire to be productive but don’t want to experience financial stress, that is going to be the point at which they breathe easier.  I don’t think they’d feel “rich”, as I explained in my theory.  It’s not let’s-go-order-a-bespoke-Brioni-coat-for-fun money.  But with that asset base, provided it is in productive investments, someone with financial discipline should be able to always enjoy a stocked larder, full stomachs, fires in the fireplaces, warm blankets on the bed at night, a nice car, regular vacations, a good education for their children, and the independence to do what they love, not just take jobs that pay the bills.  They’d still go to work, spend their salary, but watch their net worth grow higher as time passed and compounding built their treasury.

To see what I mean, think about the average married couple in your life with kids.  If they are fully employed, have a college education, earn a good living, but at the same time their investments are generating as much income as they do from working and that money is getting plowed back into their balance sheet to grow each year, they are going to be fairly content because psychology tells us that it is not – as stupid as it sounds – our absolute level of comfort and security that matters, it is the illusion of improvement and our relative station compared to our neighbors.

Of course, we already know that $75,000 per year is the price to buy happiness so if someone wanted to give up work completely (very few people do – we need a purpose in life), it would require between $900,000 and $1,000,000 depending upon the rate of return that could be earned on the money.

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