The cost of being independently upper-middle class declined a bit in the last year. But just a bit. So don’t expect any shouts of joy here— just an ongoing assessment of how much money we would need to be better off than most.
The magic number this year: $4,363,503.
Yes, it’s time for the annual Life of Riley Index update. The index, which goes back to 1985, measures the amount of income you need to enter the top 25 percent of households in the United States. This year, the estimate is $77,234.
From that I calculate how much you would need in a 50/50 portfolio of stocks and bonds to provide that income. This year it’s the intimidating figure above.
While the amount has been stable in the last few years— it peaked at $4,890,267 in 2012— it’s still enormous. It's more than double what you’d need if interest rates and dividend yields were at their historical averages. That would be 5 percent and 3 percent, respectively.
That $4,890,297 is also more than ten times what you would have needed in 1985. Back then the income threshold was lower ($30,928) and yields were higher than the historical average.
The dividend yield on the S&P 500 rose to 1.87 percent. But the increase was offset by the lower yield on 5-year Treasuries. They fell from 1.71 percent to 1.67 percent. The net result: An itsy-bitsy increase in portfolio yield to 1.75 percent.
I also make two other calculations. First, I calculate how much you’d need at a 4 percent withdrawal rate. That's the income rate an average historical portfolio would have produced. It's also considered a safe withdrawal rate in normal times. This year you'd need $1,950,850.
For retirees, I add how much you’d need to provide the same income if Social Security kicked in forty percent. With that you would need a mere $1,158,510. These figures make the upper middle class life style somewhat more attainable.
Slice it whatever way you like, you need a lot of investment money if you want to live on interest and dividends. One implication: keep your day job.
That is exactly what millions of older Americans are doing. Between 2002 and 2012 the labor force participation rate of those 65 and older rose from 13.2 percent to 18.5 percent. The increase was even greater for workers on the cusp of retirement, those 65 to 74 years old. Their participation rate rose from 26.1 percent to 32.1 percent. As a historical event, this qualifies as weird. It’s the opposite of the long-term trend.
The participation rate increase may be part of the explanation for why things are so tough for other workers, particular the youngest. Labor force participation rates fell for all workers as a group. But the biggest decline in participation was for workers age 16 to 24. So if you’re older and have a boomerang kid, your continuing to work may be part of the problem.
When will the growth of working older people end? Not any time soon, but higher cash returns from savings would make it possible.
Some readers have asked why I focus on this particular level of income, the entry to the top 25 percent. I’d like to say I was scientific about it, but I wasn’t. I just figured that most people like to feel that they’re a little better off than some, or most. (Sorry, that’s just human nature.) So being better off than three out of four households seemed like a reasonable level. Being a 1 per-center seems a bit much. Remember, the goal here is being comfortably well off without working. It isn’t to be a new member of the Forbes Billionaire list.
It turns out that the top 25 percent mark was a wise choice. Happiness research has shown that money has limits. Happiness does not increase much with more income after reaching around $75,000.
So, by accident, we’re measuring more than modest comfort. We’re measuring the income needed to achieve about as much happiness as you can attain with money. Beyond that amount, we need to find our happiness elsewhere.
This could be bad for Ferrari and Lamborghini, not to mention the entire cosmos of luxury brands. Somehow, that doesn’t worry me at all.
The Life of Riley Index
This index shows the amount of investment money needed to sustain the income required to be at the 25th percentile of U.S. household income, given the ups and downs of interest rates and dividend yields. Columns 7 and 8 show the same income for a withdrawal rate of 4 percent and for a withdrawal rate of 4 percent after Social Security provides 40 percent of necessary income, a common Social Security replacement rate.
|Year||S&P 500 Yield||5 Year Treasury Yield||50/50 Portfolio Yield||Top 25% AGI Threshold||50/50 Portfolio Required||Nest Egg Needed @ 4% Withdrawal Rate||Nest Egg needed after 40% Social Security|
|Sources: IRS data, Economic Indicators, Federal Reserve, Bloomberg data, Author calculations. For 2014 and 2015 the income is estimated by adding the inflation rate to the 2012 income figure in the IRS income analysis.|