The Above Average Millennial Net Worth
The Millennial Generation (18-29 years old) has gotten a bad rap. I’m part of this group (as much as I deny it due to the negative connotation!) and can safely say, that they (not we) deserve part of it, but not all of it! So where do we proud few, we above average Millennials rank? What should our net worth goals be?
In September, the WSJ reported that as of 2013, it only takes $10,400 to be richer than a millennial (which they describe as under 35 years old)! Think about that, if you have a 401k plan, chances are you have a greater net worth than that (assuming minimal debt). That even includes 6 extra years of earnings than my definition! Unemployment in June 2014 fell to 6.1% but the unemployment rate of Millennials remained at a whopping 15.2% if you include those who have given up looking for work.
It’s hard to get ahead without a job! But for the rest of us who have jobs and are working hard towards financial independence, how do we compare ourselves to a financially sub-par generation? We don’t, obviously. We need our own formula.
Let’s borrow from Financial Samurai’s definition of an above average person and make a few changes for the millennial generation:
- A person who went to college and performed well.
- Saves for the future with the goal of retirement.
- Does not depend on the government or their parents for financial support.
- Understands the importance of risk-reward in investing and in their career growth.
- Consistently seeks to improve in all facets of life, not just their career. This includes, becoming or staying healthy, learning, and being socially healthy (this includes surrounding oneself with like-minded individuals).
- Has some student loan debt initially but focuses on paying it off immediately.
- Spends money to enjoy life instead of purely save for retirement (namely a lot of travel).
Student Loan Debt
We’ll explore student loans first. Generation X had a much more favorable higher education environment than Millennials. How you may ask? Less than half of graduates in the Class of 1994 left university with student loans compared to over 70% for the Class of 2014. The average amount of debt has almost doubled from an inflation-adjusted $17,500 in 1994 to a whopping $33,000 for the Class of 2014. This represents an inflation adjusted CAGR (compound annual growth rate) of 3.2% or 6% if we don’t adjust for inflation.
Meanwhile, on an inflation adjusted index, median income has fallen 0.5% per year. So, if we take the growth in tuition of 3.2% and tack on another 0.5% for falling real (inflation adjusted) income then the true effect is more like 3.7% annually. I say that is the true effect because your income level is directly associated with your debt level. Stating the obvious, right?
Pre-Tax 401(k) Savings
As a result of student debt, Millennials will not be able to max out their 401k contributions immediately. Let’s look at two scenarios here. First, in the Conservative case, we’re assuming it will take 3 years to pay off your student loan debt. As the average debt is $33,000, we assume our above average Millennial had scholarships and internships in college that paid off some of their debt. In the Conservative case, we assume $22,500 of debt to be repaid in 3 years (~25% less debt than average) and in the Aggressive case (assuming a better than average internship every summer) we will assume that we have $7,500 of debt to be paid off (~75% less than average).
Keep in mind that even though these debt amounts seem “much better” than average at first glance (especially in the Aggressive Case), state scholarships and worthwhile internships quickly add up. For instance, a Wall Street internship pays the pro-rated amount equal to a $70,000 salary year. A rational, above average Millennial will use a lot of this money wisely.
After the initial pay down of debt, it is expected that you contribute the maximum amount to your 401k per year. Both cases are generally conservative for two reasons. First, we assume the max contribution amount of $17,500 does not increase. Second, we assume a very conservative 4% return in our Conservative case and a less conservative (but still below historical average) 6% return in our Aggressive case.
Note that we’re assuming these are pre-tax savings in an effort to be conservative. I’ll apply a punitive tax rate further on in the analysis.
Home ownership is widely considered to be a key stop on the road to wealth. Studies come out every few years detailing that homeowners have 20-40x greater net worth than renters. A few thoughts about this: renters are typically younger (and thus have less time to build their net worth) and renters do not include the extremely affluent which skew statistics. Regardless, those who own homes will build equity in their home which will become a valuable (and illiquid) asset.
However, real estate, namely your home, should not be included in your net worth. Chances are, when you retire, that you will not sell your home and thus will not be able to draw money from your home like you will your savings accounts. To go another route, Millennials just aren’t buying homes until they start a family. Home ownership simply isn’t as important to this generation as it was to previous ones. Thus we can safely exclude this asset from our calculation.
The Above Average Millennial will have very solid income streams once they turn 30. For example, associates (relatively early career) in banking can earn anywhere from $85,000 to $110,000 in base salary alone. Factor in a 25-50% bonus (conservatively) and all of a sudden you have a very large amount of cash flow.
That being said, it’s highly unlikely that the above average millennial will not save outside of their 401k. Taxable accounts are typically the way to save here. I will assume that beginning in their 5th year of work, outside savings will begin modestly at $2,500 and ramp up to $10,000 over time. See the chart below for my assumptions.
Keep in mind that these savings seem modest given the salary range I mentioned for an early career banker, but that salary range is on the higher end of the spectrum. So for another example, let’s look at different career: saving $5,000 a year extra as an engineer shouldn’t be difficult as the total saving rate including your 401k would be approximately 32%. I’m also assuming that around age 30, you will begin to start thinking of starting a family and thus buying a house. The down payment required will eat into much of our post-tax excess cash flow.
Lastly, this other income should not solely come from your salary. Those who truly think as the wealthy do always find other ways to earn an income. Some will invest into business ventures as active partners, some as passive partners. Regardless of the method, you should always be thinking of how to make an extra buck!
The Above Average Millennial Net Worth
Let’s bring this all together now. We’ll assume a 33% tax rate in retirement to continue being conservative with our 401k savings.
As you can see, the difference between the two cases is almost $1.5 million! This simply goes to show the power of compound interest. When you compound at 4% versus 6% over 43 years, you naturally will see a huge difference. The take away in that difference should be to start investing early. The quicker you pay off your student loans and build your savings base, the sooner you can just watch your money exponentially grow!
I would argue that $120,000 at the age of 30 (post tax) is a very conservative number. Assuming you reach the max 401k contribution of $17,500 for just 5 years, you’ll already have almost $90,000 saved in pre-tax dollars assuming zero return! By age 60, the average tax adjusted net worth should be approximately $1.9MM excluding any real estate equity built up. Not too shabby!
This conservative approach (when it comes to tax and interest rates) will mean that many of you already have much more saved than I projected. For example, it was recently reported that at just a $135,000 salary, which is easily attainable in banking and technology sectors, below the age of 31 puts you in the top 1% of your age group! Thus, using a salary near $135,000 or anywhere near the top 1% is unrealistic, even when we’re discussing the above average millennial.
May the (compound interest) force be with you!