Are You Rich? How the Wealthy Are Defined

 

Maryalene LaPonsie

 

How much money do you need to be rich? According to respondents of a 2019 Modern Wealth Survey from Charles Schwab, once you have $2.3 million in personal net worth, you can call yourself wealthy. On the other hand, people responding to a 2019 survey from the market research website YouGov said you need to earn just $100,000 a year to be rich.

 

“Wealth is in the eye of the beholder,” says Tiffany Welka, an accredited wealth management advisor with financial firm VFG Associates in Livonia, Michigan.

 

The IRS, financial advisors and average Americans all have different ideas about what makes someone wealthy. What’s more, a person’s location, age and friends can all play a significant role in whether they feel rich. Keep reading for a look at how various groups define wealth and if you can consider yourself among the nation’s financial elite.

 

Wealth by the Numbers

 

There are often discrepancies in how people perceive wealth. For instance, the 8% of the Schwab survey respondents who said they were already rich believed they achieved wealth once their net worth was an average of almost $700,000. That’s well below the $2.3 million average cited by others surveyed.

 

The top 1% of income earners is also often used to categorize the rich. In the United States, those people make at least $421,926 a year, according to the most recent wage data reported by the Economic Policy Institute, a nonprofit think tank.

 

When it comes to taxes, the standard for wealth is set differently. Single taxpayers need to have an annual income of $518,400 in 2020 to hit the top tax bracket of 37%. For married couples filing jointly, incomes greater than $622,050 are subject to the 37% tax bracket.

 

“Once you get past $200,000, you’ve probably phased out of many tax benefits,” says Jamie Hopkins, director of retirement research at Carson Group, a financial firm headquartered in Omaha, Nebraska.

 

The limits for some tax deductions are even lower. For instance, the ability to make deductible contributions to an IRA begins to phase out for couples filing jointly once they reach an income of $196,000. However, that limitation only applies to those who also have a workplace retirement plan such as a 401(k). For the Lifetime Learning Credit, which can offset the cost of higher education, the tax benefit phases out for joint filers earning $116,000 in 2019.

 

Income VS. Net Worth

 

The size of someone’s paycheck is only one factor contributing to overall wealth. Many times, net worth is considered as well.

 

“Net worth is all the things you own minus your liabilities,” Welka says. In other words, your net worth is calculated by taking the value of your home, cars, retirement funds, financial accounts and other assets and subtracting any debts or payments you may owe.

 

Financial advisors usually consider anyone with a net worth greater than $5 million to be a high net worth individual, Hopkins says. At that point, people have additional considerations regarding estate taxes and planning that don’t apply to lower net worth people.

 

Net worth may be a better gauge of wealth than income, according to some financial planners. “It’s easy to have a high income and a small balance sheet,” says Monica Sipes, senior wealth advisor with Exencial Wealth Advisors in Frisco, Texas. Those with large incomes could spend all their paycheck on debt or expenses and have little in the way of assets. “Real wealth creation is going to be shown in (someone’s) net worth,” she says.

 

On the other hand, just because a person has a high net worth doesn’t mean they have ready access to cash. A person’s wealth may be tied up in real estate or financial accounts such as life insurance where it can’t be easily tapped for spending.

 

Factors That Affect Wealth Perception

 

Wealth can be relative. A person’s age, location and friends can all determine whether someone feels wealthy.

 

Using commonly accepted percentages for budget categories, a $100,000 income would allow you to comfortably spend the following each month:

 

Housing: $2,500

Savings: $1,250

Transportation: $850

Food: $850

Insurance: $850

Utilities: $450

 

That, of course, doesn’t include income taxes which can vary significantly based on your household size and deductions. However, the budget above would leave you with another $1,500 for this and other expenses.