By Scott Burns
If you want to be rich, you'll need a lot of money.
You didn't need to be told that, did you? But the real question is exactly how much? Try $3.1 million as the entry level for 2009.
That's more than three times the amount required only 15 years ago. It's double what you needed in the crazy days of 1999. This is the amount you'll need in financial assets to be a "person of independent means," capable of living better than 75 percent of your fellow Americans without suffering the indignity or inconvenience of work. If you are hoping to get rich the old-fashioned way--- by marrying well--- you'll have to find a mate with a lot more money than just a few years ago.
The $3.1 million figure comes from my Life of Riley Index, an irregular exercise I do to find out how much money we need to be independently upper middle class. Note that this isn't genuinely rich. It's just middling comfortable. It means you won't be hungry, but you won't gargle with champagne, either. It means you'll own a car, but it won't be a Ferrari. It means your home will never be photographed for Architectural Digest, and you'll never buy a watch that is advertised in The New Yorker magazine or fashions advertised in Vogue.
But $3.1 million is, well, a good start. And it is way more money than most people have.
Here's how I get the figure. Our friends at the Internal Revenue Service, always eager to be useful, compile lots of statistics about tax returns and income. One set is a time series that shows how the distribution of income (and taxes) has changed over time. It tells us that if you wanted to be in the top 25 percent of all households in America by income, you needed to have an income of $64,702 in 2006. (To be in the top 1 percent you needed $388,806, and to be in the top 10 percent you needed $108,904.) That's the last published data, so I take an educated guess at 2007, 2008 and 2009 by using wage increase figures from the Economic Indicators, a monthly government publication. That provides the income figure.
To get the wealth figure I use the average dividend yield on the S&P 500 and the yield on a 5-year Treasury obligation. Then I assume the portfolio is invested 50/50 in stocks and 5-year Treasuries to calculate the average yield from the portfolio. Finally, I divide the needed income by the average portfolio yield to learn the required wealth (see table below).
Needless to say, that $3.1 million isn't written on clay tablets. The amount can be changed by using assets with different yields such as value stocks, relatively high yield REITs or government-backed mortgage securities. That may reduce the amount you need well below $3 million, but the growth of required wealth is likely to be very similar to the figures presented here.
Basically, you need a lot more financial assets these days to replace the income from working your day job. For all the attention to the growth of wealth and the number of people investing, a life of leisure based on dividends and coupon clipping is a lot more elusive than it was 5, 10, or 20 years ago.
Can it be said that life is getting harder?
Yes, it probably is---catching the big brass ring of luxury and leisure requires a bigger stretch than ever.
The Life of Riley Index— (or, how much money you need to be independently upper middle class)
This table shows how much you need in financial assets to produce an income at the 25th percentile of all American households. The actual amount could be changed by substituting investments with different yields than the S&P 500 index and 5 year Treasury note that are used in this example.
| Year | S&P500 Yield | 5Yr Treasury Yield | 50/50 Portfolio Yield | Top 25% AGI Threshold | Portfolio Required |
| 1986 | 3.49% | 7.30% | 5.40% | $32,242 | $597,627 |
| 1987 | 3.08% | 7.94% | 5.51% | $33,983 | $616,751 |
| 1988 | 3.64% | 8.47% | 6.06% | $35,398 | $584,608 |
| 1989 | 3.45% | 8.50% | 5.98% | $36,839 | $616,552 |
| 1990 | 3.61% | 8.37% | 5.99% | $38,080 | $635,726 |
| 1991 | 3.24% | 7.37% | 5.31% | $38,929 | $733,817 |
| 1992 | 2.99% | 6.19% | 4.59% | $40,378 | $879,695 |
| 1993 | 2.78% | 5.87% | 4.33% | $41,210 | $952,832 |
| 1994 | 2.82% | 6.68% | 4.75% | $42,742 | $899,832 |
| 1995 | 2.56% | 6.77% | 4.67% | $44,207 | $947,631 |
| 1996 | 2.19% | 6.07% | 4.13% | $45,757 | $1,107,918 |
| 1997 | 1.77% | 5.77% | 3.77% | $48,173 | $1,277,798 |
| 1998 | 1.49% | 5.15% | 3.32% | $50,607 | $1,524,307 |
| 1999 | 1.25% | 5.54% | 3.40% | $52,965 | $1,560,088 |
| 2000 | 1.15% | 6.15% | 3.65% | $55,225 | $1,513,014 |
| 2001 | 1.32% | 4.55% | 2.94% | $56,085 | $1,910,903 |
| 2002 | 1.61% | 3.82% | 2.72% | $56,401 | $2,077,385 |
| 2003 | 1.77% | 2.97% | 2.37% | $57,343 | $2,419,536 |
| 2004 | 1.72% | 3.43% | 2.58% | $ 60,041 | $2,331,689 |
| 2005 | 1.83% | 4.05% | 2.94% | $62,068 | $2,111,156 |
| 2006 | 1.87% | 4.75% | 3.31% | $64,702 | $1,954,743 |
| 2007e | 1.86% | 4.43% | 3.15% | $67,225 | $2,137,520 |
| 2008e | 2.37% | 2.80% | 2.59% | $69,242 | $2,678,607 |
| 2009e | 2.36% | 2.13% | 2.25% | $70,142 | $3,124,365 |
| Sources: IRS, Economic Indicators, Author Calculations | |||||
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