Why aren't more people rich?
If you invest 25k a year + employee match into a tax free ETF and let it churn for 40 years at an average inflation-adjusted return of 7%, you will net £10 million in todays money (assuming 'normal' inflation rates).
This seems ridiculously easy for a lot of people on this forum, yet it seems nobody really is worth that much in real life. Imagine earning £100,000, spend £25k on ETF, take 52k home (UK). 52k is insanely comfortable from my perspective - my parents brought me up on a combined income of £40,000 and we still were able to eat out weekly, go to the cinema, afford gym/netflix etc very comfortably (albeit outside London).
"If you invest 25k a year"
Let me stop you right there...
People are on a hedonic treadmill and inflate their spending to live at or beyond their means.
What I want to know is what company does he work at where the employer matches every bit of the 401k (or whatever the British equivalent is)?
All the 401k matches I've seen have had so much fine print that they end up being worthless. First of all, it's never a 100% match, second of all, it's limited to being a certain (small) percentage of the base salary, and third, it vests over several years so if you switch companies (which realistically happens often) you end up losing most of it.
That's not how it works in the UK, the vesting part. In the UK it's just called a workplace pension, not a 401k.
Here the company chooses the match, most often have a non-contributory contribution too. I.e. if you don't contribute anything, the company will still put money as a % of your salary into your pension. There will be a limit to the match but it can be pretty good. I've seen anywhere from 6% non-contributory + 5% match (16% total assuming you match 5%) to 6% non-contributory +7% match (20% total) to 8% non-contributory + 4% match (again 16% total) etc.
+ You can contribute whatever fixed amount you want above the match and still get tax benefits.
Then when you leave the company, it's still your money. Nothing happens to it, there is no vesting. It just stays in the custody of whoever your workplace uses as a pension provider e.g. Aviva, Aegon, L&G, Scottish Widows etc. Some allow you to transfer it to a different provider, some don't. But you cannot obviously use it until retirement or 25% of it 10 years before (currently will be age 58). At least 75% can only be withdrawn at retirement age.
What's the catch? The more you earn, the less the government allows you to save. The limit gets tapered till it becomes pretty insignificant. I don't have the exact numbers but it gets down to a £XXXX limit per year pretty sure.
This is probably something OP has neglected to consider or hasn't thought enough about.
Also 7% inflation adjusted return is a pretty high assumption but could've maybe been achieved in the past 40 years (except OP fails to remember that low cost ETFs are a relatively new concept so some of that return would've been eroded by fees in reality).
This math means those people are wealthy at retirement age... lots of retirees have assets but don't appear wealthy because they've been living frugally for 50 years.
Even so, those early years do the heaviest lifting thanks to compounding. Very few people actually have $25k to invest in their first few years out of school, and 100% match isn't that common. If you compound $25k a year for 30 years instead of 40 and ignore the employer match, that's going to come down to ~$2.5MM, or $100k / year at a 4% withdrawal rate - a decidedly middle class income.
Now add in potential for student debt, grad school, kids, etc. etc. Lots of random shit can come up as well - maybe an accident that insurance doesn't cover, medical expenses (in the US), you get laid off and burn through savings, you move across the country / world, you get a new job and sell your house at a bad time, decide to retire at 55 instead of 65... the list is endless. Life doesn't fit into an Excel sheet
If you're looking at just people who spend their careers in front office finance, then yes, I would argue a large portion of that sample set will have $10M+ in assets by 65, but that's a very small percentage of people even on this forum, let alone in the real world
Thank you for the response. I see/understand a lot of this, but there are also counter arguments e.g. promotions, inheritance, relationships (wife/husband also working etc).
I think what I'm trying to get at is a lot of people 'sacrifice' their youth for the hope of big bucks, gaining weight, becoming duller and generally not enjoying their work (NOT SAYING THIS APPLIES TO EVERYONE!!!) just to get golden handcuffs and start earning big bucks late into their career anyways. Why not do something more enjoyable, have more free time to do things you enjoy (allowing you to save more aggressively) AND retire with a nice pot?
Perhaps it's just my personal view, but I feel like if you aren't happy with a couple million, you won't be happy with any sum. It is highly unlikely to get millions early on in your life following a 'fixed' path, so why not play the long game whilst enjoying yourself?
"The best-laid plans of mice and men often go awry."
I think there are a lot of reasons that can differ quite a bit on the person. Excess spending, a risky mistake, a medical emergency. Retirement, new career interests, family.
Also, I think there is definitely a lot of money out there of the sort you are talking about. I didn't see as much of it where I grew up, but I saw a lot more of it in college and now in NYC. I'm sure there are plenty of people like that in London.
Because most people are lazy, unrefined, and unwilling to work hard beyond their comfort zone.
Surely it must go beyond that. I'm convinced that anyone who is semi-active in this forum has the capabilities to save £25k pre-tax income yearly. The only obstacle being able to step away from high spending habits. If you are earning 6 figures, you should still have plenty of opportunities to have a nice life (buying dumb shit, going on nice holidays and whatever).
Then when you get to retirement, you have created generational wealth, that if managed properly, will set up your kids/grandkids for a very long time.
I said "most people," not "most people on this forum," that is a big difference.
Why would I sacrifice my comfort today so my kids or grandkids don't have to work or so that they can buy a bigger house or more expensive car? I want my kids to work, and I don't think it's good for them to buy outrageously expensive things. I think I'd rather spend the money today on a Broadway show or a hot tub.
As we learned during Covid, “rich” describes your wealth relative to other people. If the government gives everyone $1 million, no one is actually getting richer
For your stocks to make money, other people need to spend money. If everyone invested a healthy amount, consumer spending probably would drop too much.
And the people on this forum are largely too young to have seen long-term compounding results too.
Exactly.
It's kind of like saying why isn't everyone whose 90 Warren Buffet wealthy. It's because Warren Buffet invests in a way that's somewhat counter culture (don't spend money and reinvest). It only works because other people spend money on things produced by companies he owns. If everyone lived that way there would be less spending, therefore less capital gain.
Who's realistically got two grand post-tax to spare every month for 40 years?
The median income in the US as of last year is ~54K.
And shyt happens - factor in job loss, raising kids, a general lack of personal finance knowledge and you get the drift
Lots of people put their wealth in their homes, and we've already lived through a period where even that got wiped out in one fell swoop
It's not surprising that people struggle to build wealth in general
I think if you are a prudent saver then you should be targeting ~15% Pretax, which means you probably need to be making over ~130k to be saving 2k. I feel like that is not a terribly hard number to reach if you are a moderately driven in your career.
It all comes down to delayed gratification and self-control for a LONG time waiting before seeing significant gains to actually see the benefit of compound interest.
You could pose the same question as “why are so many people fat?” You literally just have to reduce calories to lose weight. Throw in some push ups and you can get reasonably fit without paying any money for a fancy expensive gym or going anywhere.
First, you discuss rich but ignore the idea of actual wealth.
Second, you undercut your own argument by walking it back about "our family only made this much" but you're talking about saving 3/5 of that total amount. The vast majority of people don't have that opportunity to kickback 25k every year. Maybe some of us on WSO can...but doesn't mean we will. I won't wade into the waters with you about the tax status effects in the UK since my experience only goes so far as PAYE and the pension schemes ya'll have. All herald the almighty HMRC!
Third, all the above posters are correct in their varying discreprancies about your thought. IE Just because you make it that well early on, doesn't mean you're not going to want the nice cars (not to mention ya'll's car insurance and fuel costs are insane from my perspective and then the congestion fees and parking?), or pick up the latest jersey for whatever football club you support and then take it out to a Premiere League match.
1) employers don't match $25k a year
2) inflation adjusted returns of 7% over that time period are far from the norm
3) not everyone saves that much in the early years because, outside of a few select jobs, it's very difficult to do at a young age
4) plenty of people do end up with meaningful assets by their 60s
5) if everyone was rich, nobody would be rich
I think that your number 2 is one key fact that a lot of people are forgetting about, we peg 7% as the "overall" market return, while including the greatest bull run in history over arguably the best country in a golden era. No way 7% is going to be a consistent market return going forward.
Right - and that's gross return. Inflation adjusted return is a whole other ball game.
I'm basically OPs example. I put ~£1.3k a month into retirement account pre-tax, that's 14% employer contribution 4% my contribution. I also put my bonus into pension contribution (the cap just got increased to £60k so doubt I will hit that) then I also max out ISA (tax free investment account) with £20k per annum. I'll come back in 30 years to let you know when I retire a millionaire.
Potential road bumps? Having a family, buying a house, moving abroad again (I've moved countries twice already, not originally from the UK), future market returns underperform historic averages.
You contribute just 4% and your employer contributes 14%? Wtf?
Employer contributes 10%, then a 4% match for my 4%
Phil LeotardoYou contribute just 4% and your employer contributes 14%? Wtf?My previous employer contributed 15% when I contributed 10%, got lucky on that one
Most people in their 20s don't make enough to max retirement accounts while still affording rent/food etc, and most people 30+ don't make enough to max retirement accounts while paying for childcare related stuff (childcare can easily run $2k/month per kid even in LCOL areas). Of the remainder, a lot of them get sucked deep into lifestyle inflation. I bet there are lots of people in "elite" NYC circles making around 7 figures who spend almost all of it each year.
Because 95% of ppl cannot save 25k for consecutive decades. I save enough as a single person but that is still tough. As soon as ur responsible for other humans the medium term tradeoff for saving is so much less; the long term gets blurry. Add recessions, scares and personal pressures to liquidate and spend… plus divorces or messed up kids, or an expensive health disaster if you live in the us….
also bc ppl like flexing in the current. People want to do the peacock dance now not in 20 years
imo
Some of my friends and also my parents (and their generation) are older now, and they all say the same thing - " I wish I had lived life more. '
Now, when their friends die or have a sudden medical condition, they are asking themselves whether working and saving so much was really the right goal when life itself is running away.
Like others have mentioned already, if you add wife, kids, house, cars, hobbies, vacations, tuition, child care, care for parents, etc to the annual laundry list... it gets pretty obvious why even a six figure salary won't be enough after taxes.
I haven't spent anything at all in my life, never owned a TV, furniture, cutlery, art, or anything really... and I don't think it was the right way. A large portfolio, at the end of the day, is just a number if you have nothing else to show for in life.
Good points.
I'd just add, "i wish I had lived life more" doesn't always mean spending more money. Some people need leave their hometown or state of birth and have lived plenty of life, while some people have been to dozens of countries and lived less of a life.
I think your numbers are unrealistic. Unless you work in IB, it's doubtful that people in respectable, but not elite jobs, can save $25K a year in their 20s. Putting all that aside, I find that many things in life are pretty easy in concept, but hard in execution. A lot of success in life comes from doing unpleasant things for long periods of time and slowly reaping rewards. A couple of easy examples are just passively investing in $VOO and being OK with letting compounding generate your wealth for you instead of chasing excess returns through crypto/unprofitable tech and being 75% underwater on big chunks of your assets. Another is to not be lazy and just do some basic meal prep/groceries on weekends to save a little bit of money on food instead of spending crazy amounts of money eating out every meal and potentially ruining your health as well in the long-run.
For better or for worse, people are emotional, short-term oriented and bad about thinking exponentially or long-term. If you can manage your impulses and keep an eye on the long-term prize, you'll be better off than 90% of people you'll encounter, even if they seemingly are off to a head start based on their pedigree, job title, etc. I know this is controversial, but I truly believe most people are their own worst enemy and the cause of most of their problems.
Although it's such a simple concept, you'd be surprised how little people know about this, especially older people. It's a very popular concept in our generation because we all grew up on the internet so we could learn it, whereas for the average person 40 years ago unless they were in the right circle of people they had no way of finding out about index funds and compound interest etc.
I disagree that it’s popular, the median retirement savings for 25-29 year olds is 0, for 30-34 its $2,000. Even with a more broad definition the median in those 2 groups rises only to $3,100 and $10,700.
https://dqydj.com/retirement-savings-by-age/
I suspect this is less driven by knowledge of investment products than a lack of dollars to invest. The median 30 year old has an income of $50k.
https://dqydj.com/average-median-top-salary-by-age-percentiles/
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More people are not rich because of something economists call "hyperbolic discounting" - which is the natural innate human tendency for people to choose immediate rewards over rewards that come later in the future (even if the immediate rewards are smaller)
Human brains have been hard-wired over millions of years of evolution to favor instant gratification. It's rooted in human survival, and indeed, our ancestors millions of years ago had much shorter, brutal lives with far greater amounts of uncertainty, e.g. early human hunter-gatherers didn't know where their next meal would come from, or if they would be someone else's meal (early humans were prey of wild beasts like bears, sabre-toothed cats, lions, etc.)
Nowadays, humans in developed countries (and if you are on this forum, you are in that category) live in a state of abundance and don't need to worry about such basic things like succumbing to a lack of food or getting eaten by a wild beast, but our brains are still programmed to seek out instant gratification.
I would argue this is the root cause of why most people are not rich.
The ones that are able to resist this innate desire often become rich.
I would argue most HNW people earn their way to wealth (i.e., they are high-income professionals or business owners) OR, if we're talking about $1-5 million net worths, they are the beneficiaries of good timing in the purchase of their personal residence, so they would technically fall under the "savings" category but really it's dumb luck (e.g., a couple gets married in 2011 and buys a house because they're married and 2011 just so happens to be the rock bottom of the real estate market). It's incredibly difficult to save your way to significant wealth; those that do are almost certainly the beneficiaries of good timing in the stock market.
there has been ~20 years of inflation since your parents raised you on £40k. thats probably more like over £100k inflation-adjusted for today.
personally i put everything above higher rate tax into pension. liking the increase to £60k and removal of LTA. once i hit the £60k ill put rest into ISA. thats the plan at least.
This is the way.
Better max out those benefits before Labour reintroduces the LTA and removes higher rate tax relief from pensions.
Nobody:
Dudes that spend a year in finance: why is everyone so poor lol just make more money
If everyone is rich, then no one is rich.
Summing up some points above, getting rich in the way the OP suggested is more about execution than knowledge. In the US, most people are horrible at the execution part, and that's why it doesn't get done.
You have to look at it on a paycheck level. Its like when people eat a whole bag of chips or a box of cookies, most don't plan to eat the whole thing, they just eat one cookie at a time until its gone. Most know they need to save, its just "the amount I planned to save I'll use on a trip, but I'll get the next one" then "an emergency payment popped up I need to use savings on this paycheck", continually, until months or years ago by without saving.
Another point, I think most people live their life by anecdotes and not stats. So people excuse themselves from saving/thinking about money because "they can get hit by a bus tomorrow" when really that most likely won't happen.
Finally, I think it's somewhat similar to when people run ponzi schemes, as in, if you know anything about them you know they are unattainable for long, but I think most people who run them would rather live a short time as a prince/king/queen than jail, than a smoothed out life themselves. Same thing with people, by not saving they are somewhat running a ponzi scheme on themselves. I think that most people will hit you with not caring where they end up, meaning they would rather have a good life at 30 and be in the crappy retirement home, than save and be in a nice one.
No one gets rich from working from someone. The key is to be an owner or start a business
Yes and no. Depends on what you define as rich. Plenty of people I know are like two high income earners, think $500-$700k a year in a LCOL or MCOL market. My neighbors, both WFH, are software engineers and combined make close $700K. Their house is paid off, cars are paid off, college funds for both kids are fully funded. They're in their mid 30s. They are now investing heavily in index ETFs and real estate. Living a very nice life. In my opinion this family is rich or if not will be very wealthy in another decade. They both work jobs and have no business or plan to start one.
7% is tough, especially inflation adjusted.
Putting away $25k per year is doable most years, but 40 yrs straight is another story. There will be job losses, maybe costly career pivots, kids, etc.
Plus at some point people realize you only live once and they want to take their shot at starting their own business or doing something else risky & expensive which derails this steady path.
But overall it’s not a bad plan for those who can stick to it.
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