Here’s the net worth and income that puts you in the top 5% of American households by age

Your net worth is like a scorecard of how you’re doing financially. Continued movement in a positive direction means you are making strong progress toward becoming financially independent and toward retirement.

Calculating your net worth is simple. You add up all your financial assets—checking accounts, savings accounts, investments, the value of your home, and any other property. Next, you subtract any financial obligations — your mortgage balance, student loans, credit card debt, or anything else you owe.

If you consistently save more than you spend, you’ll see your net worth grow over time. Creating this habit will ensure you don’t reach retirement with nothing to show for your long career.

Steady progress towards a higher net worth is an achievement in itself. But if you want a big benchmark to aim for, you might want to know the net worth that puts someone in the top 5% of households. A high net worth is often (but not always) associated with high income, so seeing what the top 5% of earners in each age group bring home can also help you gauge where you stand and how are you doing on your income level.

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Here is the net worth that puts you in the top 5% by age

The Federal Reserve surveys the finances of American households every three years, including every little detail about the types of assets they own, the debt they have and various sources of income. The latest data from the Fed’s Survey of Consumer Finances comes from the end of 2022.

If you wanted to be in the top 5% of households at that point, you would need a net worth of $3,795,000. However, as you might expect, you don’t need that much to reach the top 5% of younger households. Meanwhile, you’ll need a lot more to get into the top 5% for older households.

Here’s how the numbers break down by age group.

*For couples, the reference person is the male in mixed-sex couples and the older individual in same-sex couples. Data source: Federal Reserve. Calculations according to the author.

As you can see, the wealthiest families increase their net worth dramatically in their forties and fifties. High-level net worth doesn’t grow as fast in people’s sixties and actually declines later in life. There’s a simple explanation: Families typically spend or give away their retirement savings in their sixties and beyond.

It makes sense that families in their 40s and 50s are increasing their net worth rapidly. While they may have more financial responsibilities (home, children, and the like), those are generally the highest-earning years of their careers. When you earn a high income, you generally have more money to invest, which is key to increasing your net worth over time.

Here’s the income that puts you in the top 5% by age

A high income isn’t absolutely necessary to propel you into the top 5% of households by net worth, but it can certainly help. Even if you are earning a high income, it does not mean that you will find yourself among the richest people in your age group.

When the Fed conducts its survey, it counts all kinds of sources of income in its calculation: wages, businesses, farms, interest, Social Security, retirement account withdrawals, and basically anything else that will show up on the statement. your tax return. So people’s sources of income in their 70s are likely to include a lot of Social Security and retirement income, while someone in their 20s will get most of their income from regular wages.

With that in mind, here are the incomes that put you in the top 5% by age.

*For couples, the reference person is the male in mixed-sex couples and the older individual in same-sex couples. Data source: Federal Reserve. Calculations according to the author.

Big income is not enough

The percentage of households earning income high enough to place them in the top 5% while maintaining a net worth in the top 5% varies by age. Only 32% of top earners in their 20s also have a net worth high enough to put them in the top 5%. That number rises to just over half for people in their 30s and 40s, and rises even more in households with someone 50 and older.

To be sure, consistently earning high income makes it much easier to achieve a high net worth. But you have to save and invest to get there. Most of the wealth in high net worth households is held in retirement and investment accounts.

There is no shortage of different investment strategies you can use to grow your wealth. An S&P 500 index fund like that Vanguard S&P 500 ETF (NYSEMKT:VOO) is one of the easiest ways to ensure that you get your fair share of stock market returns. The fund charges extremely low fees and invests in all stocks included in the S&P 500 index, which is the most popular benchmark for tracking the overall US stock market.

You may also want to focus more on specific strategies such as growth stocks, dividend stocks, or specific market sectors where you have a strong understanding of businesses. Doing so can produce better returns, but it also comes with more risk.

As you approach retirement age, you may want to diversify your portfolio into some less volatile assets like bonds to preserve the capital it took you years to accumulate.

If you consistently earn more than you spend, you can build a significant net worth with each income. The most important factors in reaching the top 5% of households by net worth are saving and investing, not necessarily how much you earn.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.