So you’re wondering what income level is considered rich. If everybody makes $1,000,000 a year, are you considered rich if you make only $500,000 a year? Probably not! In other words, rich is relative and also subjective.
When Obama was president, he considered single people making over $200,000 to be rich. He specifically called for raising taxes on singles making over $200,000 and couples making $250,000 every year he was in office.
At the end of 2012, there was a compromise in Congress for raising income taxes for those making $400,000/$450,000 and above. Why $400,000 + $400,000 doesn’t equal $800,000 for a married couple to pay more taxes, I’m not sure. The government harkened back to its old days of believing one spouse should stay at home. Thankfully, the marriage penalty tax has all but been abolished.
With the new tax plan that started in 2021, the Trump administration now views individuals making $500,000 and married couples making $600,000 as rich, because those are the income thresholds that now pay the top federal marginal income tax rate of 37%. Further, the estate tax threshold doubles to $11.58 million per individual and $23.16 million per married couple.
There are two aspects of monetary wealth we can focus on: Income and Capital. Some make a lot of income, but have only a little amount of capital since they are either starting off in their careers, or haven’t saved and invested an appropriate amount. That’s not going to happen to you because you read ONIG Financial Blog and will follow my savings guide to ensure capital accumulation.
Meanwhile, there are those with a tremendous amount of Capital, with little income given they may have inherited their wealth but have no income generating skills. Capital heavy people may have invested skillfully over the years, built great companies, or were incredibly disciplined in their savings. There are many different types of folks in the Capital heavy category. It’s not a bad place to be at all.
Ideally, it’s best to have both high income and a large capital base. This is my goal, and therefore my goal for all of you as well. In this post, we’ll focus on the income side of the equation and what to strive for just in case we don’t have a trust fund from mom and dad.
Instead of just saying what I think, I’m going to share my thoughts on various income levels per person for populations living in coastal cities such as San Francisco, New York City, Los Angeles, Boston, and Washington DC and work out the answer.
The idea is to focus on the more expensive parts of America, which can therefore translate into living in other expensive countries in the world such as Paris, Hong Kong, London, Tokyo. Of course, if you move to much cheaper places, you’ll be considered that much wealthier.
Let’s look at what income level is considered rich.
Not at all. The median household income in 2021 is about $65,000. After contributing $10,000 to your tax-deferred 401(k), you are left with $55,000 in gross income to live. With an effective tax rate of about 15%, you have about $46,750 left after taxes. $46,750 is enough to live a middle-class lifestyle, however, you’ll probably want to find a partner who makes at least $25,000 a year to be comfortable with a family.
Earning $100,000 is not considered rich either. You are considered middle class to lower middle class in expensive coastal cities. $100,000 is considered upper middle class in lower cost areas of the country.
After contributing $19,000 to your tax-exempt 401k, you are left with $81,000 a year in gross income, and ~$60,750 net income based on a 25% total effective tax rate. The income limit where you can no longer contribute to an IRA is $73,000. It’s too bad the government puts income caps on certain retirement programs given everyone should improve their finances.
At $200,000 a year, you are considered upper middle class in expensive coastal cities and rich in lower cost areas of the country. After $19,000 in retirement contributions to your 401(k), you are left with $181,000 in gross income, leaving you with roughly $126,700 in after tax income using a 30% effective tax rate.
By the time you are making $200,000 in your career, you’re probably in your 30s or older and have a mortgage and kids to consider. Preschool may run $10,000-$25,000 a year, followed by $30,000-$40,000 in annual housing costs for a reasonable home. You’re left with $20,000-$40,000 to spend on food, travel, groceries, gifts, lessons, and so forth. Not bad.
Here’s a sample $200,000 household budget. It comes from my post: How To Make Six Figures And Still Not Feel Rich. The money goes quick!
At $350,000 a year, you’re upper middle class in an expensive coastal city and rich in a low cost of living area. After $19,000 in 401(k) retirement contributions, you’re left with $331,000 in gross income, or roughly $231,700 in after tax income using a 30% effective tax rate.
With a 30% after-tax savings rate, you guys have $157,000 left to spend. Your family has grown to four, and you seek a bigger home. An average 3 bedroom, 2.5 bath home in a good area in San Francisco will run you about $1,500,000 to $1,700,000. We’re not talking anything super fancy at 1,800-2,800 square feet. Your mortgage at 3.5% on $1.1 million will therefore cost around $60,000 a year + $15,000 a year in property taxes.
Below is a detailed budget I’ve put together for a family of four earning $350,000 living in an expensive metropolitan area. Both parents work, so they get to contribute double the amount to their 401(k) while also now earning $4,000 worth of child tax credits.
See: Why Households Need To Make $300,000 To Live A Middle Class Lifestyle Today
With a $500,000+ income, you are considered rich, wherever you live! According to the IRS, any household who makes over $470,000 a year in 2021 is considered a top 1% income earner.
With $481,000 in gross income after contributing the current $19,000 maximum to your 401(k), you have about $300,000 in after tax income (effective at 35%, which includes 10% state). That’s right, you are paying around $183,000 in taxes alone, yet the government still wants to take more from you!
Undeterred, you crank up your savings to 35%, and put away another $105,000, leaving you with $195,000. Subtract $70,000 for annual mortgage/property tax leaves you with $125,00. Then subtract another $40,000 in tuition for two.
With around $7,000 a month in money available for travel, food, entertainment, goods, gifts, you are sitting pretty, especially since you are putting away away $122,000 a year in savings. That said, there are couples still struggling to get by on $500,000 a year!
The debate about what income level is considered rich is endless. The income level really depends on your cost of living and your desires. Therefore, here’s another definition for when you considered yourself rich.
If you don’t have to work for a living, you are also considered rich! To be free, you need to have enough investment income to cover your desired daily living expenses. If you are super frugal, then becoming rich is much easier. However, there is obviously a balance where you don’t want to be so frugal that you’re miserable.
I left full-time work in 2012 at the age of 34. Even though I went from a multiple six-figure salary to $0, I felt incredibly rich because I was 100% in control of my time. I had about $80,000 a year in passive investment income that could provide a simple life for my wife and me in San Francisco.
For five years, we lived a care-free life and traveled the world. Then in 2021, we were blessed with a baby boy. The desire to earn more money took a jump higher. We needed to make enough so that both my wife and I could continue taking care of our boy full-time before he goes off to kindergarten in 2022.
We were also blessed with a baby girl at the end of 2021. Therefore, we’ve been 100% focused on building more passive income.
Below is our latest non-401(k) retirement portfolio income streams. Sadly, we’re still about $50,000 short to live a middle-class lifestyle for a family of four in expensive San Francisco. But thankfully, we have supplemental online income from this website.
The most exciting passive income source right now is real estate crowdfunding. To simplify life, we sold an expensive SF rental property for 30X annual gross rent and a 2.5% cap rate, and reinvested $550,000 of the proceeds into real estate crowdfunding across the heartland of America.
Now we don’t have to deal with maintenance and tenant hassles, while earning a much higher cap rate of ~12%. If you’re interested in diversifying into real estate, check out Fundrise for free. It is my favorite real estate crowdfunding platform if you want a diversified, low volatility portfolio portfolio.
You can also check out CrowdStreet, if you are an accredited investor and want to invest in specific commercial real estate deals across the country. CrowdStreet is focused on 18-hour cities where valuations are lower and growth rates are potentially higher due to demographic shifts. It is also free to sign up and explore.
If you want to get rich, here is the game plan I would follow.
Earning a high level of income is a choice, no matter what the naysayers tell you. It is up to each of us to further our education to develop a skill-set that enables us to earn more. It is up to us to work longer than our peers, so that after two more hours of work a day, we’ll have made over 600 more hours of progress a year. Don’t you think you could develop something amazing with 600 hours of time? You know you can.
If you want to learn how to become wealthy, learn from someone who is already wealthy, not someone who tells you how to get wealthy without being wealthy. Those folks are charlatans, and some do it very well, which is why they are wealthy.
Instead, seek out a mentor and do everything possible to ingratiate yourself into their circle. Successful people want to give back. It’s the way they are hardwired. Your mentor can tell you what income level is considered rich and give you great guidance.
Wherever you go, there you are. You mind is either like a power plant of positivity, or a cesspool of negativity. You must believe in yourself, otherwise nobody else will. I am so internet/computer illiterate that I thought there was no way I could start a website, until one day in 2009 I said ,”f*ck it” and got it done. I’m only slightly more literate than a doorknob now, but at least things are running and I can just do this full-time if so desired.
Earning six figures and saving millions of dollars is straightforward. It just takes time. When you are incredibly rash, you do stupid things and screw up your financial goals. Save and invest even 10% of your income over 30 years and you will likely have more money than you will ever need.
Time and time again, you stumble across stupid things that turn out to be big hits. Twitter, for example, was one cockamamie idea that has revolutionized the way we communicate. Airbnb is another idea that has helped lower costs in the hospitality industry.
Everybody should at least own their brand online by starting a website. I started FinancialSamurai.com in 2009, and by 2012, I was making enough to live a good life in expensive San Francisco. Now, I never have to go back to work again! Not a day goes by where I’m not thankful for starting this site.
Let’s be frank. Life is much better if you can find a loving partner to share not only your experiences, but your expenses. Your loving partner will also be your greatest champion, pushing you ahead during difficult times. If you’ve haven’t found someone yet, it’s absolutely worth spending more time finding a life partner.
Finally, here’s a good net worth target to follow. After all, it’s not so much how much you make, but how much you keep. To be truly rich, you should aim for a net worth equal to 20X your average annual gross income or more.
You can also shoot for 25X your annual expenses, but I’ve found many people cheat using expenses as a variable. People will just severely restrict their spending to try to get to 25X.
But with your annual gross income, it’s much harder to cheat because it’s a more rigid figure. Further, income tends to go up over time, making the capital accumulation goal harder.
I hope this post has answered what income level is considered rich. Choose the income you believe to be ideal, and go for it.
In the meantime, sign up for Personal Capital. It is the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to track your spending and manage your net worth. You can also make sure you are not paying excessive investment portfolio fees with their award-winning Investment Checkup tool.
After you link all your accounts, use their Retirement Planning calculator. It pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely check to see how your finances are shaping up as it’s free. There is no rewind button in life. Therefore, you might as well do the best you can now to make sure your finances are in good shape.
What Income Level Is Considered Rich was originally published back in 2012. It has been updated for the new decade. It now takes over $470,000 to be a top 1% income earner.