Are You Wealthy?
Last week I came across an Interesting article commissioned by the BBC[1] on our collective wealth. The article looks at total private wealth and how it is distributed, both in terms of assets and more importantly, across the population.
This is particularly interesting to us as we come across a variety of people with different views of their and others’ wealth. The majority of our clients do not view themselves as particularly wealthy, whereas we know that compared to the average person, they definitely are.
In this blog I’ll highlight a couple of issues raised in the article and a consideration for your own financial planning. And I promise I won’t make any political comments/judgements.
What does the nation own?
£12.8 trillion apparently (that’s about £13 million million. It has boomed since the 1980’s growing from roughly 3 times GDP (Gross Domestic Product – an estimate of the value of everything our economy produces) then, to about 7 times GDP now.
This boom has largely been driven by two things; house prices and pension entitlements.
We can see property and private pensions dominate, accounting for £9.9tn (78%) of assets between them. Financial assets include cash and investments and physical wealth is possessions e.g. cars, jewellery etc.
How is it distributed?
Excluding physical assets, the average net worth per adult is £105,000[2]. As you would expect, there are huge differences between the most and least wealthy. The bottom 10% of households have less than £3 per adult i.e. the majority having a negative net worth. By contrast, to be in the top 10%, you would need a net worth of over £671,200 per adult.
So, the average person we deal with may not feel particularly wealthy, but they are a long way above average, and virtually all are in the top 10%.
Wealth inequality between the top 1% and the rest has been creeping up over last 30 years, having previously decreased consistently since 1920.
An interesting distribution is that amongst age groups, shown in the following chart:
The general shape of this chart is as we would expect – wealth increases with age as assets are accumulated throughout working life, before being decumulated in retirement. The exact shape of the chart changes over time due to socio-economic realities, e.g. housing affordability.
In our early years we have our peak levels of human capital, which we (hopefully) convert to financial capital over our working lives. We need most the most financial capital just as we finish work, which can then be consumed throughout retirement.
What is your number?
With the above in mind - how much would you need to walk away from your work/business at your planned retirement age? What would you need to live off, or give you your desired lifestyle, over the rest of your life? This is your number. This is the wealth you need – excluding assets you use, such as your main residence – in order to become financially independent of your work.
Do you already have it?
This is a crucial area we assist/have assisted most of our clients with. It’s also an important one to get right, as getting it wrong can be very painful.
Having achieved their number, we help all our clients manage the decumulation process – how much they can afford to spend/give away and when. This is essential to making most of life; making the most of your wealth to achieve what is important to you.
Finally, to come back to a comment from the start; why don’t our clients feel as wealthy as they obviously are on the face of things? Because it is relative to them, not the average. Because the majority have accumulated and decumulated wealth in line with their plans and are spending/giving in line with what they want to achieve. Relative to their plans and aspirations, most don’t have large amounts of excess wealth above this, they have the right amount.
[1] Produced by George Bangham, research and policy analyst at Resolution Foundation
[2] Worked out as wealth per family/household, divided by number of adults in the family.
Categories / Topics
Latest / Recent Posts