Our net worth – and more importantly, the trajectory of our net worth – is a crucial indicator for understanding our current and future financial health. The Office for National Statistics (ONS) released some important data on this metric last year, and it’s worth reviewing its implications for our own personal finance journeys.
But before that, let me start with a couple of caveats.
Firstly, believe it or not, the purpose of this blog post isn’t to encourage us to make unhealthy comparisons about how much money we have or ‘should’ have. I want to touch on the issue of net worth by age because I think it provides a good indicator for understanding our financial trajectories. This next point really matters: financial trajectory is far more important than how you compare to your peers in the present day.
Secondly, the data I’m looking at here is predominantly UK focused, but still underlines some important trends that hold statistically true across the United States and other developed economies. Those trends are the focus of my attention in this article. While I’ll provide the absolute data, given some of the potential statistical skews and regional disparities, I’m much more interested in highlighting where we should be attacking our net worth trajectory in order to become outliers to these numbers. So that’s my focus.
What is net worth?
Before we review the data, here’s a quick refresher on net worth.
In short, net worth is the total value of all your assets less the total value of all your liabilities. This can be split down further into four components:
- Property wealth (net): The current value of any property you own less the total value of outstanding mortgages on that property.
- Private pension wealth: The total value of any defined contribution, defined benefit or other private pension holdings.
- Financial wealth: The total net value of any other financial assets and liabilities, such as stocks and shares and cash in the bank.
- Physical wealth: The value of household possessions and personal valuables, e.g. antiques, artworks, collections and vehicles.
If you’re not already tracking your net worth, I strongly recommend doing so. It’s the most complete metric for understanding the health of your personal finances.
Net worth by age in the UK and US
The below table summarises median net worth data from the ONS and Federal Reserve. I don’t recommend comparing the UK figures with the US figures in absolute terms. They’re different economies and use different methodologies, but I have included the US figures as a reference point for readers from the US.
Nonetheless, they both show consistencies in the key growth age ranges. From 45 to 65 in both the UK and US, our net worth grows at a substantially sharper rate than the preceding 20 years. And if you think about it, that’s what we’d expect.
Between 25 and 34, lots of us are carrying student debts out of university, which weigh down and burden our net worth after university. As we race into our 40s, we begin to see the work experience curve drive up our earning power. Meanwhile, the pensions we have been investing into during our working lives are compounding and our proportional contributions from our larger earnings are increasing. The end result is sharper growth in our net worth during the second half of our working life.
Net worth by age, split by wealth category
But it gets a little more interesting when we take the medians from the four components of net worth mentioned above. Take a look at the table below. This splits out medians by property, private pension, financial and physical wealth – and there are some interesting trends.
As you might expect, median property wealth starts to grow from age 35 and eventually increases to its peak of £180,000 at retirement age, while private pension wealth lags slightly behind until 55. This is better illustrated in the below graph, where you can see the build-up of these two wealth categories and the subsequent utilisation of private pension wealth.
It’s also clear that we hold more cash as we get older, with fewer liabilities to service in our retirement. And meanwhile, there’s a steady increase in physical wealth as we accumulate possessions over the life-cycle.
How to be an outlier
But this is all as you might expect. The average person’s personal finances peak just before retirement age between 55 and 65. The real question for those of us focused on early retirement or financial independence is how we shift that peak to an earlier age bracket – and ideally sustain our level of wealth, before utilising private pension wealth.
This means achieving an equivalent level of private pension wealth and property wealth at our desired retirement age, shifting the curves. If I wanted to retire at 40, for example, you’d expect to see significant wealth accumulation between the age of 25 and 40. But you’d also expect to see an additional focus on financial wealth to provide passive income and asset sale opportunities over the subsequent 15 to 20 years. After this point, you’d be able to cash out on the pension wealth.
But how can we shift the curve? How can we rapidly accumulate this level of wealth to beat the trend?
#1: Kill all debt as early as possible
If there’s one thing grabbing the attention it’s that debt kills wealth accumulation between 25 and 45 years of age. We leave university mired by student debt, and this acts as a drag on our net worth. In addition, as we get onto the property market, our higher rates of mortgage leverage in the first half of our working lives also act as an interest drag.
It follows that to achieve significantly earlier wealth accumulation than this trend, we must eliminate these debts that act as a drag on our wealth as soon as possible. That means that unless you’re getting a rate of return higher than your interest payments, eliminating these debts should be your focus in the early stages of your working life. Otherwise they have the potential to act as a drag during the entire first half of your working life. And that’s just not viable in an early financial independence pursuit.
In some ways paying down this debt may feel counterintuitive for a while. You’ll see big chunks of cash disappear from your account for a few years, and you’ll feel like you’re not really making much progress. But as the net worth trend demonstrates, once you’ve eliminated debts, you’re paving the road for much bigger net worth increases than your peers over the subsequent years.
#2: Control your physical wealth burden
Something else that catches the eye in this data is physical wealth. I was particularly surprised to see median physical wealth between 25 and 35 of £23,000, which then doubles on the way to retirement years. If you’re on a journey to early financial independence, my opinion is that the growth and absolute figures here are simply too high, particularly in the first half of the working lifecycle.
A big portion of physical assets tend to be made up of depreciative assets, like vehicles and household possessions. Of course, we can’t cut back the essentials entirely, but holding too much physical wealth can therefore have an adverse effect on net worth.
This is one of the reasons why so many of the people who have achieved or are pursuing financial independence advocate a minimalist approach to physical assets. This is a simple philosophy that advocates only having physical assets that add value to your life.
#3: Invest aggressively and earlier into private pensions
If you plan to exit the rat race early you’ll be giving up years of contributions to your private pension. And if you don’t adjust for this fact, your pension pot when you reach real retirement age may be inadequate. That’s why it’s imperative to maximise your contributions to your private pension while you have the chance.
All UK companies must now provide a pension scheme, and quality corporate pension schemes offer excellent matching employer contributions. You’d be wise to optimise your personal contribution percentage to get the maximum matching percentage from your employer. What’s more, it’s a good idea to provision for continued contributions to a scheme in your future living expenses.
#4: Identify and attack your early retirement investment fund
Whatever the investment category you choose, if you want to achieve early financial independence, the chances are you’ll need an investment strategy to achieve sufficient passive income to cover living costs. This might be from a rental yield on property wealth or from dividend yields on financial wealth, but the point is that you’ll need to attack this strategy sooner rather than later.
And that means you’ll need to see increases in these categories of wealth way beyond the median levels. Building your wealth in these categories provides a passive income opportunity, but also the opportunities to sell off these assets as you enjoy your independence.
Don’t neglect this part of your journey while you’re focusing on everything else. As your rate of saving increases after eliminating your debts, this needs to be front and centre of your attention.
What can we conclude about the data?
First and foremost, it’s down to you. It doesn’t matter how wealthy the average person is at your age. What matters is your own plan – and your own trajectory.
We can see a few important trends in net worth by age, especially by wealth category, and these provide some indications as to what we can do to move things along. But there is no magic number that works for everyone, and median data doesn’t reflect circumstantial and geographical differences.
What’s clear is that if you want to be an early financial independence outlier, you’ll have to take a dramatically different financial course over the work life-cycle. By focusing on the four aforementioned areas, this can be a game changer from your twenties through to your forties.