Every Saturday at 9am, Jane walks out of her house with a bucket of hot water.

She drags the hose from the side of the garage and begins to wash her Toyota.

Her husband, Tony, teases about her structured weekend routine. But as a full-time accountant in London, she’s too busy for plenty of household chores during the week.

“Good morning Harry!” Jane calls out to their neighbour across the street.

“Morning Jane,” he replies, as he gets into his Mercedes, tennis racket in hand.

Jane and Tony are in their early 50s. Harry is about the same age, but he retired a few years before.

“Harry is rich,” Jane told her husband.

“How do you know?” Tony had asked.

“Well, plenty of people believe that if a person has a high salary, a big house and a flashy lifestyle, that makes them rich. But in most cases, that isn’t true. Someone’s job could pay £5 million a year, but if they spend almost all of that, they aren’t rich. In my book, someone is rich if they don’t need to work, they have a mortgage-free home, and their investments provide them with three times more than what the typical household earns in their given city.”

“What if they could pay off their home at any time, but they choose to have a mortgage? It might charge a lower rate of interest than what they expect on their investments.”

“In that case,” Jane replied, “I would only call them rich if their investments generated more than three times the median income in their city. Depending on the size of the mortgage, it might be a lot more.”

“What’s the median household income in London?” asked Tony.

“It’s less than you might think. Our attention is often drawn to those who drive new cars, live in lovely homes and eat at pricey restaurants. But that doesn’t represent the majority. Some people also mix up the definitions of average and median. An average can be skewed upwards by a small number of huge income earners. But a median represents what’s typical: the middle of the road. Over the 3 years from 2018-2021, the median pre-tax household income in London was £41,866 a year. Let’s estimate about £47,000 in 2023. Three times that amount would be £141,000 ($183,868 USD).”¹

“How does Harry earn more than £141,000 a year without working?”

“He doesn’t own income-generating property. But he told me his diversified portfolio of index funds is worth about £5 million ($6.52 million USD). He should be able to sell an inflation-adjusted 3 to 4 percent per year and never run out of money.^2/3 That means if he sold an inflation-adjusted 3.5 percent per year he could withdraw about £175,000 a year. That’s more than triple what the typical household in London earns.

“What does he pay in taxes?” asked Tony.

“Surprisingly, his tax rate is much lower than if he earned that income from a salary. So he might have four times the after-tax income of the typical Londoner. And unlike us, he doesn’t have a mortgage, doesn’t need to work, and he no longer needs to put money aside for retirement.”

“So, if we built our portfolio to £5 million in 15 years, we would be wealthy too?”

Jane laughed, “No, we would need a lot more than that. Inflation would reduce the buying power of that money. For example, if inflation averaged 3 percent per year over the next 15 years, we would need about £7.8 million to have the same buying power in 2038 that Harry has today.”

“But couldn’t you argue that, for many people, wealth is just a state of mind?”

“I think so. But here’s something weird. Let’s say you were a lawyer earning £200,000 a year and drove a 5-year old BMW. If you lived in a neighborhood where everyone else earned £400,000 a year and drove a new Porsche or a new Aston Martin, this could negatively affect your health.”

“Come on, Jane. That can’t be true.”

“It’s crazy. But according to research from the University of Stirling, our health is greatly affected by our wealth, relative to our neighbours’ wealth. The stress of keeping up with the Jones’ is definitely real.”⁴

“So,” said Tony, “My odds of getting a heart attack or cancer are lower if my neighbours earn a little bit less than me?

“Yeah, that’s what the research says. It might make you think twice about where you choose to live.”

“I don’t think I need to be wealthy. But it would be interesting to see how much we would need to be rich in different cities.

“That’s an interesting point,” says Jane. “The wealth benchmark is lower where people earn less. The cost of living is lower too. That’s one of the reasons many people report higher levels of health and happiness when they retire to a lower cost city or a lower cost country.”

“Would you like to be rich?” Tony asked.

Jane gazed up at a bird, flying overhead.

I like to think we’ll have something that even many billionaires will never have,” she said.

“What’s that?”

“I think we’ll have enough.”

How much money (in USD) do you need for a rich retirement?

Based on income levels from the sources (and years) below. Actual income levels in 2023 should be slightly higher.
*Assuming 3.5% to 4% annual inflation-adjusted withdrawal rate

Sources

1. Pre-tax median household income in London: UK Government Ethnicity Facts and Figures
   • Greater Perth, Australia Pre-Tax Median Household Income: Greater Perth, 2021 Census All persons; abs.gov.au
   • San Francisco Pre-Tax Median Income: Federal Reserve Bank of St. Louis: www.fred.stlouisfed.org (2020)
   • Vancouver, B.C., Pre-Tax Median Pre-tax Income: Statistics Canada (2020)
   • Kuala Lumpur Pre-Tax Median Household Income: researchgate.net (2019)
2. The Secret To Spending More In Retirement Without Running Out of Money
3. The Biggest Risks Of The 4% Retirement Rule
4. A Social Rank Explanation of How Money Influences Health, University of Stirling.