Aug
Will Your Grandchildren Be Rich if They Make $200,000 a Year?
Written by Leo FranklinRecent reports show that the average family makes almost $1,000 a week. According to USA Today, “Inflation-adjusted median household income increased 4%, from $49,434 to $51,413, from August to December, according to a study released Thursday by Sentier Research.”
That’s the biggest jump since the start of the recession in December 2007, according to an analysis of Labor Department data by the economic research firm.
With this data as a starting point, we can see that future generations may have an average annual income that sounds rich by today’s standards. One of the easiest rules to apply in finance is called the “rule of 72” which shows how quickly money doubles. You simply divide the annual growth rate by 72 to learn how long it will take for the initial amount to double in value.
For example, if you could earn 10 percent a year on your investments, your account would double every 7.2 years (equal to 72 divided by 10). Income will also double according to the rule of 72.
How inflation grows average household income over time
In general, the average income grows at about the same rate as inflation. While the inflation rate can vary significantly, over time it has been fairly low. Inflationdata.com reports that inflation has averaged 3.43 percent a year since 1913. That is the year that the Federal Reserve was founded and monetary policy was turned over to the central bank.
Most economists believe that Fed policies will continue to deliver low inflation over the very long-term. Most economists also agree that inflation will be significantly higher or lower than average in the short-term.
With 3.43 percent inflation pushing average incomes higher at a similar pace, the average family income should double every 21 years. That means the average family income would top $100,000 in 21 years and $200,000 in 42 years. By the time today’s newborns retire in 65 years, 3.43 percent annual gains in income would push the average family income above $400,000.
That would be average, so they would not be rich per-say, even though earnings would be eight times higher than they are today.
This slow but steady inflation also pushes up the value of assets. Homes have generally kept up with inflation in the long-term. That makes a home a valuable asset.
In time, that asset value should grow and with a reverse mortgage those gains can be unlocked as retirement income. Over time, the growth in your home’s value may be substantial and for those who are at least 62 years old now, a reverse mortgage can turn that value into current income.
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