Can You Grow Wealth on an Average Salary?

In an earlier post, I talked about the difference between income and wealth. I claimed that an average person can retire early if they want to. Now I want to elaborate on that point I was trying to make. The point being, you don’t have to have a high salary to create wealth. In fact, you can earn an average household salary and still create enough wealth to provide a passive income.

The example I laid out anecdotally in my previous article is below;

John is wealthy but has never earned a large salary. He began working at age 22 after going to university. Although his starting salary was low after he graduated, John was focused to live within his means. He decided to invest at least 20% of his income by automating his finances. John’s salary grew in line with the average salary increases. After each pay rise, he increased his automated investments to reflect the increase in income- always investing 20%.

John got married and had a family. His family lives a normal life in an average house. He and his wife managed to pay off the mortgage a few years ago. Their children all attended public schools, and when they grew up, they all got used cars and paid cash. They may not live an extravagant life, but the family is more than comfortable – and they are now debt free.

John has been investing 20% of his income over his entire work life and now after 30 years of, has built up an investment portfolio worth around $1.5 million.

Living of an annual budget of $45,000, John’s family could easily sustain their current lifestyle for more than 30 years using the 4% rule, without John, or his wife ever needing to work again.


Let’s assume that Johnstarted his working life at age 22 in 2007. He got married the year after, and in 2008 had his first child, a boy. And a girl in 2010. His wife, Sarah, stopped working while she had the kids, and then started a part-time job later on.

Now before I go into the numbers- please don’t shoot the messenger. I am using average data over the entire country from reputable sources. The housing cost data I am using is from Statistics NZ and include the expenditure on rents, mortgages, property rates, and building related insurances. The Income statistics I am using come from Statistics NZ and include income figures for all people aged over 15 years. The cost of food comes from the Otago study on the Estimate food costs.

Now, I know that averages may not be applicable to everyone. Some people have a higher cost of living, and some people have a higher income. You will have to do some calculations for yourself, for your own situations.
But hey, governments use averages for their modelling- so it’s good enough for me.

The Data

The data used in my scenario spans from 2007 to 2018 and covers the average household income, housing cost, and weekly food cost for a moderate diet. The housing cost includes expenditure on rents and mortgages, property rates, and building related insurance. Below are the estimated weekly food expenses for 2018. I have compiled the same data for the years 2007 to 2018 and used it in this simulation.

Estimated Weekly Food ExpenseYear Ending 2018
Adolescent Boy$97
Adolescent Girl$79
10 year old$69
5 year old$57
4 year old$44
1 year old$38

The food expense I used includes the estimated for a man, woman and children who move through the food expense table depending on their age.

The data for the average household income comes from the IRD and is averaged over the entire country. It is the total regular and recurring income for all people over the age of 15 and is a gross income- that is to say, it is before tax. The tax was estimated using an individuals tax rate for each particular year, given that the tax system has changed between 2007 and 2018.

Using an individuals tax rate for a household income isn’t strictly correct. It will result in the household paying more tax than they would in reality. But that is better than ignoring tax altogether. Besides, I haven’t included any forms of government family benefits either.

Since the data for household income, tax, food, and house expenses starts in 2007 and only go to the present. I have linearly extrapolated all the income and expenses beyond the year 2018.

The Simulations

The simulation for John’s family is really quite simple. Take the Average Household Income subtract Taxes, House Expenses, and Family Food Expense. Then invest 20% of net income leaving the household a remainder for everything other expense

The investment rate I used for John’s portfolio is 20% just like the example above. In a real situation, this 20% would include savings vehicles such as Kiwisaver, but on top of that, there would need to be a personal investment fund.

I have estimated a return on John’s investments of 7.8%- this is the average return for the NZX-50 over the last 69 years. The S&P 500 has a higher return than this, so a 7.8% average return is achievable.

Let’s look at some graphs. The first graph shows all the spending categories for John’s household over the period from 2007 to 2018- for which there is data.

The interesting this to note about this graph is that all the expenses and income track along at about the same level, only increasing year to year with inflation. This allows us to extrapolate linearly out with some degree of certainty. I have extrapolated it to 2040, which is a 34-year working life. Graph below;

Now, look what happens with Johns investment portfolio versus his household net income over his 34 year working life.

While John’s household net income increases in a straight line, his investment portfolio increases exponentially. His investments dwarf his household income after a few decades.

When Can John Retire?

John can retire when his investment portfolio returns more than his household expenses. John needs to cover his family food expenses and the expenses of his house. We will call this John’s total household expenses. He will also need to have some extra money for other day-to-day expenses. Using a 4% safe withdrawal rate we can see when his portfolio’s returns surpass his household expenses.

In the year 2032, If John’s started a 4% safe withdrawal rate his portfolio would provide more income than his expenses- but only by around $1500. Not enough to have a decent life. But in the year 2040, his investments would provide an extra $32,000 above all his expenses. This is certainly enough to retire on. That is 34 year after John started working. John is now the age of 56. Nearly a decade before he is supposed to retire.

Can the Average Kiwi Retire Early

If you start investing around 20% of your income from early on in your working life you can indeed retire early. If you leave investing until you are part way through your working life, it will become harder. You will likely need to increase your investing rate above 20%. But it is achievable to retire early on an average wage.

You don’t even need to skim and be frugal. You just need to automatically set a certain per cent of your income, around or above 20%, into investments. Once you have automated your investments, the rest of the money is yours to do what you want with.

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