Last year, we published a mildly interesting article which stated that the correlation between income and wealth isn’t that strong (despite what we have been told). Today we’ll follow it up with the correlation of wealth and income with a twist – we’ll see how it changes per age group.
However, the problem with that sweeping generalization quickly became clear upon looking at the graph – what do we do with all the retirees? And, additionally (through reason, not looking at graphs) – how about folks who don’t go to college? That do? that go to graduate school and have large student debts?
Fast forward to 2015, and this is your follow up. And we have an interesting point to make: younger workers certainly benefit in the net worth department from high incomes. However, as you advance in your career, it’s disciplined savings that will make the difference.
Age as it Relates to Income as it Relates to Net Worth
Now, as we showed last article, it’s not really a linear relationship… so we’re torturing the math a bit. However, errors being in the same direction and all, we can be fairly certain that what we see in the following graph is significant: namely, that as you get past the 30-34 age group, net worth stops depending so much on ‘current income’.
(As in the last piece, all this data is for the United States, using the Federal Reserve’s 2013 Survey of Consumer Finances.)
Interesting – I don’t really have a narrative for you on why 18-34s don’t fit the model that well… perhaps I chose my age cutoff poorly and I’m missing too many doctors and lawyers and other “long-education” careers? Maybe student loans are throwing it off? I’ll admit, I’m a bit burned out on the topic, but if there is overwhelming demand we could figure out what age is the proper break-point… but I digress.
The key takeaway here is that for the 35-39 set, income is actually a great indicator for net worth. That is to say, if you know the income of a household headed by a 35-39 year old, you can take a reasonable guess at their net worth.
As households get older and older, it’s not as clear cut – higher incomes don’t necessarily mean higher net worths, all the way down to a weak .273 R^2 once you hit the 60-64 age group. Millionaire low income workers and broke 6 figure earners showing through once kids are out of the house? Maybe… but all we can say for certain is that income doesn’t predict net worth as well.
Here’s the whole chart for your viewing pleasure:
Methodology/Source on the Correlation of Wealth and Income
All numbers calculated from 2013 Survey of Consumer Finances microdata. We dumped all 5 imputed data sets into one, just like some of our other articles. Read the take on this (excellent, since we used it successfully) Github Repo for R users here.
For informational purposes, again, for the third time, we’re happy with what we’re publishing. The numbers would change if held up to peer review, but if you pick the same breakpoints your numbers will be similar no matter what method you choose.
So, there you have it – perhaps I wasted too many cycles (we are the slowest website in history at writing a mere 600 words, eh?) on this data, and perhaps you think this is about as obvious as the conclusion from this math-heavy article.
Well, some of us like to see the numbers before we state the popular opinion, okay? You can’t trust all popular knowledge… I mean, I used more than 10% of my brain for this article.
Has your income mostly predicted your net worth, or are variations in your net worth now far more dependent on the market? If you answer that question, do you think I can guess your age range? Anything else in the data stick out or look interesting? What else do you see in the correlation of wealth and income?