Wealth to Lifetime Earnings Ratio: Part 2

This is Part 2 in a short series exploring the concept of lifetime earnings vs. net worth.  It’s pretty heady stuff so I’m breaking it up into a couple of linked posts.  You can find Part 1 here.

Today, we’re going to look at the lifetime earnings part of the wealth to lifetime earnings ratio:

1. How to calculate it
2. What you can learn from it
3. How yours compares to others

Step 1: calculate your lifetime earnings
As of 2016, if your income is from the U.S. and you make less than $118,500, your task is easy. Go to the social security website and logon (create your profile if needed). Once you’re in, find the “Your Earnings Record.”. Download your earned income history so we can do some math (yes, math… unless you’d prefer to go back to watching cat videos).

If you’ve ever earned more than $118,500, you could take the extra step of finding out your actual earnings for those years. (Americans are only taxed on the first $118,500 of earned income). Every earned dollar above $118,500 is exempt from social security taxes. If you want to find your real wages for years when you made more earned income than $118,500, tax returns, old pay stubs, or the spreadsheet you started this exercise on when you first read Your Money Or Your Life (affiliate link) in the 90’s are your best bets to find this information.

Step 2: what can you do with it?

The first thing to do once you have your earned income history is plot it over time. Here’s the median US household income plotted over time.  Depending on your personal situation, your actual income may be close to the median or far from it.  But, it’s a consistent yard stick that you can measure yourself against other Americans.

US Median Income

Median US household income in 2014 dollars, from Census.gov

Has your earned income grown over your career? What kind of disruptions can you see (e.g., Dotcom era, Great Recession)?

If you take each year’s % change, you can see your annual earned income growth/decline.  Here’s a view for % change from year to year for the US Median Household.  Not terribly exciting is it?

US Median Income Percent Change

Year/Year % Change in median US incomes.  Source: Census.gov

The long-run average annual % change: 1.0.  Not a 1% increase.  Flat.  It took me longer than I care to admit to extract the data from the census website.  I kept thinking there had to be a better way than just re-typing.  (There probably is, but I gave up).  So, I made a Google spreadsheet that has the raw data, the percentages, and space for you to put your values in and see how you’re comparing to the US median over time.

Please, please download the sheet to your local system first!

Here’s a snapshot of what the spreadsheet would look like for someone starting with $60,000 of earned income in 2000 and making a 3% raise year over year for 10 years.  Let’s hear it for compounding growth!

OwnIncomeTool

OwnIncomePercentChangeTool

So, how does your income compare to the US median?  Did your earned income keep up with the median year/year rate changes?  What insight did you get from plotting your data this way?