New York (MainStreet) - Millennials aren’t given a lot of credit. They tweet too much. They Facebook too much. They've all moved back home with their parents and would rather spend time polishing their selfies than their resumes. Still, it turns out they've been doing one useful thing all along: building up permanent income potential.
According to a new report from the Federal Reserve Bank of New York, most people establish their lifetime earning power within the first ten years of their career. After age 35, income growth pretty much flattens, so if you haven’t struck it rich by then, it’s probably never going to happen.
“Across the board, the bulk of earnings growth happens during the first decade,” wrote authors Fatih Guvenen, Fatih Karahan, Serdar Ozkan and Jae Song. “…[And] with the exception of those in the top 10% of the LE (life earnings) distribution, all groups experience negative growth from ages 45 to 55.”
The revelation is part of a major study that the authors undertook into the earnings of American men, analyzing data from approximately five million workers spread out over a period of 40 years. (They did not, it appears, include women in the data points.)
Perhaps unsurprisingly, the authors found that results vary widely depending on how much money you make. In fact, wealth is an overwhelming determinate in how much you can expect to continue earning.
The wealthy are the exception to aging out at 35. Starting in the top 10%, those in this group continue to increase their average earning power past their mid-30’s. After age 45, only the top 2% of earners can expect to make more money.
From age 25 to 55, workers in the top 90th percentile increase their earning power by 127%. In the 95th percentile that number swells to 230%.
By the top 99th percentile (the epithetical 1%), a worker will generally increase his earning power 1,450% over a 30-year career.
The median worker has an income growth of 38% over his career, virtually all of which will come before age 35. Starting at age 45, that will probably even slip a little.
For workers on the bottom 20% of the spectrum the numbers are considerably worse. Over a lifetime, they actually lose earning power and can retire making less than the day they started.
The good news for middle class workers is that they have a lot less to fear from sudden changes to income, or “shocks.” The less you earn the more likely it is that sudden swings will be positive, or at least short lived.
“Positive shocks,” the authors wrote, “to high-earnings individuals are quite transitory, whereas negative shocks are very persistent; the opposite is true for low-earnings individuals.
“It seems that the higher an individual’s current earnings, the more room he has to fall and the less room he has to move up,” the authors wrote.
This is economist for, “the bigger they are, the harder they fall.” The wealthy experience more and worse income dips because they have more to lose, while the poor and middle class have more to gain and less ground to recover in case things go badly. Cold comfort sure, but it’s better than nothing.
Combined with their findings on age, the authors found that “the lower 95 percentiles and the top 5 percentiles display patterns with age and recent earnings that are the opposite of each other.” We live in different worlds.
All of this matters, because understanding lifetime earning is a major determinant for financial decisions. A worker who has better times ahead will feel in a good position to take out a mortgage, while someone with more to fear might begin hoarding his nuts. Getting that call right can mean the difference between a comfortable retirement and an underwater three-bedroom.
This is also a dire warning sign for Millennials.
As a generation that came of age during the Great Recession, many, if not most, of Millennials got out of school and took whatever jobs they could get. Cohort-wide, they suffered a 9% loss to their income, considerably more for some. Although economists have long warned that it would take years for this generation to catch up, and this paper suggests that that might never happen.
The earnings hangover from a recession can last for years. Unfortunately for Millennials, by the time their incomes rebound to historic norms, it may simply be too late. For a 34-year-old who’s finally caught up, it’s not merely that he’s lost all of the money he would have made in the previous ten years. He’s also probably about one year away from peaking out altogether. That lost ground will never come back.
So for all of the young workers out there, now is the time to push for more. Establish your earning power early… while you still have the chance.
--Written for MainStreet by Eric Reed, a freelance journalist who writes frequently on the subjects of career and travel. You can read more of his work at his website A Wandering Lawyer.