Income is not wealth.
We forget this when complaining about the 1%. Because it’s hard to figure out how much wealth people have, it’s easy to look at the tax tables–forgetting that the two doctors earning a combined $400,000 a year are paying a total of perhaps 30% to the fed, maybe another 10% to the state, leaving them an after-tax income of $240,000 a year.
And while that may sound like a hell of a lot–and let’s be honest, it is a hell of a lot, especially given the average income of a working family today in the United States is perhaps $60k/year–but when you then subtract out payments on student loans (which for doctors can be upwards of $500,000 at 5%–peeling off $45,000 a year just in loan payments), then subtract out the typical stuff that people tend to surround themselves with (Million dollar home? $67,000/year. Two BMWs? $36,000/year–and that’s if you cheap out and get a really well equipped 5-series rather than going for the top-of-the-line. Oh, and don’t forget the insurance for all this stuff.)
Suddenly, that $240,000/year has been eaten up: just with loan payments for the nice home and the nice cars, and toss in perhaps $50,000 a year on everything else: food, vacations, clothes, insurance, utilities)–and that power-couple doctor pair may only be able to save $40k/year for retirement–assuming they’re saving anything at all.
And that 1%er in income, bopping along without paying attention, not really saving for retirement, suddenly realize they don’t want to be arms-length in someone’s insides for the rest of their lives–they wake up and start shoveling money into retirement. But $48k/year over 15 years of savings only amounts to $1.2 million (assuming 7% ROI on investments, which is better than consumer averages)–and that means our doctors are going to have a serious hair cut on their standard of living.
Fuck, even if they were smart and saved that $48k/year over 30 years–that only amounts to $4.8 million. But remember: inflation ate away at the spending power of that money, making it “only” worth $3.3 million. A “safe” withdrawal rate on an invested $3.3 million for retirement purposes is around $130k/year–far far less than our Doctor’s $240k/year lifestyle. And remember, that was for someone who conscientiously saved over a 30 year career for their retirement.
Most of us are not that conscientious.
(If you want to be, may I suggest the writings of Dave Ramsey?)
Now I don’t feel sorry for those doctors. For the average person making due on $60k/year, $130k/year sound fantastic. For most of us it would solve all our problems.
But my point is this:
Those 1%ers in income do not have a lot of wealth.
(Okay, $4 million with a paid off $1 million home is pretty damned good. But it’s not “buy a million dollar yacht and sale around the world from your private Caribbean island” rich.)
I point this out because I would often see estimates by the Federal Reserve, such as used in this article, which claim the bottom of the top 1% (in terms of wealth) have at least $7 million in assets.
And I think “on what fucking planet?”
There are a lot of older generation people who have successfully retired. But they’re not retired on the returns on investments accumulated over a lifetime. They’re retired on fixed pension plans–pension plans that are not available to the majority of my generation or to those who are younger. (My father receives a railroad retirement pension–but I believe he was one of the last to receive such a generous payout; certainly to my generation a pension which pays out 80% of your income for the last 30 years of your life would be absolutely unheard of.)
I think this skews estimates of net wealth (which can only be estimated) upwards. For me to retire on 80% of my current income would require several million dollars (using various safe retirement rules published on the ‘net). But my father’s pension is not worth millions. It pays like it was worth millions. But when he dies, *poof*, it’s gone.
It’s why I found this guy’s essay so interesting: because by using the methodology used by the IRS (and not the Federal Reserve) using anonymized tax return data to estimate net wealth, the estimated amount of money necessary to enter the top 1% of wealth (not income, wealth) is considerably less.
Around $1.2 million (as of 2011, or around $1.3 million in today’s dollars).
An Investment Manager’s View on the Top 1%
Until recently, most studies just broke out the top 1% as a group. Data on net worth distributions within the top 1% indicate that one enters the top 0.5% with about $1.8M, the top 0.25% with $3.1M, the top 0.10% with $5.5M and the top 0.01% with $24.4M. Wealth distribution is highly skewed towards the top 0.01%, increasing the overall average for this group. The net worth for those in the lower half of the top 1% is usually achieved after decades of education, hard work, saving and investing as a professional or small business person. While an after-tax income of $175k to $250k and net worth in the $1.2M to $1.8M range may seem like a lot of money to most Americans, it doesn’t really buy freedom from financial worry or access to the true corridors of power and money. That doesn’t become frequent until we reach the top 0.1%.
In other words, financial security is increasingly eluding our grasp. And unless you inherited a small fortune or built a large business and successfully sold it off, your net worth will probably never crest the $5 million mark (putting you in the top 0.1% of wealth).
No matter how much you make in salary.
I find stuff like this interesting.
But I do want to make an observation.
Unless you were part of the ruling class during medieval times, you worked until you died. There was no “financial security”–and in the turbulent periods of medieval times, there may be little political security as ruling lords often fought each other for land and status.
In fact, the very notion of “retirement” is a recent invention. Previously as one aged, large extended families may take care of you. But it was not so you could relax; Native American tribes would take care of the elderly in the same way they would take care of the sick and ailing: if you can’t work, your family would take care of you until you died. If resources were tight, they may cut their losses–and leave you in the wilderness to die on your own, or put you on the ice flow to allow you to die at sea.
But we invented the notion of retirement on the theory that we needed to make space for the younger to obtain jobs–yet notice, we set the retirement age at roughly the life expectancy age: meaning chances were, when Social Security was invented, you’d die before you received a dime. And even if you collected, chances are you were only collecting around 12 years of retirement on average.
So I suspect this notion of financial security eluding our grasp was a fiction — and most of us will be working (even if just part time) supplementing our income up until the day we die.
Even those in the top 1%.