There was an interesting article recently on how the average age of those with $25 million or more dropped dramatically in the course of the last 4 years.
From 2014 to 2018, the average age of those deemed by some managers to be ultra high net worth, i.e. those having $25 million or more fell from 58 in 2014 to 47 in 2018. Meanwhile the average age of those with a net worth of at least $1 million remained flat at 62.
Putting it in Context
We often look at income as the measure of being rich, but I prefer to combine that with wealth to get a better picture. This is because the greater wealth you have, the less you have to earn from wages to have an income that many consider rich. For example, there is a rule of thumb with retirement savings that one should take about 4% out of their savings in order to make sure their nest egg remains stable through retirement. If we use that yardstick, then someone at 62 who has a $1 million would receive $40 thousand a year in income from those savings. If you eventually add social security on top of that, you are likely to come to an income close to the national household median of $60 thousand. Not what most would consider rich, but a person or couple that can live reasonably in retirement.
In contrast, if we were to use the same rule of thumb for a household with $25 million this would be $1 million a year in income. This would easily place you in the top 1% of taxpayers and about halfway to the $2.2 million needed to be in the top 0.1% before these folks even lifted a finger to work.
If you are someone who earned that kind of money through entrepreneurship or just hard work and saving, more power to you. However the article points to a more worrying force at play.
In the survey, it mentioned that 9 out of 10 investors under 38 attributed their success to inheritance and family connections. This is hardly scientific and a bit broad but points to the fact that we may be starting to see the beginning of a broad transfer of wealth from the older baby boomer generation to the younger generation, which is helping to push down the age of the super rich.
The number of households that have wealth of $25 million or more also more than doubled from 84,000 in 2008 to 172,000 in 2018.
So Is it Just Inheritance Driving This?
It’s easy to brush this off as another example of yes, the rich are getting richer, but I am curious of the forces that are driving that phenomenon.
A 2015 study on wealth inequality from Emmanuel Saez and Gabriel Zucman shows that in fact, when you break it down in terms of wealth, the US has been quite unequal for most of its history.
Source: http://fordschool.umich.edu/files/zucman-4-24-15.pdf
It’s Really a Story of the Top 10%
The top 10% in terms of wealth have traditionally held a high proportion of the total wealth in the US for the past 100 years. It hit a low of 64% in the early 80’s and has been creeping back up since. As of 2012, it took $660,000 in net worth for a household to be in this top 10% as can be seen below.
Source: http://fordschool.umich.edu/files/zucman-4-24-15.pdf
Vast majority of this top 10% in terms of wealth is made up with those with bachelors, masters or professional degrees. It’s well documented that education gives most people a leg up when it comes to income on average as pointed out by The Tax Foundation and their chart of census data.
Source: taxfoundation.org
A study from the St. Louis Fed which looked at head of households over 40 returned similar numbers.
Source: stlouisfed.org
However, in the same study, the gap seems to widen when you look at wealth instead of income for that same demographic.
Source: stlouisfed.org
But if education seems to only get you about 1.2 times the income of the median household, why do we seem to see the net worth of these earners taking off and passing it on to their offspring? The culprit may have to do with savings. The median income for a household with a professional degree holder is about 6 times those with no HS diploma but 14 times as much in terms of net worth.
Is Saving and Investing the Difference Maker?
The savings rate of US households has always been quite low. As of October 2018, it was 6.1% of income.
Source: stlouisfed.org
If we break the overall savings up though to look at the savings rates of the 1%, the top 10% and the bottom 90% for the last 100 years points to the fact that the dip in savings from those in the bottom 90% in terms of net worth may be part of the cause of the decoupling of the net worth of the top 10%.
Source: http://fordschool.umich.edu/files/zucman-4-24-15.pdf
This phenomenon is pretty much unprecedented and poses other questions as to why the bottom 90%, which is the overwhelming majority of US households, felt the need to start to go into debt starting in the late 90’s only to be slowly crawling out of it now.
In addition, due to the power of compounding, if those savings are being invested in equities and fixed income, instead of cash in the bank, the ambitious savers can easily begin to leave the more traditional savers in the dust. Who tends to hold the majority of equities and fixed income? You guessed it, the top 10% in terms of net worth.
It also may point to why the ranks of the super rich are growing. The super rich can create trust structures that minimize taxes and pass wealth on without inheritance taxes down to their offspring, further widening the gap that had previously existed within their own generation.
For this reason the ranks of the super rich are expected to grow as many of the baby boomer generation who were high earners, diligent savers and consistent investors, reap the benefit of trusts and low or nonexistent inheritance taxes to further swell their ranks as they pass away and leave these riches onto their adult children. Don’t expect this to change in the next 10-20 years and be on the look out for worsening inequality without a significant policy change in Washington when it comes to inheritance and taxes.
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