A Look Inside the Top 1% of Wealth and Net Worth in the United States

If you were 50 years old, had a net worth of $2 million, no debt, owned 3 Dunkin' Donut franchises, loved your job, and "tap danced to work" every day, I think only a fool wouldn't consider you a wild success.
Worldview Weekend

What does it take to be in the top 1% of wealth in the United States?  Many of you write me and ask that question, hoping someday to make it into the top 1% of net worth but not sure where that line gets drawn.  I thought it might be useful to provide a reference to which I could point people in the future whenever they write, as well as make for some interesting afternoon reading for those of you who are curious about the nature of the economic world in which we live.

We’re Going to Look at the Top 1% of Wealth and Net Worth in the United States, Not the Top 1% of Income

Notice that we are going to discuss the top 1% of wealth not the top 1% of income.  As illustrated by our recent discussion of Terrell Owens, Jamal Mashburn, and Ulysses Bridgeman, Jr., depending upon how wisely a person’s income is invested, income may or may not result in building wealth.  Hence the startling statistic pointed out in a Sports Illustrated article explaining that in the NFL alone, 78% of players went bankrupt within 2 years of retiring.
We are talking about what Dr. Thomas J. Stanley calls “balance sheet affluent” in his research, as opposed to “income statement affluent”.  That might seem a bit confusing since I am a fan of the older, British method of measuring wealth wherein a person looks at the level of passive income (or “private income”) thrown off by investments.  But the distinction is there because I am discussing income generated by assets that do not require your labor as opposed to that which would disappear if you failed to get out of bed in the morning. Additionally, we are not going to discuss income inequality or wealth inequality because those are expansive enough topics they deserve their own articles.  Instead, our objective is to simply focus on the data at this juncture and answer the question: How much money does it take to get into the top 1% of wealth in the United States?
Psychology studies tell us that humans, regardless of intelligence, often have a difficult time grasping percentages in terms of real world implications.  So let’s flip the numbers on their head in an exercise.>

Imagine you are in a stadium of 100,000 people that represent a perfect cross section of the population in the United States.  If we divided the groups based on net worth, here is how it would look:
  • There would be 1,000 people with a net worth of $1.2 million or more.
    They would be richer than 99,000 other people in the stadium.
  • There would be 500 people with a net worth of $1.8 million or more.
    They would be richer than 99,500 other people in the stadium.
  • There would be 250 people with a net worth of $3.1 million or more.
    They would be richer than 99,750 other people in the stadium.
  • There would be 100 people with a net worth of $5.5 million or more.
    They would be richer than 99,900 other people in the stadium.
  • There would be 10 people with a net worth of $24.4 million or more.
    They would be richer than 99,990 other people in the stadium.

Dividing the Top 1% of Wealth Into Two Groups

One thing I found interesting about the Who Rules America body of work is an article written by an anonymous wealth manager who clearly disdains the nature of economic allocation currently prevalent in our nation.  Among his observations are his belief that the top 1% can be divided in half.  As he put it:
 The 99th to 99.5th percentiles largely include physicians, attorneys, upper middle management, and small business people who have done well. Everyone’s tax situation is, of course, a little different. On earned income in this group, we can figure somewhere around 25% to 30% of total pre-tax income will go to Federal, State, and Social Security taxes, leaving them with around $250k to $300k post tax. This group makes extensive use of 401-k’s, SEP-IRA’s, Defined Benefit Plans, and other retirement vehicles, which defer taxes until distribution during retirement. Typical would be yearly contributions in the $50k to $100k range, leaving our elite working group with yearly cash flows of $175k to $250k after taxes, or about $15k to $20k per month.
He goes on to explain that beyond that, you get into people who build and sell businesses, investment bankers, corporate executives, real estate developers, and a handful of other careers.  He mentions that, on occasion, a particularly intelligent physician or attorney will come in with a net worth of $15 million to $20 million as a result of wise investments but they are rare.

The Wrong Focus (and How to Think About Money)

The article itself is useful but the author seems somewhat disenchanted and bitter.  I don’t agree with his conclusions on the nature of the bottom half of the top 1% but I think it probably comes down to a basic disagreement about the nature of the world.  How so?  A scenario might help.

CONTINUE