A few weeks ago, in response to all the renewed interest in Washington D.C. politics about the inequality of income and wealth in America, I cobbled together some wealth accumulation formulas.
What I wanted to see was how easy or how difficult it is for someone to grow their net worth to top five or top one percent status using retirement accounts.
That little project and the blog post it produced (click here to see it) meant I spent time poking around the raw data you use to do these sorts of calculations, including the Internal Revenue Service’s 2012 study on personal wealth statistics.
What I quickly realized is that these statistics, though pretty raw, provide truly interesting insights into what the finances of someone in the roughly top one percent look like.
I’m going to do at least three more blog posts about the one percent, accordingly, sharing what I hope are useful insights for the small business owner. And the first post, this one, talks about how caricaturing the rich can taint our business planning and personal financial thinking.
Paint This Picture
To start, I’d like to ask you to take a second and jot down on a piece of paper a few bits of information you assume about the one percent: their net worth (obviously), the value of the home lived in, and the make and model of the car or cars they drive.
Think about how they’ve made their money–the money that puts them into the top one percent.
Now with that in mind, let’s look at what the IRS data says about the top one percent. Note that the data comes from a 2012 study using tax return information from 2007, which was of course right before we went into that recent economic spin cycle.
How The Rich Break Down Into Tiers
The IRS data, for the record, don’t actually report on the top one percent but on the top three-quarters of a percent, summarizing the financial characteristics of the richest 2.3 million people in the country.
Further, the data breaks the rich into tiers based on the individual’s gross assets. To get the individual’s net worth, therefore, you have to subtract their debts.
When you do this little bit of math, however, you get the wealth statistics shown below:
|Under $2 million in gross assets||449,000||$1,046,619|
|$2 million to $3.5 million in gross assets||1,008,000||$2,593,065|
|$3.5 million to $5 million in gross assets||364,000||$4,151,220|
|$5 million to $10 million in gross assets||286,000||$6,817,462|
|$10 million to $20 million in gross assets||116,000||$13,713,802|
|$20 million or more in gross assets||66,000||$60,029,379|
The “lowest” first tier, for example, shows people with less than $2 million dollars of gross assets and includes roughly 449,000 people. The mean net worth for this tier equals $1,046,619.
The second tier reports on people with gross assets between $2 million and $3.5 million. Somewhere in this second tier should be person who is richer than half of the one percent-ers and poorer than half of the one percent-ers. A group of more than one million individuals, the mean net worth of this group equals $2,593,065.
Note: The mean values probably overstate things, which means that probably most of the top one-percent had net worths of far less than $2,593,065 in 2007. For example, suppose for illustration’s sake that some tier included only three individuals with following net worth values: $2 million, $2 million and $3.5 million. With these net worth amounts, you get a mean of $2.5 million. But the median, the mode, and the best guess as to the “typical” net worth equal $2 million.
Maybe this data doesn’t surprise you. But let’s keep going because as the picture of these one percent-ers comes into focus, you as a small business owner get useful insights.
Homes and Homeownership Rates of the Rich
The table below breaks out mean home values and homeownership rates by those same six wealth tiers the IRS uses:
|Category||Mean Home Value||Homeownership Rate|
|Under $2 million in gross assets||$513,125||78.62%|
|$2 million to $3.5 million in gross assets||$548,031||74.80%|
|$3.5 million to $5 million in gross assets||$704,458||75.55%|
|$5 million to $10 million in gross assets||$890,136||76.92%|
|$10 million to $20 million in gross assets||$1,495,556||77.59%|
|$20 million or more in gross assets||$2,380,037||81.82%|
Not surprisingly, homeownership rates of the one percent easily beat the American average.
But look at the mean home values–and in particular the mean home value for that second tier that probably includes the greatest bunch of one percent-ers–it’s $548,031. A nice home obviously. Especially in some parts of the country outside of those expensive coastal metropolitan areas.
But again the weirdness of using a mean? Perhaps the great majority of home-owning one percent-ers, live in a place that’s worth less than half a million bucks.
For 2007, for example, the U.S. Census Bureau reports that the median home price was about $227,000 while the mean home price was closer to $284,000. These values, by the way, are close to the most recently available median and mean home values, reflecting the recovery in home values since the meltdown in 2008. (Click here for data.)
With half of all homeowners living in a home valued less than that $227,000-ish median value and presumably another big chunk living in homes with values between $227,000 and $284,000, one can probably fairly say that the great majority of homeowners live in homes worth less than that $284,000 mean value.
Following this same logic, very possibly (maybe probably?) the majority or even the great majority of one-percenters live in homes worth less than the mean value of roughly $548,031.
The picture is coming into focus, right? Yes, we’re talking about very wealthy people. But we are not talking yet about anything close to what the anti-capitalists describe, what the television and the movies (which we both enjoy) often portray, or what the get-rich-quick promoters use to seduce.
Let’s keep going.
Mean Dollar Values of Other Assets of the Rich
No surprise, but the rich aren’t only relatively moderate in their home choices.
They’re also moderate in their other durables spending–at least according to the IRS study.
If you break down the other non-business and non-investment assets they own by tier, and exclude their art holdings (which are pretty rare it turns out), you see a breakdown like this:
|Category||Mean Asset Value|
|Under $2 million in gross assets||$60,606|
|$2 million to $3.5 million in gross assets||$71,794|
|$3.5 million to $5 million in gross assets||$98,091|
|$5 million to $10 million in gross assets||$160,473|
|$10 million to $20 million in gross assets||$323,145|
|$20 million or more in gross assets||$1,112,859|
Again, you possibly want to focus on that second tier since that’s where the typical one percent-er sits. That person owns about $70,000 of stuff. So the car or cars, the furniture and household appliances, the clothes, all the stuff with any value the person has collected… in total, the total is slightly less than $70,000.
Again, that’s a big number. And it provides for a couple of very decent vehicles and a house full of furniture.
But we’re probably not talking about expensive German luxury cars, boats that need moorage, or antique furniture.
Caricature vs Character
Here’s my point in making you suffer through this long ramble.
Most of us (hey, including me too!) don’t fairly characterize the rich. Instead, we caricature them. So we’ve got one picture in our heads—maybe the one you painted a few moments ago. But the reality is different.
The one percent-er doesn’t resemble the villain (or the hero) from the last television show he starred in.
Rather, he or she has a net worth of something less than $2.5 million on average, including a house probably worth less than $500,000. He or she owns close to another $70,000 of stuff.
I’ll talk in more detail about the other pieces of the puzzle in my next two posts, but just so you know this now, that stereotypical one percent-er also commonly displays these features: He or she holds about $500,000 in his or her retirement accounts, owns about $500,000 of publicly traded stocks, owns a business worth around $500,000, and sits on maybe $260,000 of cash. According to the IRS.
To put some color into these numbers, then, we’re talking (say) about the woman who owns the local pharmacy (or some other small business). Yes, she has accumulated a nice-sized stock portfolio. She’s got a very nice home. And she’s done a decent job with her 401(k) or IRA.
But this stylized one percent-er does not entertain like Martha Stewart. She does not drive one of the cars reviewed on BBC’s popular car show, Top Gear. She probably does not live in a house or apartment as nice as your favorite fictional television family.
And so now (finally) I get to my three takeaway points for the small business owner reading this.
Takeaway #1: Here’s the first takeaway I want to throw out to you. While it’s pretty common to see and perhaps even subconsciously adopt the one percent-er caricatures, any small business owners who want to move toward or achieve one percent status should avoid such caricaturing.
Here’s why: If you or I plan our personal finances using these caricatures, we’re not beginning our journey with the right destination in mind. And we probably make choices that get in the way of where we want to end up. (This was one of the great points made and artfully discussed in Thomas Stanley’s book, “The Millionaire Next Door.”)
Takeaway #2: And here’s a second specialized takeway: If you or I work in business or profession that serves the top one percent (or the top five percent or whatever) caricaturing the rich can contribute to missing the mark in terms of creating and delivering appropriate products and services. (This can be a risk, for example, for professionals like accountants and attorneys and for financial services companies like banks who may unintentionally allow caricatures to influence thinking about clients and customers.)
Takeaway #3: A quick final takeaway: While the rich, and maybe especially the one percent, do have massively greater financial capacity to support federal, state and local government and to contribute to things like charities and churches, as a community we need to acknowledge these families’ finances are often not as liquid or extensive as we might guess.