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 2013 study on personal wealth statistics.
What I quickly realized is that these statistics, though pretty raw, provide insights into the finances of someone in the roughly top one percent.
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 make a few guesses about who the one percent are and what their finances look like. Guess at their net worth, for example. Estimate the value of the homes they live in. Think about the make and model of the car or cars they drive.
And then, of course, make a guess about about how they made 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 wealthiest Americans. Note that the data comes from an IRS study using 2013 tax return information.
How The Rich Break Down Into Tiers
The IRS data, for the record, don’t actually report on the top one percent. The data reports on roughly the richest 600,000 taxpayers in the country. Approximately 126,000,000 people file tax returns. So, really, we’re talking about the top half of one percent.
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 $5 million||102,954||$3,057,895|
|$5 million to under $10 million||325,371||$6,894,697|
|$10 million to under $20 million||103,903||$13,368,603|
|$20 million to under $50 million||37,596||$29,345,010|
|Over $50 million||13,369||$125,745,772|
The first tier, for example, shows people with less than $5 million dollars of gross assets and includes roughly 103,000 people.
The mean net worth for this tier equals $3,057,895. This first tier–remember the IRS data reports on the top half a percent–probably includes the average “top one percent” millionaire.
But this important note: These mean values overstate people’s wealth, which means that probably most of the top one-percent had net worths of far less than $3,057,895 in 2013. For example, suppose for illustration’s sake that some tier included only three individuals with following net worth values: $2 million, $2 million and $5 million. With these net worth amounts, you get a mean of $3 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 the wealthy comes into focus, you as a small business owner get useful insights.
Home Ownership Rates of the Rich
The table below breaks out mean home values and home ownership rates by those same five wealth tiers the IRS uses:
|Category||Mean Home Value||Home Ownership Rate|
|Under $5 million||$869,918||61.73%|
|$5 to under $10 million||$872,470||75.91%|
|$10 million to under $20 million||$1,208,629||75.31%|
|$20 million to under $50 million||$1,781,547||81.55%|
|Over $50 million||$3,598,604||73.79%|
Not surprisingly, home ownership 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 the first and second tiers. The mean values fall a little short of $900,000. A really nice home obviously. Gosh, 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 wealthy live in a place that’s worth much less than $800,000 or $900,000.
Note: For 2018, the U.S. Census Bureau reports that the median new home price was about $302,400 while the mean new home price was closer to $362,400. (Click here for data.)
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 $5 million||$135,674|
|$5 million to under $10 million||$259,788|
|$10 million to under $20 million||$392,082|
|$20 million to under $50 million||$689,642|
|Over $50 million||$2,675,369|
Again, you possibly want to focus on that first tier since that’s where the typical “multi-millionaire” sits. That person owns about $136,000 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 $136,000.
Again, that’s a really big number. And it provides for a couple of very nice 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 “top one percent” individual 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 $3 million on average.
He or she probably has a nice house. And more “other stuff” than the typical person.
And then he or she probably has a decent but not great retirement account balance and then one other chunk of wealth. (That other chunk of wealth is maybe a rental property, a small business, or a chunk of publicly held stock such as from an employer.)
To put some color into these numbers, then, we’re talking, say, about the woman who owns the local pharmacy. Yes, she got a very nice home. And she’s also 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 most often 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 caricatures of the wealthy as accurate depictions of the wealthy, we want to avoid that.
If you or I plan our personal finances using caricatures, we begin our journey with the wrong destination in mind. Further, 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 takeaway: 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 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.