IRS wealth statistics paint a fascinating picture of the wealthiest Americans—but oddly a picture that diverges from what the mainstream media depicts.
In this blog post, therefore, I’m going to describe the most recent IRS wealth statistics on the top quarter of one percent—they’ve been available for a couple of months—and point out some of most interesting features that pop out.
Note: At the end of this blog post, I provide a link you can use to grab the IRS Excel spreadsheet that holds the data.
Insight #1: IRS Wealth Statistics Diverge from Popular Thinking
A first insight? The IRS’s wealth statistics diverge—significantly—from the wealth statistics supplied by other popular sources including the Federal Reserve’s Survey of Consumer Finances.
Sources like the most recent Survey of Consumer Finances suggest that to join the top one percent, a family needs roughly $6 million in net worth.
But take a look at the table below. The table breaks roughly the top quarter percent of individual Americans (so individuals, not families) into six wealth brackets and then gives each bracket’s mean net worth. Note that the IRS statistics say that the mean net worth of the first wealth bracket equals roughly $3 million. Way below the Federal Reserve’s value.
| Wealth Bracket | Individuals | Mean Net Worth |
|---|---|---|
| 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 |
| $50 Million or more | 14,369 | $125,745,772 |
Further, note that the mean measure of a person’s net worth should exceed the median by a large value. (The Federal Reserve’s 2016 Survey of Consumer Finances, for example, estimates that the median net worth of the top ten percent equals roughly $2.4 million while the mean net worth of the same group equals roughly $5.3 million.)
This seems interesting to me. And I wonder if the IRS’s statistics, which are based on nearly 18,000 estate tax returns filed by the wealthiest Americans, give rawer but more realistic numbers than the Federal Reserve’s survey, which samples around 6,000 families to generalize about a 126 million households, does.
Insight #2: Low Borrowing Levels
A little detour that’s probably sort of interesting…
The IRS wealth statistics suggest the top quarter a percent make little personal use of debt relative to their net worth.
As shown below, except for the first wealth bracket (where personal borrowing equals roughly 45% of net worth), personal debts run 10% or less of net worth. That’s interesting.
| Wealth Bracket | Individuals | Mean Debts & Mortgages |
|---|---|---|
| Under $5 Million | 88,466 | $1,383,017 |
| $5 Million to under $10 Million | 232,032 | $498,009 |
| $10 Million to under $20 Million | 80,269 | $862,088 |
| $20 Million to under $50 Million | 28,766 | $2,081,520 |
| $50 Million or more | 12,756 | $5,123,236 |
Low leverage obviously dials down the financial risk someone bears…
Maybe getting or staying wealthy requires a strong personal balance sheet?
Insight #3: Relatively Modest Homes
An interesting observation, at least to anyone who spends time watching the HGTV network…
The wealthy—especially the super-wealthy—make relatively modest investments in their principal residence, as shown in the table below:
| Wealth Bracket | Individuals | Mean Personal Residence |
|---|---|---|
| Under $5 Million | 63,552 | $869,918 |
| $5 Million to under $10 Million | 246,977 | $872,470 |
| $10 Million to under $20 Million | 78,249 | $1,208,629 |
| $20 Million to under $50 Million | 30,661 | $1,781,547 |
| $50 Million or more | 10,603 | $3,598,604 |
Now, obviously, the wealthy own very nice homes. The first two wealth brackets suggest mean home prices approaching $900,000. In comparison, the most recent Census Bureau data says that as of September 2017, the mean U.S. home price equaled roughly $385,000 (click here for link). Big difference there…
But the homes represent relatively modest percentages of their net worth.
Further, the richer someone becomes, the less (proportionally) he or she spends on a house.
Finally, one other observation… A noticeable chunk of each wealth bracket doesn’t even own a residence. (You compare the counts of people within a wealth bracket to the homeowners within a bracket to see this.)
Insight #4: Big Cash Balances Common
According to IRS wealth statistics, the wealthiest Americans hold large cash balances, as shown in the table below.
The amount shown, for many of the wealth brackets, approaches 10% of net worth.
| Wealth Bracket | Individuals | Mean Cash Holdings |
|---|---|---|
| Under $5 Million | 95,800 | $283,079 |
| $5 Million to under $10 Million | 306,094 | $688,138 |
| $10 Million to under $20 Million | 102,085 | $1,477,553 |
| $20 Million to under $50 Million | 37,463 | $2,556,336 |
| $50 Million or more | 14,240 | $8,651,264 |
I found the high cash balances curious at first. But the more I think about them, the more they make sense.
Big cash balances allow someone to take advantage of unusual opportunities and to more comfortably deal with rough financial patches.
Note: I’m not going to provide a table—this blog post is going to end up way too long—but the wealthy also tend to hold large amounts of bonds: municipal bonds, Treasuries, corporation bonds and bond funds, and so forth. That’s maybe another way they dial down financial risk… and dial up liquidity.
Insight #5: Middle Class Retirement Accounts
Curiously, the wealthiest Americans hold relatively modest balances in their retirement accounts.
In fact, most of the wealthy hold no more in their retirement accounts than many middle class and upper-middle class folks hope to accumulate.
And then, equally curious, a significant percentage of the wealthy completely skip the retirement account option. The table below provides the details.
| Wealth Bracket | Individuals | Mean Retirement Balances |
|---|---|---|
| Under $5 Million | 78,980 | $684,477 |
| $5 Million to under $10 Million | 243,107 | $1,235,904 |
| $10 Million to under $20 Million | 77,289 | $1,480,327 |
| $20 Million to under $50 Million | 26,617 | $1,819,814 |
| $50 Million or more | 10,229 | $4,441,588 |
Can I just say here what everybody should be thinking? Skipping the retirement accounts isn’t smart. These accounts are an even better deal for the wealthy.
Insight #6: Thomas Stanley Was Right
You may remember, perhaps even have read, Thomas Stanley’s popular book, The Millionaire Next Door. Stanley become famous for pointing out the rich typically live in middle class neighborhoods and drive American-made cars.
The IRS wealth statistics nicely mesh with Stanley’s research.
The table below reports on the dollar values of the other personal assets held by each wealth bracket. (Note that other real estate like a second home and art aren’t included.)
| Wealth Bracket | Individuals | Mean Other Assets |
|---|---|---|
| Under $5 Million | 92,700 | $135,674 |
| $5 Million to under $10 Million | 283,004 | $259,788 |
| $10 Million to under $20 Million | 96,990 | $392,082 |
| $20 Million to under $50 Million | 35,923 | $689,642 |
| $50 Million or more | 14,019 | $2,675,369 |
The table above shows big numbers relative to the typical, middle-class household. That household earns on average about $60,000 annually according to government reports. But dig into the details and think in relative terms and things all sort of make sense and jive with Stanley’s work.
For the first wealth bracket, once you allocate a chunk of the funds to furniture and a couple of nice cars, you use up most of the money.
As you look at the higher brackets, yes, you see bigger amounts spent on these other assets.
But even in that top wealth bracket where these other assets total nearly $2.7 million, the IRS wealth statistics suggest the wealthy don’t spend the way television and films depict. The mean value simply isn’t big enough to include items like yachts or private jets or an eight stall garage full of super cars.
Note: I don’t have room for it here, but the wealthy do seem to splurge on one thing: art. In fact, the wealthy can spend as much on art as they do on other “stuff.” Download the IRS spreadsheet via the link below for details.
Insight #7: No Mutual Funds, No Passive Index Investments
Something that probably doesn’t really make financial sense for the wealthy?…
In spite of the clear superiority of passive investments like index funds, and then also the diversifying power and massive efficiency of mutual funds, the IRS wealth statistics indicate that the wealthy don’t emphasize passive investments or mutual funds.
The typical mutual fund holdings appear in the table below:
| Wealth Bracket | Individuals | Mean Mutual Fund Balances |
|---|---|---|
| Under $5 Million | 32,473 | $95,864 |
| $5 Million to under $10 Million | 145,332 | $223,536 |
| $10 Million to under $20 Million | 48,814 | $343,569 |
| $20 Million to under $50 Million | 19,644 | $551,568 |
| $50 Million or more | 6,943 | $1,748,380 |
Weird, right? Only a minority of wealthy investors use stock mutual funds. And when they do use them, they don’t use them very much.
Insight #8: Active Small Business Investors
Okay, the IRS wealth statistics provide a bunch more details on the financial profiles of the wealthy.
You won’t be surprised to hear they own a little real estate in general. Or that they tend to invest in more exotic investments like limited partnerships, hedge funds, venture capital funds and municipal bonds.
But the other thing—maybe the really unique thing—they invest in appears to be private businesses.
The table below, for example, shows the details of these individuals’ investments in closely held corporations. Note that the table shows a pretty big chunk of each wealth bracket’s members have on average roughly a third of their wealth tied up in a closely held corporation.
| Wealth Bracket | Individuals | Mean Private Corporate Holdings |
|---|---|---|
| Under $5 Million | 29,678 | $930,352 |
| $5 Million to under $10 Million | 102,692 | $1,689,207 |
| $10 Million to under $20 Million | 44,724 | $3,779,313 |
| $20 Million to under $50 Million | 22,179 | $8,306,461 |
| $50 Million or more | 8,384 | $39,879,890 |
And then here’s where this gets really interesting, I think. The same sort of active private business investment shows up a couple of other places in the data too.
Each of the wealth brackets, for example, also shows a big chunk of individuals with on average a big investment in un-incorporated businesses like a professional service firm partnership.
And each of the wealth brackets shows a chunk of individuals with on average a big investment in a farm, which is another type of small business obviously.
The details appear a little fuzzy. Only someone very foolish draws hard conclusions—and then shares them in a blog post. Or a comment to a blog post.
But it appears that a majority of these wealthy individuals have a chunk—on average a big chunk—of their wealth in a closely held corporation, a business partnership, or a farm.
Furthermore, the wealthier an individual is, the more likely he or she owns an interest in a private company.
You can’t say that everyone who owns their own business joins the top one percent or top quarter of a percent. (Roughly 28 million small businesses exist in the U.S.) But the IRS data makes one wonder if most of the people who join the ranks of the truly wealthy own an interest in a successful small business.
Note: Another big chunk of each wealth bracket’s money resides in publicly traded stock. This chunk may report on investors who’ve successfully managed active investment portfolios. But this chunk may also report on top managers and technology company employees who’ve built wealth through their employer’s stock.
Final Comments
Looking at the finances of people who have more money that you or I do can be a little unsettling. If we’re not careful, the financial voyeurism can also foster a sense of ingratitude. That’s not good…
But can I suggest a little bit of looking is okay? I see three helpful insights we glean from looking at how others run their finances.
First, I am pretty sure many in both the news and entertainment media exaggerate the affluence, consumption and the financial sophistication of the top one percent or top quarter percent.
Second, the robust personal balance sheets and (relatively speaking) modest consumption of the rich provide a blueprint that everybody can use to improve their finances.
Third, and finally, you ought to know that it seems very possible the way most people end up in the top quarter a percent (and maybe the top one percent too?) is through ownership of a small business. Maybe you or a child or grandchild will want to do that…
Other Resources You May Find Useful
Downloadable IRS Wealth Statistics (Note: For this blog post, I calculated the mean values shown above by dividing the dollar values shown for each asset or net worth amount provided by the number of individuals within a category.)
Financial Planning for the Top One Percent (and everybody else)
The Rich Get Poorer: Myth of Dynastic Wealth
2016 Survey of Consumer Finances download page
IRS whitepaper on why IRS and Federal Reserve Numbers differ
And then these blog posts about the last IRS wealth statistics study might be interesting, too…
Caricaturing the Top One Percent
Joining the Top Five or Top One Percent
Steve,
I like these type of posts that you put together from analyzing IRS data and agree with most of your conclusions. I had a slightly different take on a couple of items. With regards to the high cash balances, I’m curious if some of this might be due to the following: 1) higher expenses (and thus higher emergency-type funds to cover expenses for the next 6-12 months) or 2) excess cash to simply take risk off the table from both business ownership & equity markets – even at the risk of inflation eating away at the value. Lastly, I wasn’t entirely surprised that many aren’t heavy index fund investors (especially those with $10 million or so in assets). To get to this level, it would seem that your wealth would be driven by participating in business ownership or event-driven income of some kind.
Good thoughts Brian… good thoughts. Also I’m not sure we disagree here. The data, though raw, inspires all sorts of reasonable explanations.
What the heck is up with that debt number for the “under $5 million” bracket? Why so high?
I think it’s probably people’s mortgage. I.e., above that $5M level people probably don’t have mortgages as commonly.
Love this sort of analysis Steve; Thomas Stanley probably would have as well.
I wish the data was more granular-removing lawyers with equity in their firm, or doctors who have equity in their practice would be interesting to me.
My next steps will probably involve building a small business, but have no desire to go back to school for an advanced degree.
Agree it would be great if the data let you do that… BTW I don’t think you need an advanced degree for entrepreneurship… 🙂
The rich are not like you and me.
“Great Gatsby” quote?
Evidence show the rich are just like any others and unlike as portrayed on TV.. A good portion of them live in middle class neighborhood’s and drive moderate priced cars.
On point #5, the contribution limits on retirement accounts make them not linearly scale with wealth after you remove the influence of time, A business twice as successful does not allow the owner contribute twice as much to the retirement accounts.
Those are good points, Harry, about the nonlinear scaling and influence of time… Good points. Thanks for sharing them.
Yes was about to make the exact same comment ragrding retirement plans–many of these wealthy individuals may be pulling in several million per year but only able to sock away exactly the same as the rest of us in retirement plans.
So, in other words, that statistic isn’t puzzling at all but just confirms that these folks play by the same rules as we do.
What is puzzling is why they don’t all participate! I know if you make $5M that deducting 18k isn’t much, it don’t leave $$ on the table!
My bet is that their “savy financial advisors” have convinced them not to participate but rather invest more in the lucrative (and fee-rich) hedge fund
This information is very interesting and helpful to me as a recent successor trustee from a rather dysfunctional family. My father is in a nursing home and I’m trying to learn how to handle his assets “on the fly”. He never took time to teach us about money.
As I read your blog I could see many similarities, and answers to some of the things that don’t make good financial sense. Much of the oddities are fear based, like buying municipal bonds and holding a lot of cash. Not only is cash useful for jumping on good deals, physically holding and counting it offers a sense of security and accomplishment. The preference of stocks over index funds is just a lack of knowledge about index funds, stocks are “old school”. Most of them made their money by working hard in the family business, that they likely started years ago. They made their money by working and building the business, the investing came later and wasn’t their primary expertise. They didn’t have the luxury of the internet for learning about investing or the power of computers for comparing the past performance of various investments.
Good comments. Thank you Alan.
Re: Insight #7
The low proportion in mutual funds does not necessarily indicate so small an allocation to passive investments. Per the data definitions (https://www.irs.gov/statistics/soi-tax-stats-personal-wealth-study-terms-and-concepts), Diversified Mutual Funds only includes, “mutual funds that are broadly composed of a variety of different kinds of investment instruments. Also includes mutual funds whose asset composition could not be determined.” Thus, the low value here may indicate only that the wealthy don’t buy funds that allocate across different asset types, which is to be expected.
Publicly Traded Stock includes domestic and foreign stock mutual funds, ETFs and individual issues. held in taxable accounts. Those holdings make up 10.75% of assets in the under $5 million category. Add the 12.37% Retirement Assets, a significant proportion of which may well be in passive investments at the bottom tier, and we’re over 23%.
Steve, regarding items #5 & #7, “what everybody should be thinking” is not that skipping retirement accounts (and mutual funds) isn’t smart, but instead WHY are the top 1% avoiding these vehicles and should I follow their lead? Do the wealthy have reason to believe their taxes will be lower in the future? Prolonging the receipt of compensation now is akin to borrowing from someone notoriously bad with managing money (i.e. government) and allowing them to set repayment terms later, based solely upon what THEY need in the future. (Have you seen our national debt, unfunded Medicare, Medicaid, social security, etc? I think they will be pretty needy.) Aside from that, retirement plans and mutual funds in particular are a scam, played upon the common man, by Wall Street. There is rampant insider trading, back-dating of trades and almost no oversight, prosecution, or penalties from the SEC. (Read “Pirates of Manhattan”.) Returns are being grossly overstated using a figure “average rate of return” which doesn’t correlate to anything but makes returns look good. The average rate of return over two years of a fund that has a 100% return, then a -50% return is reported as a positive 25%. Yet $10,000 invested, grown at 100% to $20,000, then subject to a 50% loss leaves an investor at $10,000—a ZERO % return. The more volatile the fund/stock, the more overstated its actual return. Target date funds are designed to keep the average person’s eye OFF the ball and to steer large numbers of institutional (retirement plan) investors into the same investments where Wall Street has better control rather than let crazy novices invest irrationally and cause market unpredictability. The only thing holding up our wildly overpriced stock market right now is employer’s automatic enrollment (and auto escalation) features in 401ks. These guarantees a continuous supply of unsophisticated money to fund the giant Ponzi Scheme. The wealthy know you don’t play games with people who can easily cheat you.
Interesting thoughts Deborah. And I appreciate you taking the time to share them.
My experience serving wealthy and the entrepreneurial class? I don’t think the wealthy “know” this stuff better than the common man or woman on the street. But I do think the statistics suggest they do more “hands-on” investing… and that that gives them (in best cases) a way to build real wealth.
Hi Steve,
I fall into the under $5 mil category and the numbers are dead on! The “low” amounts in Retirement Accounts are due to the Maximum being put into a Sep every year for 30 years from the income on a “pass-through ” business. We also bought rental properties and a building to house our business which will provide rental income for our upcoming retirement. Passive Investments are something we use, my husband and I are both Financial Advisors and know lower costs lead to better returns, Index Funds are our favorites. The high amount of cash on hand is due to having available funds to replace income in down markets and during slow business cycles And/OR an opportunity to invest in another property. We have mortgages on our first and second homes as we don’t believe in putting cash on hand into a ” dead” asset, especially at 3.75% with a tax deduction. We believe our money will earn more outside a house. I drive a 2012 Toyota Highlander, my husband a leased Jaguar. No one would ever think we are “1%” Frankly, I didn’t realize it until I read your article, we both started with literally nothing and slowly and steadily it grew. We always lived below our means and don’t buy crap we don’t need. We’ve been able to start and fund 529’s for grandkids, nieces and nephews at $50 a month (x5) We also give at least 15% of our income to various charities and I’m in the process of getting a charity I started up and running. We will always have more in common with ( and more fun with) the average working class person as that is the way we see ourselves (I worked in a stable from the time I was 8-21 and I tended bar all through college and my husband worked in a diner and retail for years) . I have more fun with the wait staff at a party than the guests. The presumptions people have about people in any “category” is pretty comical. You CAN’T judge a book by its cover…or its Assets! : ) Happy New Year and thank you for a great article.
Good comments Jennifer. Thank you for sharing. Happy New Year to you and your family, too. 🙂
My understanding of the above scenarios is limited. I do wonder, however, how many professional athletes and entertainers are included in the above numbers and if they were excluded from the data, would the ratios be the same.
I think the numbers would include any taxpayer with a “tax return profile” during the survey years that indicates the individual’s net worth falls into the top .25%. So it should include celebrities who have tax returns that indicate they have a high net worth.
The one thing we probably all know about those folks, though, is that their high incomes often are short-lived. A professional athlete, e.g., can make $5M a year… but as I calculated in another blog post (link below), she or he needs to live on “only” $500K and then save whatever else is leftover after taxes in order to be able to “retire” after 7-8 years and continue to live on $500K a year.
https://evergreensmallbusiness.com/financial-planning-for-top-one-percent/