December 3, 2023 – When I wrote my post on the “Die With Zero” philosophy in October, I dug through the Survey of Consumer Finances (SCF). I used the detailed wealth distribution data to study the extent of asset overaccumulation late in retirement. The Federal Reserve releases the SCF only every three years, and just a few weeks ago, we got another survey covering 2022 and providing a wealth of information – pun intended. Quite amazingly, in 2022, for the first time in history, the average household net worth crossed one million dollars, now standing at about $1,060,000. Of course, wealth is unequally distributed, so while we may all be millionaires on average, the number of millionaire households is much smaller.
Then, what’s the percentage of millionaires? Is it a tiny elite, like the wealthiest 0.1% or 1%? I remember reading years ago that the share of millionaires was in the high single digits. So, I was surprised that more than 18%(!) of households were millionaires in 2022. That’s across all households and all age groups, and it is significantly higher for older folks. Also, the overwhelming majority of millionaires are homeowners. Homeownership can’t be such a terrible investment after all.
Since I did all that work, writing a Python program to dig through all those datasets, I thought I might as well write a blog post and share the results with you. Let’s take a look…
A few notes on the Survey of Consumer Finances
Note that the $1m average net worth is not per capita but per household. So, with an average household size of about 2.5 members, the per-capita net worth is “only” about $400k. So, individually, we’re not even close to reaching millionaire status, but $400k is also very impressive because that’s the net worth of every resident, old or young, working or not.
Also, the Federal Reserve publishes aggregate data on household balance sheets as part of the “Financial Accounts of the United States (Z1)” dataset. Those releases are quarterly (though with several months’ delay). Even before the new SCF data release, crossing the $1m average net worth threshold was a forgone conclusion; we have about 131 million household units in the U.S., and the total net worth has been above $131t since 2021. For example, in Q2 of 2023, the most recent data available, the total net worth reached just under $146 trillion, so the average net worth has increased to over $1,130,000.
What’s the use of the 2022 SCF data then? The SCF goes further and interviews a large sample of individual households. Thus, we can gauge the distribution of wealth that would get lost when looking at aggregate data. Please find more info on this landing page at the Fed. The summary is available in HTML and PDF formats.
So, let’s get to the SCF data now…
Findings
The average net worth is above a million dollars. But it’s unequally distributed!
While the average household net worth is above $1m, the median is only $192,700 (all figures rounded to the nearest $100). The Gini coefficient, a measure of inequality (0 means all wealth is equally distributed, while 1.0 would imply one person owns everything and everyone else has zero), is notoriously high in the USA at 0.83, higher than in most other developed nations. Surprisingly, though, Sweden ranked higher, at 0.881 in 2020.
We can also study the distribution in more detail. I calculated the net worth at different percentiles of the distribution. Here are the cutoffs you’d need to make it into the bottom or top 1%, 5%, 10%, and 25%. The bottom 1% and even 5% of households have negative net worth numbers. If you own only $450, you’re already better off than the bottom 10%. Meanwhile, to belong to the top 10%, you’ll need almost $2m. Just under $4m puts you in the top 5%, and you’ll need to reach the “eight-figure club” at over $13m to get into the top 1%.
Notice that the numbers above are the exact cutoffs to get into specific percentile groups. We can also calculate how much of the total net worth is owned by particular population percentiles. In the chart below, I plot the 2022 Net Worth Lorenz Curve, i.e., if I were to rank all U.S. households from low to high on the x-axis, then the Lorenz curve tracks the cumulative share of those households on the y-axis. The Lorenz Curve would be a straight 45-degree line if the net worth were perfectly equally distributed. But in reality, the Lorenz curve is the convex curve below. For example, in the Lorenz Curve below, we can see that the bottom 50% of households own only about 2.2% of the total net worth. And for the quantitative geeks, the Gini Coefficient is derived from the Lorenz Curve. Specifically, we calculate the Gini coefficient as one minus two times the blue-shaded area underneath the Lorenz Curve.
Some additional observations: the top 0.1% of households own 14.7% (=100%-85.3%) of the total net worth. The top 5% already own 61%, thus a majority of the total wealth. And the top 10% of households own almost three-quarters (100%-26.6%=73.4%) of the nation’s wealth. Pretty mind-blowing numbers! But take solace in the distribution being even more lopsided in Sweden!
Percentage of millionaire households:
I remember years ago learning that about 10% of households were millionaires. Now that share has increased to 18%. What’s more, the percentage of “5x-millionaires” is an equally impressive 3.7%, so about one in 27 households. But also notice that about 7.9% of all households have a zero or negative net worth! In fact, if we look at the Lorenz Curve above and zoom in to the lower left corner, one would see the curve dip below zero for a while. (Side note for the math geeks: the Gini coefficient could theoretically exceed 1.0 if enough households had a negative net worth!)
Age is a significant determinant of net worth!
This should not be too surprising: people accumulate wealth as they age, so households led by older individuals are significantly wealthier. In the chart below, I plot the mean and median net worth by age group and the top and bottom 10% and 25% cutoffs. The mean household net worth increases for every age up to the 65-69 cohort and slowly decreases again. Only for the 50+-year-olds do you get an average net worth in the seven figures. I also noticed that for older households, the 75th percentile is already above one million dollars, so more than a quarter of the senior households are millionaires. And the mean net worth is well above $1.5m for all age groups 60+.
Side note: I should stress that the SCF is purely a snapshot of the 2022 population. We cannot translate the SCF into time series paths of actual households. So, for example, in 2022, the 60-64 and 65-69 age groups had an average net worth of $1,675m and $1,837m, respectively. It does not imply that today’s 65-69-year-olds grew their net worth by $162k over the last five years. But the general pattern, i.e., saving and accumulating over the typical career years from your mid-20s to mid-60s and then slightly decumulating over your retirement years, is still valid. However, we’d have to employ panel data, i.e., tracking a large panel of households over a longer time horizon, not just in one single snapshot.
The rise in net worth is not just due to inflation.
Naysayers will object that the rise in net worth is simply due to rampant inflation. But that’s not the whole story. If we plot the average and median net worth numbers over the entire set of 12 SCF surveys from 1989 to 2022, we get the charts below. Notice that I plot both the nominal net worth (i.e., in current dollars) and the real figures in CPI-adjusted dollars, measured in 2022 dollars. So, for example, in 1989, the average net worth was $184,900 in nominal terms, which is equal to $436,600 in 2022 prices. By definition, nominal and real dollars are identical in the base year 2022.
According to the charts below, average and median net worth numbers increased substantially, even when adjusting for inflation!
However, it is noteworthy that the real median household net worth took until 2022 to pass its 2007 level again. The average real net worth already reached a new high in 2016.
And again, we can also track the share of millionaire households over time, both in nominal and real dollars. The blue line (percentage of millionaires in nominal dollars) went from 3% in 1989 to 18% in 2022. Eroding purchasing power over time makes it much easier to surpass the million-dollar threshold. But even adjusting for inflation, that share of millionaires has more than doubled since 1989 (8.2% to 18.0%).
Why America should not be ashamed of its Gini coefficient
If I want to put a positive spin on the unpleasant wealth inequality stats in the U.S., I would again point to the net worth chart by age group: Some of our inequality is due to the natural wealth accumulation lifecycle. For example, within my age group (45-49), the wealth Gini coefficient is lower: 0.769. Americans are very good at building assets, thanks to their entrepreneurial spirit and generous tax incentives, like tax-advantaged retirement plans and capital gains deferral.
In other countries, wealth accumulation is not as common thanks to people relying more on government-run retirement systems, like in most of Western Europe, especially in my native Germany. Let’s see how that works out for their retirement planning! I’d rather take my chances with an S&P 500 index fund than with the German government. However, I was surprised that even in Germany, the Gini was relatively high at 0.788 in 2020, according to Wikipedia. Germany has much less mobility and a lot of “money nobility,” i.e., sticky, inherited wealth, while most American millionaires are self-made. So, especially in the FIRE community, we should not be ashamed of a high Gini. As long as we maintain wealth mobility, we should celebrate wealth inequality because it’s a symptom of self-made affluence. In an old post in 2017, I once calculated the Gini Coefficient of ten different ERN household net worth snapshots during my accumulation phase and found a Gini of 0.62. Just from the life-cycle effect.
Wealth inequality has decreased (slightly) since 2019.
It’s also worth pointing out that the Gini coefficient decreased in 2022 and now stands at the lowest level since 2007, though still far above the Gini in the 1990s. The Global Financial Crisis apparently caused a sizable bump in inequality, and we’re now slowly walking it down again. That makes sense because many middle-class households had their net worth tied up in real estate, which in many places didn’t recover until after the pandemic. Most affluent families in the top 10% of the wealth distribution likely held assets that recovered much faster: publicly traded equities, private businesses, and sometimes even multi-family real estate, which did much better during and after the crisis, more on that later. Also noteworthy: If I calculate the Gini in my age group only, we are almost back to the Gini levels in the late 1990s.
The rich are getting richer. But what about the rest?
In a growing economy, you’d hope that the gains from growth will reach all parts of the population, not just the super-rich. How are we doing in the U.S.? You hear often that the middle class is not just missing out on the gains but even falling behind. That’s not exactly true. If we compare the wealth distribution in 1989 with 2022, most percentiles gained ground. True, the 1%, 5%, and 10% lowest percentile had negative to zero net worth figures. The 1% poorest got deeper into debt. But the middle class is getting richer, albeit modestly slower. The middle two quartiles, ranging from the 25th to 75th percentiles, also gained between 77.6% and 107%. Quite intriguingly, the exact middle, i.e., the median, grew the slowest (77.6%), while the lower and upper cutoffs, folks closer to the lower middle class and upper middle class, did slightly better, though not as well as the heavy-hitters in the 90th percentile and above:
Individual results may vary!
One issue that always rubs me the wrong way when folks compare historical net worth numbers is that the time series of the net worth mean and median (or any other points in the points in the net worth percentile distribution) are not really that meaningful. As mentioned above, the typical household should experience much faster net worth growth than the economy-wide median household because of the lifecycle pattern of wealth accumulation. For example, imagine we look at the age 30-34 cohort in 1989. Those same households are 33 years older in the 2022 survey and will fall into the 60-64 and 65-69 cohorts. Well, not all of them because some folks might have died, divorced and married a head of household with a different age, moved to another country, etc. But for most families, it should be safe to assume that they moved through age groups over time and now ended up in those two age cohorts in the 2022 survey. So, let’s see how their net worth numbers compare to 1989; see the table below.
Quite intriguingly, by this measure, the median had a higher growth rate than the higher percentiles, just under 1400%, i.e., almost 15x. Of course, in dollar figures, the net worth growth of the higher percentiles was much larger, but relative to the starting point, the middle class did quite well. In fact, the lower end of the middle class, which I loosely define as the 25th percentile of the net worth distribution, had the fastest net worth growth. And just for the record, there is no guarantee that the median household in 1989 is now still the median. Some might have fallen below the median, and some might have advanced into the higher percentiles. But the distribution above the 25th percentile experienced substantial growth, much more than when looking at economy-wide figures. The lower end of the net worth distribution in the aggregate number will always look so poor due to the never-ending supply of “poor” people, a.k.a., people in their 20s with low-to-no wealth and a pile of student loan debt. But the path of actual Americans over their lifecycle will look much better!
Also, notice the tremendous rise in the share of millionaires, growing by more than 10x (slightly above 900%) from 2.7% in 1989 to 27% in 2022. And the growth in 5x millionaires is even more impressive, from 0.05% in 1989 to around 5-7% in the two cohorts in 2022, which is more than a 100x growth in the share.
More on Millionaires
Let’s look more carefully at the composition of household net worth numbers. Obviously, millionaires have higher net worth numbers, but can we spot any differences in their balance sheets? Where do millionaires invest their money? Do they own homes? Is their investing style more aggressive?
So, I slice the 2022 population into non-millionaires and millionaires. And then, within the millionaire’s category, I further distinguish between “ordinary” and “multi-millionaire” households, specifically, households with a net worth of $1-5m vs. $5m+. And I’m aware that there are different definitions/cutoff values of multimillionaires. I’ve seen people use cutoffs at $2m, $5m, and $10m. On the one hand, I wanted the cutoff to be significantly above the $1m mark, and on the other hand, there aren’t enough households with a $10m+ net worth in the sample, so I settled on the $5m cutoff.
Let me show you three tables. First, the 2022 average values in different subcategories of assets and liabilities:
And then the same table, but I display all values as a percentage of each group’s average net worth:
And third, the percentage of households that own a positive amount of the different subs:
What do we learn from the data here? A few things stick out:
- Millionaires are more heavily invested in financial assets. If we combine the categories Investment Funds + Stocks + Bonds + Retirement accounts, then about 40% of millionaire household net worth falls into that category. For non-millionaires, the four categories add up to only 24%. Also, the share of households owning any “higher-return” assets is higher among millionaires. For example, 47.5% of all millionaires and 62.6% of multimillionaires own stocks outright, while only 15.1% of non-millionaires do. And half of the latter might be GenZs living in their mom’s basement, trading Gamestop; I’m just kidding.
- A lot of non-millionaire household net worth is tied up in their home. Specifically, more than 106% of non-millionaire households’ net worth is in the nonfinancial asset bucket, mostly in homes and vehicles. The gross value of the primary residence comprises over 80% of non-millionaire household net worth, compared to 19% and 11% for millionaires and multimillionaires, respectively. Even home equity (home value minus mortgage) comprises over 50% of the non-millionaire household net worth. But only 15.1% and 9.2% of millionaires’ and multi-millionaires’ net worth, respectively. So, it seems that non-financial assets, especially homes, are crowding out the other investments of non-millionaires.
- 95% of millionaires are homeowners. This is not a typo. Even though the net worth share of the primary residence is low for millionaires, the share of millionaires that own a primary residence is about 95%. And that number is pretty uniform among both sub-categories, i.e., millionaires and multi-millionaires. In contrast, only about 60% of non-millionaires are homeowners. 66% is the overall homeownership rate.
- Millionaires are likely to be business owners. 35% of millionaires own a business. And that share increases to 55% for the multimillionaire category. So, to strike it really big in the net worth world, you probably achieved that through owning a business.
- And a lot of millionaires’ net worth is tied up in that business. The average value of the business is only $8,300 for non-millionaires but in the six-figures for ordinary millionaires and over $5m for multi-millionaires.
- Millionaires still have debt. That was a bit of a surprise! 52.3% of all millionaires and 45.3% of multimillionaires have a mortgage on their primary residence, while “only” 40% of non-millionaires do. Of course, only 59.7% of non-millionaires have a home. So, conditional on owning a home, millionaires have only about a 50% chance of having a mortgage, compared to about two-thirds for non-millionaires.
- Millionaires (somewhat) splurge on vehicles. The average value of vehicles in millionaire households was almost 3x that of non-millionaires (73.4k vs. 26.2k). Multimillionaires splurge even more and own $127.2k worth of vehicles, on average. Of course, relative to their net worth, that’s a drop in the bucket. Non-millionaires have 12.4% of their net worth tied up in a depreciating asset, a much more significant percentage than affluent households. Also, there is a much higher incidence of vehicle loans among non-millionaires.
- Millionaires prefer good debt over bad debt. As I pointed out in the previous paragraphs, the affluent still have some debt, including mortgages and even car loans, but a much lower incidence of credit card debt.
Sidenote: the high homeownership rate among millionaires is not just due to age. We know that both net worth and homeownership go up with age. So, is the higher homeownership rate among millionaires possibly due to their age? No! Even if we bucket the population by their age, millionaires and multimillionaires have a higher incidence of homeownership; please see the chart below. One exception is the very young age category (0-29 years), where the $1m-$5m category has a slightly lower homeownership rate than the non-millionaires. I suspect these are the young, nouveau rich in NYC and SF who are still renting. But in all other age cohorts, millionaire households are far more likely to own than non-millionaires.
Is there a homeownership conundrum?
Are we getting conflicting signals? On the one hand, homeownership seems to be a signal of economic success because there is a 95% homeownership rate among millionaires. On the other hand, it appears that a home is something of an albatross on the balance sheet of non-millionaires.
Could it be possible that homeownership is a terrible investment after all, as proclaimed by some personal finance influencers, i.e., Ramit Sethi and others? Are millionaires financially successful not because but despite owning a home? Maybe a house is like all the other money pits, like boats, vacation homes, etc.? So, there may be a correlation, but the causality goes the other way around: rich people can afford a poor investment. But I don’t think that’s the case. On my blog and in real life, I have always been consistent with my philosophy. I always like to point out two critical issues: An investment choice and a budgeting choice!
1: Investment. A primary residence is likely a good investment if you compare apples to apples. The total return of a home includes the implicit rental income, i.e., the benefit of not having to pay rent. Mathematically illiterate influencers who compare real estate price returns with stock total returns are deceiving themselves and their readers and listeners. Please see my post “How To “Lie” With Personal Finance – Part 2 (Homeownership Edition),” item 1.
I indeed concede that a house may have a real expected return a bit below that of an equity index fund. But once you consider the equity volatility and the tax benefits from housing, i.e., tax-free implicit rental income and tax-free long-term capital gains of up to $500,000 for couples in the U.S., you have a desirable return profile. Especially in the context of safe withdrawal rates, a paid-off home helps alleviate Sequence Risk.
2: Budgeting. A home being a good investment does not imply that a bigger home is always better. See again that “Lie with Personal Finance” post, item 4: Overconsumption is not a good investment. We must distinguish two decisions every household must make: 1) rent vs. own and 2) size and value of the home. You may indeed make the right investing decision in the rent vs. own dimension by purchasing a 5,000 sqft McMansion. But it’s a terrible budgeting decision in dimension 2 for most middle-class households! I always use the following analogy: Imagine Delta Airlines crunched the numbers and decided owning a Boeing 737 airplane to serve the route from Atlanta to Nashville is financially superior to leasing that same airplane. Would this imply that buying a Boeing 777 or 787 is an even better investment? No, because that plane would be too large for a puddle-jumper route that asks for a 737. The investing decision is separate from the budgeting decision.
Thus, I posit that the millionaire balance sheet data validates both points. First, while we cannot precisely ascertain any cause vs. effect direction, the almost 100% homeownership rate among the most financially successful households and the much lower rate among non-millionaire households, plus the simple IRR calculations factoring in all the costs and benefits of renting vs. owning and showing that housing often has a pretty good IRR, definitely support the idea that homeownership is generally a sound financial decision.
Of course, today’s home values and mortgage rates seem a bit high, but at least historically, homeownership has been helpful. Then again, today’s equity valuations also seem very unattractive relative to bond yields, so if you prefer to remain a renter in today’s economy and invest in the stock market instead, you may not be too impressed with the results either.
Second, the millionaire balance sheet data supports enjoying homeownership in moderation. Millionaires own relatively modest homes. Clearly, millionaire homes are more expensive on average than middle-class homes, but millionaires own much smaller homes relative to their net worth than non-millionaires. There seems to be a sense that large houses are holding back the middle class in their financial success because homeownership in excess impedes the accumulation of other assets, like stocks, bonds, and other high-return vehicles like investment funds held directly or in retirement accounts. To thread the needle, it would be ideal for households to own a modest home, much smaller than what your realtor and banker indicate you can afford. Then, invest the excess cash flow in high-return assets, ideally equity index funds.
Conclusion
I hope that in the FIRE community, where many of us are already millionaires or are striving to become one, people would find my little data analysis about net worth and millionaire stats valuable. I learned from the data that the millionaire club isn’t as exclusive as it used to be; almost one in five U.S. households is already in the seven-figure net worth club. And nearly one in three in the older cohorts! I also found additional evidence to support my theory that homeownership is helpful for your financial picture – if used in moderation.
Thanks for stopping by today! I look forward to your comments and suggestions.
Title picture credit: pixabay.com
Technical Appendix
I get slightly different mean and median net worth figures from the SCF, usually within 0.1-0.5%. Maybe the SCF researchers are using different functions/methods. Here’s what I used:
For weighted averages, I use Python’s numpy function, and for the Quantile values (e.g., median, 99th percentile, etc.) I use the DescrStatsW tool from statsmodels. Please see the screenshot below for a sample code generating a median of $192,700 and a mean of $1,059,470. That’s slightly different from the SCF report, i.e., $192,900 and $1,063,700 for mean and median, respectively. It’s close enough for government work, I guess, but it’s still puzzling. If anyone has any insights as to what’s going on here, please let me know! Quantile estimates can vary slightly due to different interpolation methods (e.g., closest, linear, cubic spline, etc.), but the weighted mean calculation should be standard.
You can download the above Python code here.
You should download the (very large) zipped STATA datafile from the FRB website and put the folder with the file into the “Data/” subfolder. For your entertainment, I also posted the real and nominal net worth numbers over time and by age group in these two Excel Files:
Thank you for more excellent analysis! I don’t know if you’ve had a look at this bold paper but I’ve still to find the time to look into the methodology and identify it’s weaknesses yet: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4590406
Thanks for the link. All equities? That sounds really bold. Not sure this is workable for most savers.
But I do agree that young folks should certainly hold 100% equities.
By their analysis retirees should too (if they can manage the behavioural aspects). I am a bit too tired at the moment to study the detail but suspect there is some smoothing of the data or some other aspect of the methodology that reduces the volatility and therefore improves the sequence of returns. Your analysis and mine (mainly using your spreadsheet) contradicts this. Even with pension income coming in later, I never get anything more aggressive than 86/14. I intend to remain on 75/25 and if the analysis supports it further down the line move to 80/20. Not that it will make an enormous difference.
Well, the fail-safe drops again if you go too aggressive on the equity %. But if you’re fine with that, the average and median outcome would be way higher.
Some possible ‘food for thought’ from Financial Analysts Journal at:
https://www.tandfonline.com/doi/full/10.1080/0015198X.2023.2268556
I don’t really care for that piece of research. Not sure how that paper made it into the FAJ. They cut the sample periods very selectively, to shove the longest ever bond bull market into one window. But conveniently ignoring the most recent bond market drubbing 2020-2023.
Also, when I look at my returns, i.e. SPX total returns and short-term, 10y and 30y Treasury returns, I get the following average returns:
From To SPX Short-Term 10Y 30Y
1871.0 1941.9 5.73% 4.04% 3.57% 3.28%
1941.9 1981.9 6.68% -0.72% -1.68% -2.84%
1981.9 2023.8 8.44% 0.77% 3.89% 4.92%
1871.0 2023.8 6.72% 1.88% 2.26% 2.08%
So, even with the selective time cutoffs, it’s stocks for the long-run.
If I pick 3 equal-length intervals:
From To SPX Short-Term 10Y 30Y
1871.0 1921.9 5.36% 4.55% 3.01% 2.34%
1921.9 1972.8 8.64% 0.63% 1.53% 1.47%
1972.8 2023.8 6.17% 0.50% 2.24% 2.44%
1871.0 2023.8 6.72% 1.88% 2.26% 2.08%
Very clear and consistent outperformance!
5 equal-length intervals:
From To SPX Short-Term 10Y 30Y
1871.0 1901.6 8.61% 6.99% 6.29% 6.40%
1901.6 1932.1 3.21% 2.69% 0.85% -0.26%
1932.1 1962.7 9.31% -1.36% 0.27% 0.33%
1962.7 1993.2 5.52% 1.48% 2.41% 1.64%
1993.2 2023.8 7.04% -0.20% 1.57% 2.44%
1871.0 2023.8 6.72% 1.88% 2.26% 2.08%
Thank you for your thoughts and the returns summaries.
I think what the authors missed was a middle ground between the two extremes they evaluated of 100% equities over and TDF’s that ERN has proposed something closer to 100% while working and then roughly 75% equities near/at retirement. TDF’s are too bond heavy and 100% equities is too risky in retirement in the 1929 scenario.
Yes, exactly my thinking. TDFs are a little too meek and push into bonds way too early. 100% stocks may work for some investors all the way up to retirement if your risk tolerance is high and/or you have great flexibility about the retirement date, see Part 43 of the SWR Series.
In retirement, 100% equities would have a low fail-safe. Not sure this would work for everyone.
Cliff Asness had the best reply to this paper:
https://x.com/CliffordAsness/status/1733118881303044302?s=20
See his 1996 paper.
https://www.aqr.com/-/media/AQR/Documents/Journal-Articles/JPM-Why-Not-100-Equities.pdf?sc_lang=en
An interesting read but nothing that is actionable for me as I am too lazy to pursue leverage options. So my conclusion is, as usual, to keep doing nothing.
I had been attracted by slightly more aggressive equity allocations as the percentage of my income secured by index linked pensions increases and moves from a quarter to a half and goal seeking with your spreadsheet suggests my optimum is higher than 75/25 with my cashflows (and a target for a bequest) however 75/25 is a more comforting level of volatility and a fixed target keeps the door to trading firmly shut whereas a glidepath may encourage me to try to be clever which is often when one discovers ones limitations.
From my 2016 post “Lower risk through leverage”
It’s more efficient to find the max-Sharpe portfolio and scale that up. (note the expected stock/bond returns were different then, but qualitatively that’s that Asness meant)
Agree, it’s not for everyone. It might require some leverage through futures and/or optiona.
Do you have data for the the 99.9% and 99.99% percentiles too, by age?
Please see here:
https://earlyretirementnow.com/wp-content/uploads/2023/12/SCFresults_Nominal_ext.xlsx
and :
https://earlyretirementnow.com/wp-content/uploads/2023/12/SCFresults_Real_ext.xlsx
But I’d use the extreme tail numbers at the top with caution. Not enough individuals in this sample to make any definitive statements
Great info, thank you!
Thank you for this brilliant article. I am from Belarus, read your blog every time on my way to FIRE!
Awesomes. Thanks for your continued support. FIRE must be more challenging in your part of the world. Good luck!
Excellent analysis. I find that going through govt reports is tough because unless you have the underlying data and are able to process it yourself you never fully understand what the data summaries mean (and what assumptions have been made). Thanks for the work. I finally understand the wealth distribution in the US. Most remarkable, if you want ultra high wealth own a business.
Thanks! Exactly my thinking. Sometimes you need to do the work yourself, because the official SCF report lists only a limited amount of information!
Thanks for diving into the SCF data and sharing your analysis. I found the nominal data vs. real data charts and the Gini coefficient time series chart to be especially illuminating.
You wrote: “The lower end of the net worth distribution in the aggregate number will always look so poor due to the never-ending supply of “poor” people, a.k.a., people in their 20s with low-to-no wealth and a pile of student loan debt.”
I think it will be interesting to explore the bottom 10% data in greater detail, from say 20 years ago and continuing over the next 20 years. Real student debt levels have grown significantly in the past 20 years and don’t seem likely to shrink anytime soon. Current federal interest rates are 5.5%-8.05%, depending on loan type, with the higher rates applying to graduate programs, where loan amounts will likely be higher. Although many/most professional degree students will be high wage earners, their debt loads may also be high, e.g., the average physician graduates from medical school with $200K+ debt. Whether acquired while pursuing an undergraduate or graduate degree, the growth in student debt loads will likely increase the number of people with a negative net worth. It may skew the net worth vs. age group chart to the right and do the same for homeownership. A deeper dive into the negative net worth population, determining whether it is growing over time, and if student debt is the main cause, might make an interesting post.
I’m also curious as to your thoughts on why homeownership rates drop from 60-65, then grow again, reaching maximum home ownership levels at 80+. This seems counterintuitive.
Thanks again for your prolific educational efforts!
Could be an interesting post. You can definitely notice the increase in highly indebted households, likely due to student loan debt. Especially for medical school, it’s gotten way too expensive. The solution, of course, would be to import a few 100,000 doctors from abroad. Not sure how the AMA would feel about that. 🙂
I would not read too much into the homeownership dip at 65-69. These are not to be understood as time series data, only a snapshot. It could be that this cohort was hit particularly hard by the housing crash. Or even if the dip is legit from a time series point of view it could mean that people sell their home, move to FL or AZ and rent there for a while.
Very nice paper. I wonder though, is the shift from defined benefit retirement accounts (pensions)to defined contribution accounts (eg, 401K, 403b)is partly responsible for the growth in personal wealth since 1989? If this is not part of the explanation, bit seems the survey would have to have solicited the implicit value of pension benefits that have been earned but not taken, which seems unlikely.
That may have an impact for sure. But notice that pension entitlements are indeed counted, so moving from one to another could be a wash. But I also think that most people accumulate much more in their 401ks than they would have in a pension, so the net effect is likely still positive.
Thank you, Prof. ERN, for another one of your relevant and detailed analysis. I am always learning and immensely entertained by your blog. America is a physically and financially mobile society. As I do believe Milton Freidman once said, “people vote with their feet” in where they want to live due to personal economics. We are also financially mobile as conveyed in several books by one of Milton Freidman’s former students at the University of Chicago, Thomas Sowell. Dr. Sowell demonstrated, as well as you have, that most people at the bottom do not stay put, but fortunately, move up the ladder because the American system of governance and freedom creates that environment. As an early retiree and successful child of a migrate family escaping an impoverished Caribbean Island whose parents only had a 5th and 10th grade education, I hope to see this continue for others.
Thanks, Eduardo! Yes, my post was definitely inspired by the Dr. Sowell insight on mobility. Both Sowell and Friedman are some of my favorite economists, too!
Perhaps I’ve missed something, but it seems to me that most folks in the low-end percentile categories have a “social welfare net” asset (cash welfare, food stamps, medicaid, etc.) which dwarfs the negative net assed figures cited.
And it’s not clear whether my wife and I should consider our net worth to include the Social Security pension that pays/will pay us something like $5,000 per month for life, more or less adjusted for inflation.
Yes, good point. There are likely huge incentives to not accumulate wealth as this would be detrimental to getting means-tested benefits.
Generally, government benefits are not included in the NW numbers. If you insist on including that, please see Part 56 of the SWR Series:
https://earlyretirementnow.com/2023/02/06/evaluating-annuities-pensions-social-security-swr-series-part-56/
A great book that explores just that is “The Myth of American Inequality”
https://www.cato.org/study/myth-american-income-inequality
Good link. Thanks for sharing! Agree 100%!
Great article and analysis! I recently read ‘The National Study of Millionaires’ by Ramsey Solutions and they had some interesting points.
1. According to the survey, 8 out of 10 millionaires invested in their company’s 401(k) plan, and that simple step was a key to their financial success (to your point, Mike). Not only that, but 3 out of 4 also invested outside of their company plans.
2. Three out of four millionaires (75%) said that regular, consistent investing over a long period of time is the reason for their success.
3. Ninety-four (94%) percent of the people studied said they live on less than they make, and nearly three-quarters of the millionaires have never carried a credit card balance.
4. 79% of millionaires in the U.S. did not receive any inheritance at all from their parents or other family members.
5. 88% of millionaires graduated from college, and over half (52%) of the millionaires in the study earned a master’s or doctoral degree.
6. Ninety-three percent (93%) of millionaires said they got their wealth because they worked hard, not
because they had big salaries. Only 31% averaged $100,000 a year over the course of their career, and one third never made six figures in any single working year of their career.
“The National Study of Millionaires is a research study conducted by Ramsey Solutions with over 10,000 U.S. millionaires to gain an understanding of personal finance behaviors and attitudes that factored into their financial success. The nationally representative sample was fielded November 17, 2017, to January 31, 2018, using a third-party research panel and our Ramsey Solutions research panel.”
Thanks for sharing. Very useful! Despite my criticism of Dave Ramsey (see my last post), this is really good stuff. Most millionaires in the USA are self-made, in stark contrast to many other countries with sticky, inherited wealth, e.g. Germany.
It doesn’t mean that 100% of Americans can replicate this (not everyone has a 401k/403b at work), but the vast majority of Americans should be able to get there!
Good point. However, many of us 70 and older didn’t have the advantage of those vehicles during our 20s/30s, along with the advantage of the internet and buying stocks online. Traditional IRAs and 401ks weren’t readily available until about 1982, Roth IRAs in 1998, and Roth 401ks in 2006. Although, the 50+ catchup contributions certainly helped! So, while those without a 401k cannot replicate it as easily, I still believe it is possible if they start early.
For young adults, I believe it’s about knowing what’s possible, having the discipline to save (starting as early as possible), and someone to help guide their investment and financial choices. I’ve reached half of our 9 grandchildren who have automated their saving in a Roth IRA and/or 401K, paid off their cars early, and carry no credit card debt. The two that have a 401k increase their contribution by 1% each time they get a raise.
Good point: So it’s even more impressive for the older generations to have accumulated their impressive net wroth. Young folks today have it easier with the tax code and low-commission investing. But young Americans also face challenges: they have a much harder time scraping together a 20% down payment for the median home today. That was a little bit easier 20+ years ago.
Was thinking about your comment – ‘But young Americans also face challenges: they have a much harder time scraping together a 20% down payment for the median home today.’
1. Student loans are much higher.
2. Electronics are more expensive, i.e., iphones, smart watches, video games, TV/video/sports subscriptions, large screen TVs, internet.
3. Transportation costs are more expensive – new car vs. used car, gas
Student loans and housing are the big ones. You leave college with a mountain of debt. Then never be able to save the down-payment for a house. You’ll be on a hamster wheel for life. 20+ years ago it was a lot easier to enter the suburban middle class.
I don’t believe that transportation costs, i.e., neither vehicles nor gas, are more expensive relative to a generation ago, if adjusted for overall CPI.
“Ninety-three percent (93%) of millionaires said they got their wealth because they worked hard, not
because they had big salaries.”
This is silly. One, who would admit to not working hard? 2. Suggests that “working hard” and “big salaries” are opposed.
Haha, I had to chuckle about that one myself. Of course, everybody worked hard! And they had big salaries. One doesn’t rule out the other. In fact, many worked hard to get to the big salary.
Another great blog post!
Do you know how economists factor in consumption to analyses like these? Maybe the middle class isn’t accumulating more wealth because they were *spending more money* than in the past. Measuring only net worth would miss this.
I’m a bit out of the loop in academic economics now, but there’s certainly some research out there. For example, folks have pointed out that the Gini coefficient in consumption is a lot lower than that in income. That seems to support the thesis that less affluent people are consuming very heavily, while the millionaire class has a much higher savings rate.
More important question is how much on average Karsten’s blog contributed to our increase in net worth?
Haha, that’s of course only a very small number of options traders. But we’re growing! 🙂
oh yeah, on average, human kind is dead !
I thought, in the long run we’re all dead. Now we’re all dead on average as well. Oh, my!
Two liabilities left off the household (2.5 persons) balance sheet, and that need to be accounted for:
1. PV of kids education costs. A decent private school plus University c.$750K (today’s dollars) per child liability.
2. PV of uninsured (and uninsurable future) healthcare costs
Adjusted HNW = HNW – PV Education – PV Health
To get the adjusted individual NW:
In the eyes of family law, the marriage (or defacto relationship) in most states, without a pre-nup (separation agreement), individual NW = Adjusted HNW/2 less legal costs.
No, that would not be a good idea. Net worth is net worth. It’s a level variable and we shouldn’t mix it up with flow variables (income and expenses). And here’s the reason: Once we subtract future expenses, why only include the 2 you mentioned? Why not subtract all future food and shelter costs? Why not heating costs? And vehicles expenses: insurance, gasoline? Why only subtract expenses? Shouldn’t we then also add the PV of future incomes?
You see where this is going, right? It opens such a can of worms that would render the numbers complexly useless and unreliable
I disagree in principle.
The rational market value of assets (and liabilities) are simply the PV of their expected future cashflows.
If you have known defined cashflow liability it should be recognised and brought back on balance sheet.
Cashflows with more risk and less certainty simply need to be discounted more heavily. Contingent liabilities/assets.
In retirement you are effectively setting the PV of your most productive asset (your income earning ability) to zero.
Another way to think about it is the US national debt (stock) is backed by the PV of expected future primary surpluses (flows). The US govt in accounting terms has a huge negative net worth, but clearly the market thinks the debt is sustainable and there will be a return to surplus.
You’re free to construct all sorts of stats you like. But I will stick with the stats that are economically sound and don’t mix up important economic concepts like levels and flows.
Levels are by definition the PV of expected flows. There is no mixing up.
We both being selective in your choice of levels (flows).
Appreciate the analysis, discussion for another time.
And you are selective in the PV of flows you like to include. Why not subtract PV of housing and food? Why not include PV of future incomes?
Dear Karsten,
in my opinion the point is “modest”. Modest housing, working hours, spending money, eating & drinking and of course a modest SWR.
Vielen Dank für die viele Arbeit, frohe Weihnachten und einen guten Rutsch ins neue Jahr!
Hanna
Thanks, very good summary of my post. Viele Gruesse, Frohe Weihnachten und ein Gutes Neues Jahr zurueck nach Oesterreich!
Thanks for the great write-up! This was really interesting.
One small nit I wanted to pick: in a few places you refer to people in the botton 1-5% of the wealth distribution as “poor.” I think simply from the fact that these people have a net worth that is in the negative tens of thousands of dollars, we can tell that many* (most?) of them are unlikely to be “poor” but rather recent graduates with a lot of student loan debt. Even at a relatively modest income for a college graduate, you’re not going to be considered poor. And the higher the debt (which would naively map to “poorer”), the more likely you are to be a graduate from a more prestigious school or with a more advanced degree, and thus the less likely you are to be low income.
* Nobody’s lending large sums of money to someone who is legitimately poor, they’d never see the money again. So aside from student loans, most people with massive debts are going to be those with medical debts, but this number is swamped by the student loan group.
Sorry for not mentioning that more clearly. I am referring to the one obvious dictionary definition in this context: “poor = lacking material possessions,” which is exactly what negative net worth means. Poor characterizes a level variable (net worth), not the flow variable (income), even though the two are often confused. So, an MD with a $500,000 annual salary, and a negative $500,000 net worth is poor by that definition.
I also don’t mean to insult or judge people that fall into that category.
It should also be obvious that all those people with student loan debt took on that debt as adult citizens, who were old and mature enough to vote, so nobody ended up with that boatload of debt involuntarily. And as you state, they now have a higher earnings potential and should get out of debt and into 7-figures net worth within a few decades = exactly the lifecycle of wealth accumulation I mention.
And finally, never forget that there’s hope for folks who are “poor in spirit,” see Matthew 5:3
19% of millionaires’ wealth seems to be locked up in their primary home, and even more (34%) for the 1-5M crowd. I wonder to what extent these millionaires are house-poor, i.e. they bought a lot of square footage in a rapidly appreciating area years ago, but they don’t have much in terms of financial assets to support a retirement.
That’s still not exactly house poor. Non-millionaires are house poor.
Thanks, as always, for such an in-depth look at these stats. Your articles always have me scrabbling to see if I can find equivalent details on this side of the pond (and may yet get me to learn Python properly 🙂 ).
I’ve been fortunate enough to creep up to just beneath your 5m (dollar) number over the years, but I fully admit I was lucky to have worked for US-based companies that had stock bonuses over that time (and forced me into the markets when I may not have jumped on my own). The UK was a very different place for trading back in the 80s, even though I started out having to make trans-Atlantic calls to manage my account ! Dare I say that Etrade made a big difference to that 🙂
Doing a quick memory check, I’m pretty sure our net worth was properly negative in 1989, as we bought our first place just as the housing market here pushed us into negative equity, so I’m feeling pretty blessed to have crawled up out of that situation.
Off to look for a UK equivalent to your SCF 🙂
see: https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/totalwealthingreatbritain/april2018tomarch2020
Thanks for the link. The median is certainly much higher in the UK!
It is interesting to do such broad brush comparisons. For example, the Gini is much lower in the UK too.
Do you know if such survey data is available for Germany? And would examining such data substantiate your assertion about D having more dynastic wealth. The reason I ask this is that IIRC a lot of the press reports I have read seem to suggest that a lot ‘wealthiest’ people in Germany own fairly modern businesses, such as: Aldi, TetraPak, etc However, such press reports may actually be based on income rather than wealth!
Not familiar with a German database comparable to the SCF. Also, we’d need panel data, not just snapshots like the SCF to prove that there is mostly dynastic wealth.
My claim relies on exactly the anecdotal evidence you mentioned: Rich industrial family dynasties like Aldi. Wealth going to the next generation.
There is also a very early sorting of children by skills, often after grade 4, to subsequent schools, where only the top-rated schools lead to the university entrance qualification. There is ample evidence that skilled kids from lower/working-class families will not get the OK for the higher-level school, but mediocre kids from families with rich parents will get the OK. It’s systemic inequality.
OK. I had thought you might have meant older [pre-industrial] wealthy “noble” families; as opposed to post WW2 wealth. All this stuff can be a bit tricky without common definitions. I take your points though. I am reasonably familiar with Germany, and I was under the impression that wealthy families often paid for their educationally mediocre kids to attend private universities too.
That too. But I was talking more about the obstacles of working-class families to advance and getting educational opportunities for their kids. I speak from my own experience.
Thanks, that is very interesting. Does this bias in D extend beyond education/advancement? And how would you say the US compares to D?
I would tie this to education, opportunities, earnings and wealth, all connected, of course.
And that said, It’s not a 100% insurmountable hurdle. Some kids will be able to get over it. Myself and my brother included. But there is less mobility in D than in the USA.
Thanks again.
Whilst I have absolutely no doubt about your own lived experience, you may find this ranking interesting: https://en.wikipedia.org/wiki/Global_Social_Mobility_Index
I’m not talking about social mobility. Economic mobility is crucial. None of the criteria in that index measure what I’m interested in: Can a motivated and intelligent young person who doesn’t have rich parents become affluent. That’s what I understand as mobility. Or something like: “what is the probability that someone in the bottom x% of the wealth/income distribution ends up in the top y% within z years.” All the criteria listed in that index are very imprecise proxies for that. Sometimes even hindering mobility. Sometimes nonsensical stats, like the ratios of top to bottom incomes, which is again a snapshot of inequality, which says nothing about mobility.
So, I’m not surprised that Germany ranks high and USA ranks low.
I still prefer the mobility of the US over the money nobility in Germany.
OK, and as I noted above, definitions can be important.
Having said that, I am not sure that US intergenerational economic mobility is as great as you imply [in spite of all the anecdotal evidence to the contrary] see e.g. https://en.wikipedia.org/wiki/Economic_mobility
US intergenerational mobility is exactly as great as I expected it.
Let’s look at the quintile transition matrix, i.e., p(i,j) = prob(kid in quintile j, conditional on parents in quintile i).
Zero mobility would imply p(i,i)=1.0 if i=j and 0 otherwise.
Complete reshuffling would imply p(i,j)=0.2 for all i,j.
We’re at around 0.4 at the p(1,1) and p(5,5), so pretty close to reshuffling. There should be some spill-over from generation to generation because both good and bad genes should translate to the next generation.
Also keep in mind that merely staying in the same quintile will mean progress because of real per-capita GDP growth.
I wouldn’t be surprised if in Germany p(5,5) is between 0.6 and 0.8.
Should it not be more like:
Complete reshuffling would imply p(i,j)=0.04 for all i,j as you can move more than one quintile and transitions must go in both directions.
I have no idea what relative D figure for p(5,5) might be like.
No, but I see your other comment now! 🙂
OK got it. For any initial quintile on shuffling there are only five possible destination quintiles!
Correct. The rows sum up to 1.0. Usually the diagonal elements are the largest entries and then the probabilities shrink as you away from the diagonal. Hence my point about 0.4 on the diagonal is not that bad.
Re: “ I have no idea what relative D figure for p(5,5) might be like.”
Armed with the assumption that p(z,z) =0.1 for z=1 to 10 is the expected outcome of random shuffling of income deciles, then the histogram of nations further down the same Wikipedia page under “Worldwide” may offer some tantalising glimpses. Specifically:
a) the higher the p(z,z) value the lower the mobility*
b) none of the nations sampled does better than random shuffling
c the US is amongst the least mobile of the nations sampled
d) overall, according to this study, Germany has higher income mobility than the US
However, at best, this can only provide some clues as to what p(5,5) [in wealth quintiles] might be in Germany.
*Notwithstanding your observation that in some cases p(z,z) may still may represent progress
I have a hard time believing that Germany has a higher mobility, but have to check the numbers more carefully. Traveling right now, but I will take a look at the numbers once I’m in WA again.
Thanks for sharing. Yes, working for the right companies and investing steadily with low-cost brokerages (E-Trade, Fidelity, etc.) certainly helps.
At the very extremes the Gini index would have obvious correlation between a stable state and a non stable state. If it is near 0, then you have very even distribution of wealth with no opportunity to get ahead. By human nature that would lead to a stagnation and corruption (people will find a way to hide the money outside of the system). Or at near 1, bringing back feudalism will always lead to revolution. Other than that, it doesn’t seem to have much use in predicting stability or happiness. I still think having individual billionaires or multi billionaires is the result of poor tax policy.
Yes, the Gini extremes don’t seem very appealing. You have to be somewhere in the middle.
Not sure why you think that “individual billionaires or multi billionaires is the result of poor tax policy,” though. It depends on what the purpose of tax policy is. Is it to redistribute? Or to raise revenue for necessary government programs, causing the least possible economic distortion and harm? In my view it’s the later.
If you design tax policy to prevent billionaires you will inevitably destroy incentives and economic growth and productivity. It’s throwing out the baby with the bathwater. But that goal of destroying the economy is certainly popular with the political elites (Sanders, AOC, etc.)
Not trying to be political. I don’t see taxation as a way to redistribute funds, but for investments that help all of us. If we question if we can fully support a social safety net like Social Security and our 0.1% holds the wealth that can make the program solvent, then that is both a long term social stability issue and a moral issue to reduce poverty. If we don’t continue to invest deep public funds in foundational sciences, infrastructure, excellent low cost public education we will be stripped of our enviable world position by countries that do. We should expect our government to do big things. I also, respectfully, call BS to the notion of “incentive” at this level. The personal incentives can’t be that different as you build up to a $1B fortune, or a $100B fortune. Bezos’s $170B worth is itself a distortion. I’m not proposing I know the right algorithm to tune the incentive structure, or the best taxation methods especially considering how money can be sheltered.
I’m glad we agree on tax policy’s purpose: to fund expenses. Not to prevent people from getting rich.
We also agree that tax policy should be designed to create the least amount of distortion. You may believe that rich people have zero incentives, but that’s false. Just ask any tax advisor and see how motivated rich people are to legally lower their tax bills. Your fallacy is that you believe that there is a wealth satiation point at which you suppose people wouldn’t care anymore. But that’s wrong. You may believe that you would be content at 10x your current net worth today. But once you reach that level you want another 10x. There is no satiation point. Once you’re at $1b you want to get to $10b.
And I think the world is a better place for it. If Bezos, Buffett, Musk, etc. had all stopped caring at $10m or so, the world would be a poorer place.
The alternative, where people are taxed at 100% of their earnings at a certain point is the fastest way to send us on the path to Venezuela.
I agree that it is human nature to never be satiated. It is deeply embedded and evolutional. It is also why we have wars and commit horrible acts against each other. I do question if at a certain point it wouldn’t be better in our society to curve things further so the inequities and distortions that develop are improved.
I actually don’t think if I had 10X my current wealth that it wouldn’t be enough. I have enough now. You have enough too and you still are interested in contributing. And I’ll continue to work and invent regardless. You have the assumption that what drives people to do what they do is mainly money, and when you don’t have much that is almost certainly true. As you gain more it is a more complex consideration.
Your straw man fallacy about if you get capped at $10M then great innovation and industrialists would have stopped is an extreme exaggeration of my point. I’m not saying 10M, or 100M, or even 10B. But at some point the incentive structure that helped drive great progress is negatively balanced out by a very few people that have an oversized influence on our democracy. They might do great things with it, which they have, or they might turn on the country that provided the fertile soil and see themselves as entirely outside any system which they also do.
I also call foul on your second straw man. I never said 100% at a certain level. As I confessed, I don’t know the way to accomplish this by a modification of our tax structure. I do think that the story of Bezos would be the same if he had 20B vs 170B. If you buy that, then your argument also has a philosophical component. Which is fine. I don’t know what the exact algorithm is, but my case is that we could tweak what we have and not impact progress while still providing a better life for those with less, which by your chart is most of US.
None of my arguments were strawmen arguments.
Just because you are now unable/unwilling to state an exact number for a wealth upper bound doesn’t mean anything. If implemented there would be one. A written law can’t leave that part out. Also, you seem to have very explicitly made the case for a $1b upper limit in your initial post.
We also disagree on how innovation and entrepreneurship work. The reason why so few billionaires exist is not because so few tried. Quite the opposite, many tried and 99.9% of them failed. What we see in the billionaire class are the 0.1% or so survivors in that game. In other words, if Musk had known that he’d become a 200x billionaire, then sure he could have been happy with “only” $20b. But if 1,000 would-be billionaires decide whether they want to become the next Elon Musk and they invest their money, time, and energy into that, they will do so if the final prize is $200b but will potentially pass on the investment opportunity if their final prize is capped at $1b to please MedDev, AOC and Bernie Sanders, who believe that, and I quote you, “… having individual billionaires or multi billionaires is the result of poor tax policy.” In other words, Elon Musk would have just taken his Paypal millions and called it quits. Warren Buffett would have just retired at age 60, Jeff Bezos would have just kept Amazon a book store and never expanded beyond, etc.
Also, the 100% vs. some other percentage discussion, what you call a strawman argument, is really a red herring. If you confiscate even 20% of all wealth above a certain threshold every year, then all net worth numbers will very quickly converge to that number. No need to do 100%.
Also, don’t get your hopes too high that confiscating money from billionaires will solve all of our problems:
“The United States is the country with the most billionaires, with a total of 724 individuals holding a net worth of about $4.4 trillion.”
From: https://wisevoter.com/country-rankings/billionaires-by-country/ (as of 2023)
If we confiscate all the money from all billionaires ($4.4t), we’d have enough to pay down only a fraction of the national debt ($33t): only 13.3%.
Even worse, if we were to confiscate not all but only the amount above $1b, then we’re left with only $4.4t minus $724b, or about $3.7t. A bit more than 10% of the national debt. And it’s unimaginable that you’d get away with a 100% wealth tax above $1b. Too many wealthy donors would rebel against that. So, maybe you could confiscate 20-30% of the amount over $1b, and now we’re in the “rounding error” range of the national debt. You will certainly not be able to save Social Security with that. And you will still blow up the economy and innovation and productivity with a crazy move like that.
My poor naming of logical fallacies notwithstanding…I don’t think my point was setting a limit. It was to modify our policies to make it marginally harder to achieve +billionaire status, and harder still to achieve +100B status.
I’m not saying to just redistribute cash, so mixing me in with Sanders etc. is an unworthy attack, but if it is used efficiently to help to those in the bottom 80% who now only own 14.6% of the wealth, then that is worthy of considering. “Helping” isn’t eliminating the national debt which is orders of magnitude different and is one more exaggeration. It isn’t paying for ALL of social security either, clearly. It would be used to tweak the Lorenz curve in a way where the lower 80%-90% of the population has a larger % of the wealth. That could be done in various ways including laws related to unions which strongly “encourage” higher pay for the wage earners in this group, aid to stabilize (obviously not pay for entirely) Social Security, more to public education, child support services etc. etc.
If the bottom 90% went from 26.6% to 35-40% would that really kill incentives? Would all the money and innovators flood over to socialist Europe? Would the ~30% increase of wealth to 90% of us decrease innovation and progress, or help it with added opportunities and access for a larger % of our population? I do think it is easier to be productive if you aren’t homeless, it is easier to be productive if you can provide safety and a great free education to your kids, it is easier to be productive if you have enough $ to live and still take that chance on building your own company.
The Lorenz curve that currently exist is one model which is the result of all our policies (including taxes) and our US culture put together. It wasn’t handed down by God, or mathematically proven to provide the most long term prosperity for all. My question is only if it is currently optimal since we have a lot of people with less, and we see it more everyday on our streets and in our politics.
If we to bend the curve so the lower 90% had only 5-10% of the wealth, which is the way it probably is in dictatorships in different corners of the world, that never creates innovation, progress, or stability. Just suffering by most and revolutions.
If we bend the curve so that the lower 90% have 70% of the wealth I would agree that incentives to innovate and progress would be nearly eliminated, and those that want to change things and be rewarded for it would leave or give up.
I’d argue that there is a band around this existing curve which within you get both progress, and sufficiently distributed wealth to provide long term stability, broader growth opportunities to pull up talent, and enough so people aren’t suffering.
If we modeled all the options, including mixing in the impact of various cultural values, to determine what is “optimal” you would need to define your metrics. How do you judge what is optimal? Is it the number of billionaires, is it the debt-to-GDP ratio, is it the number of people sleeping on the street, or the affordability of a home close to work for 75%, or general contentment? Because the answer isn’t just macro economics, or how many Bezos or Musk people we generate.
You have reduced my argument to some main stream media Sanders, AOC “spread out the wealth” BS which I don’t think it ever was. It was an honest question that I felt had nuance, if also some groping in the dark since this isn’t my field.
All valid points, and I am happy that you are not one of the AOC/Sanders redistribution BS-ers.
Tom Sargent (2011 Nobel) once gave a commencement speech at UC Berkely where he posited 10 basic insights in economics (no need to call them Ten Commandments) and #5 is: “5. There are tradeoffs between equality and efficiency.”
There is a fundamental truth that redistributing wealth/income has distortionary effects. That doesn’t mean we should have zero redistribution. It doesn’t mean we should have AOC’s favorite level of redistribution either. None of the extremes are desirable, but we should find a point in the middle. I believe we already passed the point of desirable redistribution, but I guess you think it’s worth doing more. It’s a quantitative issue, and without explicit modeling there is no point discussing this purely qualitatively.
The Fire community is changing…..I was so excited about Econome after listening to the latest episode of ChooseFI but when I went to sign up I got so frustrated. Half a grand for the conference? Really? Once more I realize that the old frugal days of the FIRE movement is over and now it’s about showing off what they call “quality of life” and “value spending”. I feel like this is not my community anymore! Where are those who seek FIRE through hard savings and living WELL below their means? Frugals and minimalists? It seems everyone in the community is already at fat FI/a multimillionaires w/ their Teslas, and we beginners or struggling low middle class are left out once again! Sorry about the rant but I wish so badly I had a place in this community.
Yes, I noticed that, too. Seems like the already rich influencers get even richer off the money from the aspiring FIRE folks. Redistribution from low less-affluent to highly-affluent.
We’re still here. We’re just thrifty, so we know better than to spend 500$ on workshops to tell us what we already know, or can find out ourselves for free via the library/ internet/ textbooks (thank you ERN for keeping your content free and available, and sharing the maths and spreadsheets behind your work). FIRE has a marketable audience, so some folks are naturally going to try to monetise it or make a living on their passion. There’s little point in catering to us unless they’re content with just ad revenue.
If you haven’t already come across it, early retirement extreme is a great site for frugal/ sustainable financial philosophy and methodology, as is the ERE book.
Thanks for the kind words. And yes, ERE is a great one who stayed true to the FIRE principles!
I should also emphasize that I’ve been at FIRE events as a paid guest and speaker, e.g., at three different CampFI meetings. I normally recommend those events only for folks when they’re already well along the way to FIRE and you can afford to spend that kind of money.
Can you provide a liquid 1%, 5%, 10%? It appears quite a bit of HNW individuals have assets that may not be liquid or tied to owner’s involvement in the business and not easily converted to cash.
Who am I? You research assistant? Calculate that yourself!
Just kidding. Good question. But there’s no precise distinction between liquid and non-liquid. I can do financial assets only, but even those are not always liquid (future pensions):
90th percentile: $902,000,
95th percentile: $1,940,900,
99th percentile: $7,588,100.
Now search Lexus Nexus for individuals in $1 mil>, $1-$5 mil, and $5+ mil for business sales and estimate the difference between reported value of business and actual sale price from 2000-2023 (if you yearn for graduate school days).
Haha, that’s certainly a problem with self-reporting illiquid assets like that. I suspect that some of the extreme outliers could be subject to some valuation uncertainty.
Are the net worth statistics adjusted to add the actuarial present value of social security benefits and pension benefits? Or to subtract all the taxes that will be owed on appreciated assets after the greatest bull market in all financial assets in history – the fact is that you net worth is not all yours.
Pensions yes. All others no. I agree that a lot of unrealized gains would be included in the net worth and it’s impossible to gauge how much of that would eventually go to the tax man.
Very interesting article. I found it particularly interesting that more than 50% of the net worth of the highest worth group is in non financial assets such as residential real estate and business ownership. As a California resident, about 50% of my net worth is in equity in my primary residence and second home. As a concrete example, say I have $6 million in savings and retirement accounts and $6 million in equity in 2 homes. One would expect that when I hit my 80s or 90s, I might want to sell one or even both properties due to possible mobility issues or just due to the hassle of keeping up 2 properties.
My question is, do you have any concrete advice on how the availability of significant equity in real estate (or business ownership) would affect the optimal annual withdrawal amounts after retirement? For example, say a 4% withdrawal (or higher) rate runs out “prematurely” at 20 years when I’m in my late 80s. I would still have the ability to convert some or all of my residential equity into cash and completely or substantially replenish my liquid financial assets. Is there a rule of thumb you’d use to incorporate significant equity into recommended savings withdrawal amounts?
I wrote about that in Part 36 of my series: https://earlyretirementnow.com/2020/02/26/real-estate-investments-and-safe-withdrawal-math-swr-series-part-36/
If your rental property mortgages are paid off: enjoy the extra (inflation-adjusted) cash flow and just add the SWR withdrawals to determine your retirement budget
If you still pay off the mortgage(s), things are more complicated, hence that post.