By: Phil DeMuth
November 26, 2013
With Thanksgiving on final approach, too many of us are counting our blessings and thinking of those in need. This is precisely backwards. There is vastly more income inequality among the top 1% than there is in the bottom 99%. Once all the facts are known, even the most crocodilian among us will be forced to shed a tear for those more fortunate.
An entry ticket to the 1% starts with an annual income of about $394,000 (says Berkeley's Emmanuel Saez) or about $1.5 million in liquid assets (my zestimate). Post-tax and retirement savings, that's about $220,000 a year while they are working. These are national norms. If they happen to live on the coasts or near a major urban center, as is more than likely, they might need twice as much money to crash into the 1% by local standards.
These people are small business owners and doctors and lawyers and frequent-flier mile hoarding executives rising up the corporate letterhead. They got there through advanced education, through marrying someone just like themselves, and then laying on long hours of hard work. Tell them they are "rich" and they will suppress a chortle, even though they are undeniably rich compared to the median U.S. dual-earner couple taking home $67,000. Nevertheless, as I point out The Affluent Investor, they feel like galley slaves. Their lives are fifty shades of bondage to discipline. What is their number one worry? Money, naturally.
When these worker bees hit retirement, their high-earning lifestyles will propel them off a cliff. Post-tax, but including Social Security, they are looking at an $80,000 spend annually -- perhaps one-third of what they were accustomed to during prime time. They earn so much money that they can't afford to retire. Meanwhile, the privileged 99% dwelling in the lower tiers of the social beehive won't face the same gut-wrenching drop in lifestyle after they punch out, because Social Security comprises a much larger share of their retirement income, while their taxes will be lower.
Even if we climb over the razor wire into top half of the 1% we still don't get the key to the Playboy Club. These folks earn $611,000 at the threshold and have liquid assets of perhaps $2 million, leaving them with $325,000 post taxes and retirement-plan funding. During their Golden Years, they live on $100,000 annually. Get the picture? Many at the top 99.5% are just more of the tiresome poor rich whose miserable lives of quiet desperation we have already surveyed.
The Rich Are Different
Not until you get to the top 1/10th of the 1 percent, with an income of $1.9 million a year, do you achieve orbital velocity and start to escape earth's monetary gravitational field. You're not rich in the Hollywood sense until you attain the top 1/100th of the 1%, with an annual income of at least $10.2 million. The 99% only know such people through seeing them on television or reading about them in the newspapers. People in the lower dungeons of the 1% do know these people, though, because unfortunately they have to work for them.
Even among the top 0.01%, there are big wheels within wheels. Those with $25 million feel like deadbeats compared to those with $200 million, who feel like have-nots because they are not billionaires, who feel destitute because they are not on the Forbes 400 list, where even the likes of Warren Buffett and Bill Gates have to jockey humiliatingly for position.
Those in the higher ether of the 1% have been touched by a liquidity event. This could be an IPO of the technology company they work for, the sale of the family business, the thriving of their venture capital fund, the vesting of their C-suite options, or even something as old-fashioned as banking an inheritance. This is what separates them from the low-level 1%ers spinning in the hamster wheel, who at most can try to save and invest their few pennies resourcefully. As the balloon rises within the 1%, the shift is from labor income to owning a business to making capital off of capital. Put another way, the movement is from the professional school to business school and into the tender bosom of the financial services industrial complex.
While superficially these liquidity events might sound desirable, think again. They have been known to cause psychological stress.
So this Thanksgiving, pity the 1%. The angels weep for them -- at least when the Cherubim aren't in a dog-eat-dog struggle with the Seraphs.