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Physicist, Startup Founder, Blogger, Dad

Thursday, July 28, 2011

Real wealth

A private wealth manager reflects on the top 1 percent and top .1 percent in net worth. His data would be a bit more informative if he broke it out by age group (note the numbers at the link are not entirely consistent with those given below, probably because of the use of means vs medians or threshold values). A 30 year old with a million dollars and someone about to retire with the same net worth are in two very different situations. See also working class millionaires.

... Until recently, most studies just broke out the top 1% as a group. Data on net worth distributions within the top 1% indicate that one enters the top 0.5% with about $1.8M, the top 0.25% with $3.1M, the top 0.10% with $5.5M and the top 0.01% with $24.4M. Wealth distribution is highly skewed towards the top 0.01%, increasing the overall average for this group. The net worth for those in the lower half of the top 1% is usually achieved after decades of education, hard work, saving and investing as a professional or small business person. While an after-tax income of $175k to $250k and net worth in the $1.2M to $1.8M range may seem like a lot of money to most Americans, it doesn’t really buy freedom from financial worry or access to the true corridors of power and money. That doesn’t become frequent until we reach the top 0.1%.

I’ve had many discussions in the last few years with clients with “only” $5M or under in assets, those in the 99th to 99.9th percentiles, as to whether they have enough money to retire or stay retired. That may sound strange to the 99% not in this group but generally accepted “safe” retirement distribution rates for a 30 year period are in the 3-5% range with 4% as the current industry standard. Assuming that the lower end of the top 1% has, say, $1.2M in investment assets, their retirement income will be about $50k per year plus maybe $30k-$40k from Social Security, so let’s say $90k per year pre-tax and $75-$80k post-tax if they wish to plan for 30 years of withdrawals. For those with $1.8M in retirement assets, that rises to around $120-150k pretax per year and around $100k after tax. If someone retires with $5M today, roughly the beginning rung for entry into the top 0.1%, they can reasonably expect an income of $240k pretax and around $190k post tax, including Social Security.

... Since the majority of those in this group actually earned their money from professions and smaller businesses, they generally don’t participate in the benefits big money enjoys. Those in the 99th to 99.5th percentile lack access to power. For example, most physicians today are having their incomes reduced by HMO’s, PPO’s and cost controls from Medicare and insurance companies; the legal profession is suffering from excess capacity, declining demand and global outsourcing; successful small businesses struggle with increasing regulation and taxation. I speak daily with these relative winners in the economic hierarchy and many express frustration.

Unlike those in the lower half of the top 1%, those in the top half and, particularly, top 0.1%, can often borrow for almost nothing, keep profits and production overseas, hold personal assets in tax havens, ride out down markets and economies, and influence legislation in the U.S. They have access to the very best in accounting firms, tax and other attorneys, numerous consultants, private wealth managers, a network of other wealthy and powerful friends, lucrative business opportunities, and many other benefits. Most of those in the bottom half of the top 1% lack power and global flexibility and are essentially well-compensated workhorses for the top 0.5%, just like the bottom 99%. In my view, the American dream of striking it rich is merely a well-marketed fantasy that keeps the bottom 99.5% hoping for better and prevents social and political instability. The odds of getting into that top 0.5% are very slim and the door is kept firmly shut by those within it.

... I could go on and on, but the bottom line is this: A highly complex and largely discrete set of laws and exemptions from laws has been put in place by those in the uppermost reaches of the U.S. financial system. It allows them to protect and increase their wealth and significantly affect the U.S. political and legislative processes. They have real power and real wealth. Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%. Moreover, those at the very top have no incentive whatsoever for revealing or changing the rules. I am not optimistic.

50 comments:

jaim klein said...

The picture is clear; entry into the top 0.5% and, particularly, the top 0.1% is usually the result of some association with the financial industry and its creations. 

But it was always necessarily so. Without financial manipulation, you are only a well paid workhorse. 

Julianne Marley said...

All true. Been true for a long time. Puke.

You said...

Where do you get such great links?

batmobiler said...

I'm curious to know what your daily allotted time is for free reading and what the breakdown is (fiction, blogs, news>sports, entertainment etc.). Are you a regular follower of certain sources?

Seth said...

Thanks for posting this Steve, this is a key topic.

steve hsu said...

Sometimes I find them myself, sometimes readers send them to me.

steve hsu said...

Maybe an hour or two if you sum up longer chunks with physical media (books, magazines) and time on the internet. I follow a few sports like college football, track, MMA, Crossfit. I read a lot of blogs and several periodicals: NYT, WSJ, New Yorker, Atlantic, WIRED, Economist, (in order of decreasing consistency). Once I find a first rate or incisive/original brain with a blog I tend to follow them at least intermittently to see what they are thinking :-) One way people keep track of things is with a well-organized Twitter feed. I've been meaning to do this but haven't gotten around to it and now might try it in G+ instead. I do have most of the above feeding into Google Reader. Of course most of my time is spent thinking about theoretical physics (or related stuff like genomics, which I am currently working on) or taking care of my kids :-)

steve hsu said...

Amazingly, I think I've met at least one person from each floor!

Seth said...

You've met them.  But are they all "friends" in the same sense of that word?  And you have been using the elevator more than most :)

reservoir_dogs said...

According to the wiki link you provided, the number of dallar milliionair households in the U.S. is 6.7 mil (excluding home). This is in 2008 so no doubt that number is more like 8 mill or more now today. With about 300 mill population and an average household of 2.2 people or some such, we are talking about 130 mil households. This works out to be 7% of the U.S. household being millionairs. This does not jive with the number with Steve's post. Something is amiss.

steve hsu said...

Look again at the wiki link. The number of millionaire households in the US is not known with precision. Another estimate has it at 3 M or so. Nobody really collects rigorous numbers on net worth.

steve hsu said...

No, they mostly live in different worlds as you point out.

Seth said...

I can't be terribly precise, but I would think professional wealth managers would have better estimates than wikipedia -- though of course the wikipedia article itself is largely drawn from slightly out-of-date analyses from wealth management firms.

The definition of HNWI is apparently not consistent from one firm to another, but the "I" does stand for "Individual".  So if there are now 3.1M HNWIs in the US  (http://www.capgemini.com/news-and-events/news/merrill-lynch-global-wealth-management-and-capgemini-release-15th-annual-world-wealth-report/ ), and 308.7M individuals ( http://2010.census.gov/2010census/data/ ), that means almost exactly 1% of Americans are HWNIs.  

Turning to households, I strongly suspect there are multiple HWNI's in a bunch of households (affluent lawyer marries more affluent lawyer, etc.) so the HWNI households are probably fewer than 3.1M out of the total 112.5M ( http://www.nytimes.com/interactive/2011/06/19/nyregion/how-many-households-are-like-yours.html ).  So the HNWI households would be somewhere between 1% and 2.7%.

But the main point of the article Steve quoted was that these 'ordinary millionaires' aren't living "lifestyles of the rich and famous".  They aren't being courted over cocktails by Senate or Presidential candidates at $1000/ticket house parties.  They don't figure directly in the opinion-forming process which sets the acceptable limits of government policy.

For that, you've got to ride the elevator up a couple more floors.  

stephen zhang said...

Do anyone knows some articles or books on how the top 0.1% of the society work (the hidden rules/systems)?

-----------------------------------------------------------------------------------------------------------------------------
Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%. Moreover, those at the very top have no incentive whatsoever for revealing or changing the rules. I am not optimistic.

stephen zhang said...

Do anyone know some articles/books/blogs about how the top 0.1% society works?______________________________________________________________________________________________________________________________Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%. Moreover, those at the very top have no incentive whatsoever for revealing or changing the rules. I am not optimistic.

Anonymous_IV said...

Where does your own sport/exercise time fit into this schedule?

steve hsu said...

I do a very compressed workout, about 35 min 3x per week. Sort of crossfit/tabata with weights/freebody stuff and then 20min of run/bike. I feel like crap if I go more than a couple of days without working out!

David Stern said...

Thinking about how things work here in Australia, I really don't think the government cares much at all what some guy with $25 million thinks unless he happens to be the CEO of BHP (one of the world's biggest mining companies) or something. So big corporations obviously have a lot of influence but so do union bosses I think (especially with the current Labor government) and what economists think also has plenty of obvious influence. But clearly the most important is what the opinion polls say and what the media says. So being an influential journalist or talk-radio host, academic, or union leader can have mush more impact than someone who happens to be rich but doesn't control a major part of the economy. Excepting the union bosses I think the US doesn't work that differently though donations to political campaigns are more important and so the guy with $25 million maybe can have more influence than he would in Australia.

David Stern said...

The federal reserve does but they don't breakdown the numbers much at the top end.

batmobiler said...

Steve do you make use of any spaced repetition flashcard programs (Supermemo, Anki etc.)?

ohwilleke said...

While great wealth does carry some political power, this account greatly overstates that component of the mix, in my experience both serving as a lawyer for the very affluent and in politics and lobbying.

In terms of wealth distribution, yes, the richest rich are greatly increasing their share, while the bottom 90% or 95% are losing ground.  Those in the top 5%-10% who are not in the top 0.5%, the managerial-professional elite, however, while they aren't really gaining ground, aren't falling behind either.

The growth in the wealth of those at the very top is also somewhat misportrayed relative to the last couple of decades.  Top executives in the "real economy", while they have increased their share of the pie, and not the driving factor behind the greatly increasing wealth gap.  It is the top executives in the finance sector (investment bankers, private equity and hedge fund proprietors, the top partners at the law firms and accounting firms that serve them, top executives of commercial money center banks) that have really been driving this trend.

ohwilleke said...

A good place to start would be in some of the ethnographic accounts of the big New York City law firms referenced as sources in Malcolm Gladstone's "Outliers" (e.g. the notion of resolving disputes in the boardroom rather than the courtroom, and the discussions of the importance of personal ties between rainmakers in law firms that ultimately made it to the big time and executives in business sectors that ballooned) and the biographies of the very wealthy that regularly appear in Forbes magazine.

steve hsu said...

No, I don't even know what those are. Could you explain?

steve hsu said...

If you remove just a few counties from the analysis -- including NYC, Greenwich, Seattle and Silicon Valley -- the change in US income inequality over the last decades mostly goes away. That should give you a hint about what is driving it.

http://infoproc.blogspot.com/2006/09/us-income-inequality-caused-by.html

batmobiler said...

Thanks for the insights above. They're software that use algorithms to maximize retention of information (spaced repetition). So basically you put facts into the program and review them like flashcards based on the algorithm. I personally haven't got around to using the programs but see how they could be useful for rote learning, and understandably would be quite impractical for physics haha.

MtMoru said...

I think Steve prefers the old standby, amphetamines.

How else could he travel so much unnecessarily?

MtMoru said...

I think that's cheating. If those same counties or what were the equivalent of those counties had been removed from previous analyses what would the trend be then?

MtMoru said...

Although income inequality is similar in Australia, there is much more social mobility in Australia than there is in the US. I don't think this is eliminated when only white Americans are considered. The same is true for NZ and even more so when the Maori are excluded.

ANZ is very lucky. You're Mexicans are Chinese.

MtMoru said...

"A highly complex and largely discrete set of laws and exemptions from laws has been put in place by those in the uppermost reaches of the U.S. financial system."

I think the author meant "discreet", but perhaps not. Perhaps he meant these laws are one-off, bespoke favors for campaign donors.

steve hsu said...

I wish I didn't have to travel so much. But believe it or not, to get anything done involving organizations or teams of collaborators there is no substitute for two apes meeting face to face. Even for highly abstract subjects like theoretical physics, in-person interactions are far more effective than the alternatives.

Allan Folz said...

Good point. I think they both apply about equally.

Steve said...

Seth,

Thanks, that's a very useful mental model.

David Stern said...

I don't think there is much more social mobility. Inequality is similar. I just know that I don't have even a million dollars and yet I can get to meet and talk with the head of a government department at a lunch or whatever because of my academic position. This isn't true of most academics in the system of course. Having money per se doesn't make a lot of difference unless you are a billionaire or the like I think.

Yan Shen said...

It also doesn't help when elite firms tend to recruit mostly from a few of the top schools and Asian Americans are disproportionately shut out of those schools due to racism. See this earlier Steve Hsu post.

http://infoproc.blogspot.com/2011/01/credentialism-and-elite-employment.html

It doesn't take much to put two and two together here and surmise that affirmative action potentially has a negative impact on the economic well-being of Asian Americans. If Goldman Sachs is only hiring undergraduates from the Harvards and Princetons of the world, surely this means that Asian Americans, all else being equal, will have a harder time breaking into the top echelons of the wealthy elite. If my reasoning is overly simplistic or flawed here, I would love to be corrected. I suspect that this racial discrimination angle is one which most people haven't considered.

The theme of the post seems to be that an entrenched group of privileged individuals has essentially closed the gates to others from breaking in to their sacred circle. One of the most galling facts is legacy admissions to elite undergraduate schools, which effectively perpetuates the same kind of white privilege that the article above alludes to. This privilege is maintained less by meritocratic ability and more by personal connections.

Does anyone know whether or not Asian Americans also face discrimination when being admitted to MBA programs, as opposed to merely elite undergraduate universities. What kind of adverse financial effect is this having on the Asian American population?

Christopher Chang said...

This is one of my pet peeves--most writers don't seem to perform better than random chance when it comes to discreet/discrete.  Another common mistake is confusing principal/principle.

Matt Simpson said...

Great point regarding the confusion of wealth and income.

The problem is conflation of the function (net in-place liquidation
value of assets) with the derivative (income, capital gains, value
added, sales, etc.).

The result of this conflation is a brain-dead discourse in political economy.

OF
COURSE people who have vast property rights should pay more for the
existence of the entity that upholds those property rights -- just as
they should pay more for property insurance.

OF COURSE people who make millions or billions of dollars a year should have zero tax burden as a result of those changes in their net in-place liquidation value of assets.

Dawg_from_Hell 2010 said...

It's a rather perverse way to look at the situation, but it would be good for society if those that are most capable of value creation are kept out of elite finance jobs.

"Does anyone know whether or not Asian Americans also face discrimination
when being admitted to MBA programs, as opposed to merely elite
undergraduate universities?"

Elite MBA programs have a much larger proportion of international students than elite undergraduate universities. Non-American Asians are pretty well-represented there, so if that's the path to financial glory, Asians don't seem to be shut out, though Asian-Americans probably are. However, I'm not sure that MBAs constitute a significant chunk of the >99.9 percentile in wealth population, so you probably need to recheck your MBA premise. 

Paul Young said...

There is a reason that our sclera are bright white and very exposed.  You can't notice that over the phone ...

steve hsu said...

Yes, actually one of the big advantages of the HP virtual conferencing rooms (do you have them at GS?) is that the optics are supposedly set up so that you can do eye tracking -- you can see which person on your side of the conference a person on the other side (who you see on the HD screen facing your half of the conference table) is actually looking at. This apparently makes communication much smoother and it's a good indication of how complex human interactions are.

MtMoru said...

"...good for society if those that are most capable of value creation are kept out of elite finance jobs..."

The programmers do nearly all the value creating in elite and ordinary finance. Quants who would have spent their professional lives as professors of physics or mathematics can create more than they would have but more often don't.

MtMoru said...

BS Yan. Asians (both Mongoloids and Indians) are overrepresented at Harvard, Yale, etc. They just aren't AS overrepresented as their gpa + SAT would predict.

If you want Harvard, Yale etc to be 50% Asian and you're going to whine until that's the case then FU. Asians are like kudzu, the zebra muscle, or English ivy. They're an invasive species in the US academic environment.

Seth said...

Discus is a rather counter-intuitive comment system.  While it's great to be able to edit comments, I noticed the other day that on my Blackberry, I only see the first draft.  And I don't understand how long you're allowed to edit a comment.  For example, when did you add the second sentence about upstairs people not returning phone calls? (A very apt indicator of the social distance I have in mind, btw.)

gwern0 said...

Self-promotion: http://www.gwern.net/Spaced%20repetition

Richard Lubman said...

All that's happened is that the advent of fast communications makes the economy a game of winner take all. J K Rowling makes more money than any other author because books, and other ideas, are distributed worldwide, to larger markets than ever before. Finance is a source of wealth because it allows a single person to take a cut of performance from a large pile of assets- just an economy of scale.

silkop said...

This seems also true in Germany, at least at the local (Land) government level. If you wish to gain power, you have to engage in politics, become well-known in the community, network a lot with public officials etc. Personal wealth doesn't equal power/influence and by "showing off" too much you risk alienation. There is social stratification which resembles the British - the well-off, well-educated people isolate themselves from the lower strata mostly by engaging in snobby cultural activities among themselves. Sure, you can "meet and talk" with almost everyone, but that doesn't make you their peer and invited to the parties (if that is what you care about).

steve hsu said...

I might have admin privileges that ordinary users don't. I seem to be able to edit my comments after posting them. I think I added the sentence you mentioned a day or two later.

jeemby said...

William Domhoff's "Who Rules America?" is probably the best starting point.

stephen zhang said...

Thank you.

The accumulation of money in the hands of the few rich and powerful may also have some positive side, because it is such money that created the venture capital and angel investment industry. They also donate a large amount of money to research (stem cell and etc), and top universities (such as Stanford) have almost all their buildings named after such donors. 

This perspective may be biased, as I am a researcher of innovation and entrepreneurship, and I largely look at tech multi-millionaires and their interest in innovation and R&D is quite public.

jeemby said...

There are two sides to the coin, for sure.  Those super-rich who engage in philanthropy and development of new technologies (think Gates foundation, Tesla motors, et. al.) certainly have a positive effect on society.  But then you have the Koch brothers, the Mellon and Coors foundations, etc., and it's an open question whether this kind of wealth is a net positive.

Personally, I think the income redistribution should come after death.  Inheritance taxes should be steeply progressive and should be as high as 99% when you reach say, 1000x the median income.  We know intelligence and entrepreneurship revert to the mean after a few generations and I believe it is unhealthy for a society to allow such power to drop into the lap of someone whose only distinction is that they were born lucky.  It's my impression that the less someone did to accumulate their wealth, the more entitled and arrogant they are.

Luke Nguyen said...

Yan, you should check the US census for household income broken down by race.  If you really believe the stuff you write; you're gonna be jumping for joy.  Asians do rather well in the income category.  I'm sure if they got rid of the lesser asians like the Vietnamese (my ethnicity) and pacific islanders; your group (East Asians or Chinese?) would be even farther up the ladder.  

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