The State Of ‘Being Rich’ In The USA

April 26, 2015 by

A couple weeks ago in a previous edition of the Daily Pfennig® newsletter, I wondered aloud what it means to be rich in America:

“Our friend Marc Lichtenfeld, Chief Income Strategist at The Oxford Club, notes that experiences and family and memories are the things that really make us rich, but having wealth provides the freedom from immediate need that allows us to create those experiences… A Gallup Poll referenced by Investment U notes that across all respondents, the magic number to be considered rich in the U.S. is an annual income of $150,000.”

And, when I asked our readers what “rich” means to you, the responses were many – clearly, the topic struck a chord. I’ll highlight some of your responses in a minute.

But, first, there’s no question that this is a complicated topic. Should wealth be assessed by annual income only? Or net worth? But then, how does a geographic region fit into the equation? Think about these U.S. Census Bureau stats: in Fillmore County, MN, the median home price and income are $135K and $50K, respectively, while in San Mateo County, CA, the figures are $722K and $88K.

Talking about wealth immediately raises the possibility that politics will grab the wheel and take over the discussion. I’ll mostly avoid that here, but will note that the public perception of wealth and the term “rich” are critical as they are applied to tax and other policy debates. A friend here in St. Louis says that what we are paid is the scorecard for what the payer thinks we are worth – not very touchy-feely, but that is what the market will bear.

Categorizing The Responses
So, before I get to the numbers, here’s a brief summary of how our readership responded to the “defining rich” inquiry. Not surprisingly, many of your responses centered on the ability to buy things or income/net worth figures.

Health and Happiness. A good number of people wrote in to say that health and happiness trump everything, which bears a close similarity to Marc’s viewpoint that it’s about the life we lead.

Several readers of the Daily Pfennig® newsletter also suggested that this varies by stage in life. For example, the value of a household income for a family supporting five college-aged children looks quite different than that same figure in a household of retirees who no longer support any children.

Independence. This is closer to my own definition since it includes the Health and Happiness above, but also brings in a financial measure. Paraphrasing quite a few people, it is the ability to reasonably buy what you want without consideration for budget. I would, however, add the word “sustainably” to such phrasing.

The last part of the definition is key. There are certainly rare households who effectively plan for financial needs including a budgeting process, then acquire whatever was in the plan. Buying non-extraordinary services or things without having to look up the checkbook balance could become a good working definition of wealthy.

Service. The final block of comments actually hits at the heart of modern technology development. Here, readers considered someone to be rich when they “had people.” Not just someone mowing the yard, but some version of a staff beyond the household that serves as a personal concierge and makes things happen.

Notably, the technology revolution of the past 10 years has ushered in many of these concierge-type services much further down the income chain. Want a restaurant reservation? You no longer need someone to call everywhere in town to assess availability and rate each location – just sign in to OpenTable. Want a budget analyst? Use EverBank’s Financial Manager tab or sign up with Mint.com. Want a ride to a business meeting – in a “black car”? Crank up Uber.

Of course, affording what’s ordered through these spiffy new applications still comes back to an ability to pay.

Author’s note: The facts, figures and other data contained in the following charts are provided to us courtesy of Chip Roame, Managing Partner, Tiburon Strategic Advisors, LLCTM and are reprinted with Tiburon’s Strategic Advisors’ permission.

First, let’s take a look at the total amount of money in America today. (Figure #1)

Source: Chart is the property of Tiburon Strategic Advisors, LLCTM and is reprinted with their permission.
(Click here to view a larger image.) So, our 123 million U.S. households hold $94 trillion in financial and other assets, and can claim a net worth of $80 trillion. Pulling out our calculators shows that the average net worth is around $650,000. Guess we’re all rich! Philosophers and global observers can legitimately claim that Americans are rich; however, as we know, this isn’t the case.

For now, I’ll ignore our billionaires, even though 113 of the ones here in the U.S. are too poor to be on the Forbes 400 list. Sad indeed. As we approached the end of 2014, there were 132,000 households with a net worth of more than $25 million and 1.2 million households with a net worth of more than $5 million. That’s a cumulative 1.332 million households or 1.1%. By comparison, there are 10.1 million households with a net worth of more than $1 million.

Taking a slightly different cut to assess the ability to retire comfortably, we also see a skewed distribution. (Figure #2)

Source: Chart is the property of Tiburon Strategic Advisors, LLCTM and is reprinted with their permission.
(Click here to view a larger image.) Finally, on the income side, the well-reported breakout is clear. (Figure #3)

Source: Chart is the property of Tiburon Strategic Advisors, LLCTM and is reprinted with their permission.
(Click here to view a larger image.) Putting a finer point on it (Figure #4):

Source: Chart is the property of Tiburon Strategic Advisors, LLCTM and is reprinted with their permission.
(Click here to view a larger image.) So, really, what is rich in America? The external polls say people think it’s $150,000 in annual income. Snarky commentators say, “It’s twice what you’re making now.” For me, I prefer to say that being rich is “the sustainable ability to reasonably buy what you want without regard to budget – whether retired or not.”

Until the next Daily Pfennig® edition…

Sincerely,
Frank Trotter
EVP & Chairman
EverBank Global Markets Group
1.800.926.4922
www.everbank.com