Defining Rich in America

[candrew]

You can stop right at age. Anything looking at household averages w/o regard to age won't tell us much at all about sho is or is not 'rich'.




Not just 'the farm thing', any small business with assets to keep the business going. And how about someone with a (or more) special-needs child or grandchild? Some kind souls have adopted several special-needs children. Leaving millions could really help provide a lifetime of needed support. And before you start talking about special trusts or anything - those will be used by clever lawyers and rich clients to provide for the 'special-needs' of their heirs (poor darling gets depressed w/o Dom Perignon with dinner!).



I just don't see that as a major issue. It's like saying that very few people would contribute to the Red Cross when there is a disaster, because they personally never experienced a typhoon, hurricane, or tsunami. Or that a well-fed person just doesn't understand that it is bad to be starving, or that someone who is cancer-free can't understand that having cancer can be a very bad thing. The problems with our reps go far beyond that, but I'll stop there.

I wonder if the OP will drop by and share anything - or did he just throw some gas on a fire to watch people run?

-ERD50

Posting the article was hardly a case of my intending to throw gas on a fire or stir a pot. It was actually sent to me by DW and we both had a good laugh at the idea that based on the article, we would qualify as “rich” both in terms of our household income (we’re both still working) and in retirement savings. This feeling on both our parts stems largely from the fact that early on in our married lives we struggled mightily to pay mountains of medical bills (even after our health insurances paid). Both of our sons had significant medical issues as children – our youngest born prematurely and having to spend time in a NICU. The acuity of their conditions necessitated DW having to leave her job as a teacher (I was the higher earner) to stay home and care for the kids for 8 years. The only way out from under the piles of medical bills was for me to work 2nd jobs and DW to run a small pre-school at home. I guess you could say that the whole experience taught us how to LBYM and we continue that practice today!! Even after managing to pay off our medical debts, I kept working my 2nd job as a sports official for high schools and the NCAA to help us catch-up on retirement savings. After returning to teaching, DW would pick up gigs teaching summer school and doing A.P. testing for her district.
So in summary – DW & I have always considered ourselves more “fortunate” than rich when it comes to our finances. Early retirement – if you can call it that – will be at age 59-1/2 for me. Now, if we are talking about what makes us feel “rich”, it is having each other to lean on and a wealth of life experiences (some of them difficult) to draw from along with two adult sons we are incredibly proud of (both healthy & happy) as well as two very handsome grandsons.

 

[Mulligan]

But our system heavily taxes those working the hardest for their money, and taxes very little of the "compounding"money. The growing disparity you speak of is magnified by this system favoring capitalist wealth at the expense of labor income. This ultimately means we have very low class mobility, in fact we have one of the lower rankings for the 1st world.

Let's say it a different way - the idea that anyone can achieve anything in america is not a false statement, but it is very far from being the truth too. It just makes a good sound bite.

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While I am not screaming unfair as to me I do understand the process behind it, yet your thoughts are the very reason why I chose not to try to "make some hay" and work while drawing a pension. Being just a middle class income and not really able to capture an out of expertise area high paying job, it just isn't worth it to me to only receive 58 cents on the dollar to work.


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[Texas Proud]

Why?

I've always thought an inheritance tax was inherently unfair.

Person A earns many millions in his life, saves/invests most of it and wants to give it to his relatives. His choice.

Person B earns the same amount and blows it all on fast boats, fast cars and fast women. Also his choice.

Why should person B get a pass while person A has to have what he wants to do lessened?

Just throwing out a thought on this.... not my thinking, but you asked...



Maybe because Person B has already paid a big part of his money toward taxes buying all that stuff he blew his money on and Person A has not paid his 'fair share'.....

 

[sunnysideup]

If you're really defining rich you've got to count pensions in that too. There are plenty of people with pensions that create more cash flow than a $1.3 million portfolio will spin-off.

Thanks for pointing this out. I have been telling my friends who are govt employees and teachers that they are the nouveau-riche!!! Somehow they don't get it!

Pretty soon there will be 2 classes--those with and those without--pensions...

 

[rodi]

The article title (linked in the OP) suggests that everyone considers themselves middle class. I think this is correct. It's kind of like age - what I considered to be OLD when I was a teenager I now consider to be middle aged. What I consider to be old now- is older than I currently am. So my definition has changed based on my age. I think the same happens with the term "rich"... No one considers themselves rich until there is no denying it. (Once you're shopping for mega-yachts that you plan to pay cash for, to park in front of your mansion - perhaps you'll admit you're rich... but few folks will admit it prior to that.)

I think we all justify applying the term "middle class" to ourselves because it's so easy to feel like others have more, and that we're somehow deprived because we can't afford (or won't spend money on) the finer things like expensive cars, first class tickets, or beach front homes.

I tend to identify as middle class - but two houses on my street are listed for close to $1M. If they sell for close to that - it means my house is worth a lot more than I thought - and my net worth is bigger than I thought. Maybe I'm rich after all.

Agree with this. By this article, we qualify for the top 10% (and then some) in our mid-30s by both income and net worth. But we don't feel rich, and we don't live lavishly, particularly compared with the area in which we live.

You live in a very affluent area. You can be quite wealthy and feel poor compared to residents of your town. I'm in a similar boat - since I'm "La Jolla adjacent" - and a lot of the places I go to run errands are in La Jolla or frequented by folks from La Jolla. I may be driving DH's '95 PU, and parking next to the tesla or 7 series beamer at Ralphs... Hard not to feel middle classed in comparison.

 

[engprodigy]

But our system heavily taxes those working the hardest for their money, and taxes very little of the "compounding"money.

Those working hardest for their money or more heavily taxed

That opinion might fit your ideology but I'm not sure how you would even begin to objectively defend it.

That being said, the "compounding money" has already been taxed once at the "heavier level" when it was first made via said hard work.

 

[steelyman]

Thanks for pointing this out. I have been telling my friends who are govt employees and teachers that they are the nouveau-riche!!! Somehow they don't get it!

Pretty soon there will be 2 classes--those with and those without--pensions...

That is not true. I spent a long layover in Dallas talking with a very nice lady who was a painter (non-skilled) for a university. She does not get a "gold-plated" or "Cadillac" pension and was worried about how she could pay for her prescriptions.

 

[dallas27]

Those working hardest for their money or more heavily taxed

That opinion might fit your ideology but I'm not sure how you would even begin to objectively defend it.

That being said, the "compounding money" has already been taxed once at the "heavier level" when it was first made via said hard work.

Is their a type of money that hasn't been taxed before? It goes in circle, taxed when it changes ownership.

And if you don't believe that good honest people work their asses off until they just about die and pay higher overall taxes due to consumption and income taxes , then im sorry, i dont argue math with anyone..


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[engprodigy]

Is their a type of money that hasn't been taxed before? It goes in circle, taxed when it changes ownership.

"compounding money" isn't super special exempt money that "rich" people get paid in, it was once "labor money" and thus already subject to "heavier taxation". Thus defeating any point you were trying to make regarding the unfair nature of taxing heavier the money made through "harder work".

And if you don't believe that good honest people work their asses off until they just about die and pay higher overall taxes due to consumption and income taxes , then im sorry, i dont argue math with anyone..

I never said anything of the sort. I simply pointed out that your comment:

"But our system heavily taxes those working the hardest for their money"

Is a ridiculous comment and nearly impossible to defend.

Let me know once you've come up with an objective methodology for measuring how hard people are working across all fields of work.

 

[Andre1969]

So why would this be a hard call? Money in your 30s is "more valuable" than money in your 60s, IMO. Thus equal amounts at those different ages points towards the 30s being better off than the 60s, regardless of proximity to retirement.

Oh, I meant that in the context of the message I was replying to, where the poster said that how "rich" you are should be a correlation to how close to being financially independent you are, and then mentioned not feeling "rich" because despite having $600K at age 32, they felt pretty far off from the FI mark.

So yeah, I'd much rather have $600K at 32, than at 65-70. But, $600K would be more likely to let a 65-70 YO be FI than a 32 YO. So by that particular metric (proximity to FI), it's a hard call. Of course, at 65-70 you may only have a few good years left...

 

[engprodigy]

So yeah, I'd much rather have $600K at 32, than at 65-70. But, $600K would be more likely to let a 65-70 YO be FI than a 32 YO. So by that particular metric (proximity to FI), it's a hard call. Of course, at 65-70 you may only have a few good years left...

Yeah, rich is hard to define and any definition will always leave something on the table. Rich defined more by FI seems closer than income though as it takes more into account.

I'd rather be 32 with $600k than 65-70 too, but that is mostly because I don't want to be 65-70 yet

 

[Andre1969]

Thanks for pointing this out. I have been telling my friends who are govt employees and teachers that they are the nouveau-riche!!! Somehow they don't get it!

Pretty soon there will be 2 classes--those with and those without--pensions...

I tend to forget this aspect, because I tend to associate those nice pensions with people like my parents and grandparents, moreso than my generation. But then I just remembered a good friend of mine, who is a teacher. I think his pension maxes out at something like 54% of his salary. And, he'll get SS on top of that. His salary is close to mine, and he intends to work longer than me. I forget how long he has to work to get that 54% pension. I think something like 30 years, and he has to be 55 or older. But, I don't see him as the early-retiree type, as he finds his job rewarding.

Anyway, if I worked until 55, SS at 62 would give me about 23% of my salary. If I stuck it out until 65, about 30%, and 35% if I took it at 67. I'm sure my friend's situation would be similar. So he's on track to replace at least 77% of his current salary, just through his pension and SS.

He also does save into whatever the teachers' equivalent of a 401k is, so he's in better shape than he thinks he is, although he does worry about his future.

I've told him that even with $1M, you can only live off of around $30-40,000 per year, so in many ways, he's more financially secure than I am.

 

[borrom2002]

"compounding money" isn't super special exempt money that "rich" people get paid in, it was once "labor money" and thus already subject to "heavier taxation". Thus defeating any point you were trying to make regarding the unfair nature of taxing heavier the money made through "harder work".

Wait are you actually trying to count the original taxation of the money as it was earned by the company and apply it to the "burden" of the investor?
If I had a choice of a 1 million dollar income from a job vs 1 million dollar income from dividends and capital gains I would always take the 2nd choice. The income from the investments would be taxed(to me) much less than the job income would be. What counts here is the bottom line. I have no sympathy for the investors tax burden here. Instead I am trying to get more of my income from investments because of the "super special exempt money" that the rich do get paid in.

 

[engprodigy]

Wait are you actually trying to count the original taxation of the money as it was earned by the company and apply it to the "burden" of the investor?

What?

What I'm saying isn't profound, but it clearly was overlooked or forgotten by dallas when first the highly subjective and difficult to defend opinion of "more heavily taxing those working the hardest" was first posted.

Money that is "compounding money", meaning money that is invested in some vehicle and no longer taxed as wages but taxed as capital gains didn't appear from thin air into anyone's portfolio. It first had to be made via wage before it could then be invested. It is a pretty straight forward concept.

Thus trying to make a point about "harder earned money" (wage income) being taxed higher than "compounding money" (passive income) is moot.

If I had a choice of a 1 million dollar income from a job vs 1 million dollar income from dividends and capital gains I would always take the 2nd choice.

Well... yeah, I would imagine everyone would.

I have no sympathy for the investors tax burden here.

Cool, me neither.

Instead I am trying to get more of my income from investments because of the "super special exempt money" that the rich do get paid in.

Who wouldn't want their passive income to eventually surpass their active income?

But how was that passive income built?

 

[Andre1969]

Another thing to consider about "passive" income like dividends and capital gains, is that when you get them, unless they're reinvested, they reduce your stocks/mutual funds by that much.

So, if you have $100,000 invested, and it pays dividends and a capital gain of, say, $20,000, you don't suddenly have $120,000. You still have $100,000, but now you have to pay taxes on $20,000.

Of course, stock prices usually keep going up in the long run, so you should make out okay.

Then, there's the time value of money. If I bought a stock in 1988 for $50 per share, and sold it today for $100 per share, I'd have to pay capital gains tax on $50 per share. However, adjusting for inflation, I have made nothing at all, because everything has essentially doubled since then. Now, that's an extreme example...hopefully if I had a stock that was just sitting there like that, I would have sold it long ago!

 

[dallas27]

Engprodigy, the usa greatly skews it's taxes toward income earners and consumption. It lightly taxes corps and capitalists.

If you don't want to accept the social impact of very public macroeconomic tax policy, thats your right. But I'm not going to engage in debating your belief system any further as you seem to be emotional about the subject. You can even feel you've won if you like.


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[engprodigy]

Engprodigy, the usa greatly skews it's taxes toward income earners and consumption. It lightly taxes corps and capitalists.

If you don't want to accept the social impact of very public macroeconomic tax policy, thats your right. But I'm not going to engage in debating your belief system any further as you seem to be emotional about the subject. You can even feel you've won if you like.

Talk about a good sound bite.

Do you have a metric yet on gauging how hard workers are working at specific jobs? I'm guessing no, which means that you still cannot defend your entirely emotional assertion that those working the hardest are taxed the heaviest.

Do you understand yet that passive income is built via wage income?

You have a certain obvious ideology, I barely ever lurk here and yet when I do it seems I often come across you making politically/ideologically charged posts.

Speaking of emotional responses...

But our system heavily taxes those working the hardest for their money, and taxes very little of the "compounding"money.

- the idea that anyone can achieve anything in america is not a false statement, but it is very far from being the truth too. It just makes a good sound bite.

And if you don't believe that good honest people work their asses off until they just about die and pay higher overall taxes due to consumption and income taxes , then im sorry, i dont argue math with anyone..

 

[Andre1969]

Okay guys, don't get this topic shut down on us, now!

 

[engprodigy]

Your right

 

[Amethyst]

Because Person A, being dead, is incapable of being taxed? The taxes apply to Person A's heirs, who are asked to pay their share of their unearned gains?

If one wants to help relatives while being fully aware of their heartfelt appreciation, one can give yearly non-taxable gifts. That way, one can also check to see if the relatives are just blowing the gifts on fast things, in time to change one's will and leave everything to a charity that pays no tax!

Amethyst

Why?

I've always thought an inheritance tax was inherently unfair.

Person A earns many millions in his life, saves/invests most of it and wants to give it to his relatives. His choice.

Person B earns the same amount and blows it all on fast boats, fast cars and fast women. Also his choice.

Why should person B get a pass while person A has to have what he wants to do lessened?

 

[mpeirce]

One other difference between wage income and investment (interest/dividend/CG) income is that with the later you are being taxed on your inflation gains.

Here's a simple example:

You have $100,000 invested in a stock. It pays no dividends and it increases in value at 5% a year so it doubles in value in 14.4 years. Lets also assume a steady 5% inflation rate over those 14.4 years.

After 14.4 years, you then sell your stock. It's worth $200,000 giving you a $100,000 long term capital gain. You pay a 15% federal tax on this gain - $15,000 in federal taxes.

The trouble is that this investment exactly held steady with inflation. Your $200,000 has the same buying power as the original $100,000. EXCEPT you have to pay $15,000 in taxes so you are actually behind by $15,000.

If the US ever does tax capital gains the same as wage income, we should at least add in an inflation adjustment.

 

[ExFlyBoy5]

Back to the original subject...some posters mentioned the younger folks "looking" the part. In my area, I see this A LOT. I live in a neighborhood (NW burb of Atlanta) that was built in the late 70's. Many of the original owners still live in the neighborhood and many others are retired. I bought the house in 2012 at a very reasonable $140K (now assessed in the neighborhood of 250K). Some of the best schools in the metro area (and Georgia) are where we are, so over the last 10-15 years, the developers have come in and developed most of the land that was available. Now they are buying some of the older ranches (all on 3/4+ acre lots) and building McMansions that run from low 600Ks to well over 1M. In Georgia, this is an expensive house.

ANYWAY...my DW (who is a Realtor)was pulling up deeds a few days ago and absolutely stunned at the difference in mortgages in the area. Almost all of the McMansions bought over the last 5 years were financed for at least 80% the value of the home (many with HELOCs added on 6 months later), whereas in our old neighborhood, the number of homes with mortgages was less than 40%.

I have also noticed when chatting with folks around our area, our average neighborhood neighbor is either retired, self employed, or work from home. On my street alone (7 houses), only 2 have people that physically go to work everyday. When I am walking the dog and go thorough the newest "McMansion" neighborhood during the day, it's an absolute ghost town (well, except for all the lawn services, etc.). When you do see them and chat them up, you hear about how incredibly busy they are.

So...I do think that the "millionaire" next door is a pretty common occurrence. This isn't to say that everyone in a McMansion isn't "well off", but if I was able to pull up actual net worths, I would bet our old contemporary neighborhood would give the McMansion folks a good run for their money.

 

[Mulligan]

Flyboy, my observations about the millionaire next door resembles yours. Many local people with money tend to just continue to live in the home they have lived in. Maybe synergy and comfort level. They update on inside but do not have interest in moving to a bigger home that they could easily afford. I also think in small towns it isn't as common to build a home that truly reflects your wealth either.


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[ExFlyBoy5]

Flyboy, my observations about the millionaire next door resembles yours. Many local people with money tend to just continue to live in the home they have lived in. Maybe synergy and comfort level. They update on inside but do not have interest in moving to a bigger home that they could easily afford. I also think in small towns it isn't as common to build a home that truly reflects your wealth either.


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And on that note, I see this reflected in the cars too. Almost all of the McMansions have $60K+ cars in the drives whereas we have lots of older Hondas (especially the 2000-2005 Accords!), Toyotas and a couple of Towncars (that are 10 years old). I feel out of place in my 5 year old Infiniti!

 

[scrabbler1]

One other difference between wage income and investment (interest/dividend/CG) income is that with the later you are being taxed on your inflation gains.

Here's a simple example:

You have $100,000 invested in a stock. It pays no dividends and it increases in value at 5% a year so it doubles in value in 14.4 years. Lets also assume a steady 5% inflation rate over those 14.4 years.

After 14.4 years, you then sell your stock. It's worth $200,000 giving you a $100,000 long term capital gain. You pay a 15% federal tax on this gain - $15,000 in federal taxes.

The trouble is that this investment exactly held steady with inflation. Your $200,000 has the same buying power as the original $100,000. EXCEPT you have to pay $15,000 in taxes so you are actually behind by $15,000.

If the US ever does tax capital gains the same as wage income, we should at least add in an inflation adjustment.

Good point. The bold part of your post I added is what I'd like to see - do some sort of indexing but tax the remainder (i.e. real gain) as ordinary income.