How Much Money Does It Take To Be In The Top 1% of Wealth and Net Worth in the United States?

There had been some confusion about the methodology involved in calculating the top 1% of wealth in the United States.  This article is updated with the “sticker” net worth for the top 1% as published by The Federal Reserve (assets – liabilities since that is what the typical American thinks of when they hear the term net worth) and clarifying that from what I consider the “true” net worth, which is a method called the estate multiplier technique, which is used by the IRS.  The latter results in a far lower entry threshold for the top 1% of net worth but is more accurate, in my opinion. You are encouraged to study the data and reach your own conclusion. – November 14th, 2011

This article answers the question, “How much money does it take to be in the top 1% of net worth in the United States.  If you are interested in who the top 1% of net worth is, such as demographic breakdown, educational history, and gender, you should read The New Elite: A Look Into the Top 1% of Wealth.

What does it take to be in the top 1% of wealth in the United States?  Many of you write me and ask that question, hoping someday to make it into the top 1% of net worth but not sure where that line gets drawn.  I thought it might be useful to provide a reference to which I could point people in the future whenever they write, as well as make for some interesting afternoon reading for those of you who are curious about the nature of the economic world in which we live.

We’re Going to Look at the Top 1% of Wealth and Net Worth in the United States, Not the Top 1% of Income

Notice that we are going to discuss the top 1% of wealth not the top 1% of income.  As illustrated by our recent discussion of Terrell Owens, Jamal Mashburn, and Ulysses Bridgeman, Jr., depending upon how wisely a person’s income is invested, income may or may not result in building wealth.  Hence the startling statistic pointed out in a Sports Illustrated article explaining that in the NFL alone, 78% of players went bankrupt within 2 years of retiring.

This makes our job difficult because the IRS and other government agencies release plenty of data on income distribution.  Those sources showed that in 2009, the top 1% of tax payers reported $344,000 in annual income.  That figure would be slightly higher because income held in tax-advantaged retirement plans or other structures wouldn’t be included.  It may not sound like much on an annual basis, but to the average guy sitting at home, earning nearly $28,670 per month in reported income is a lot of money.  Estimating where you fall on the income scale is easy.  Net worth, on the other hand, is somewhat difficult.  Where the top 1% entry level is requires a lot of math and even then, it is imperfect.

We are talking about what Dr. Thomas J. Stanley calls “balance sheet affluent” in his research, as opposed to “income statement affluent”.  That might seem a bit confusing since I am a fan of the older, British method of measuring wealth wherein a person looks at the level of passive income (or “private income”) thrown off by investments.  But the distinction is there because I am discussing income generated by assets that do not require your labor as opposed to that which would disappear if you failed to get out of bed in the morning.

Additionally, we are not going to discuss income inequality or wealth inequality because those are expansive enough topics they deserve their own articles.  Instead, our objective is to simply focus on the data at this juncture and answer the question: How much money does it take to get into the top 1% of wealth in the United States?

What Is the Net Worth of the Top 1% in the United States?  It Gets Tricky …

To find the “sticker” rate to rank among the top 1% of net worth, or wealth, in the United States, we can look at a handful of reports released by the United States Government, specifically the Federal Reserve’s Survey of Consumer Finances.  To make it simple (and since people prefer visual aids, anyway), the Economic Policy Institute took this historical data and in a paper called The State of Working America’s Wealth, 2011: Through Volatility and Turmoil, the Gap Widens by Sylvia A. Allegretto, reconciled it in inflation-adjusted 2009 dollars in Table 2: Changes in the Distribution of Wealth, 1962-2009.

I call this the “sticker rate” because it doesn’t reflect any of the real world barriers that would stop you from accessing your money if you were rich.  It excludes taxes due and early withdrawal penalties on 401(k), IRA, SEP, and pension assets, deferred capital gains taxes on unrealized profits on stocks, bonds, real estate, art, or other property, illiquidity discounts for closely held companies that don’t enjoy a public market for securities, inheritances taxes if you were to die and leave an estate to your children or grandchildren, liability claims (e.g., you are being sued and might owe a significant amount of money for malpractice as a wealthy doctor), money held out-of-estate in the form of trust funds that you may manage but to which you have no legal right, and all of the other things that would be accounted for and deducted if you were calculating your net worth on a GAAP basis as if you were a corporation or non-profit entity.

But the EPI data is going to be deceptive because it is average wealth, not median wealth.  That is, if the sample included Warren Buffett with $40 billion and a small town millionaire with $5 million, the “average” wealth would be around $20 billion, which clearly has no value whatsoever in understanding the economic distribution.

If you used this data, again which is technically true but what I consider intellectually dishonest, the average net worth for the top 1% was $19.1 million at the height of the real estate bubble and $13.98 million at the depths of the recession.  Common sense tells us we can throw this out and disregard it since average (mean), in this case, is meaningless.  Add to that the failure to back out the real-world barriers to getting your hands on your money, such as the taxes you’d owe on your retirement account withdrawals, and we know the figure has to be lower so we must continue looking.  (The only reasons groups like EPI use mean is to try and convince the public to raise tax rates.  They can’t win when people know the real cut-off for top income earners so they frame the data in what I consider a deceptive and misleading way.)

The question remains: How much would it take to enter the cut-off for the top 1% of net worth in the United States?

Diving Into the Appendix Tables of the Survey of Consumer Finances from the Federal Reserve and Treasury

The next best place to look would be the summary data of the Survey of Consumer Finances.  The most recent data we can get our hands on comes from the 2009 report.  Appendix Table 1 breaks down the median net worth of different wealth groups in the United States.

Alas!  We have a problem.  The Federal Reserve only gives us the top 10% of net worth, not the top 1% of net worth.  If you want, you can download the Microsoft Excel tables and have fun looking at the numbers; there is a lot of information in spreadsheets.

It Might Be Best to Look to the Expert Academics About the Top 1% of Wealth

The best place to go from here is to use some basic math.  In 2009, the median net worth of the top 10% of wealth in the United States was $1,569,000.  That is, if you had exactly that amount, half of the top 10% would be poorer than you and half of the top 10% would be richer than you.  You would be standing exactly in the middle.  By definition, we know that this must be the cut-off for the top 5% of net worth.

In other words, the moment you hit the top 5% of net worth in the United States on a “sticker” basis (excluding all of the things that stand between you and your money, such as withdrawal taxes on your 401(k) plans) you would have needed $1.569 million in 2009 on a simple assets – liability basis.  That would make you richer than 950 out of every 1,000 Americans.

That is our lower threshold against which we can check data.  From here, we can either start crunching the data ourselves or turn to academics who specialize in the complexities of the arcane.  The cutoff for the top 1 percent of American households, in terms of net worth, is about $9 million, according to New York University Economics professor Edward N. Wolff. His estimate is based on his extensive analysis of the Federal Reserve Board’s Survey of Consumer Finances, which put the figure at $8.2 million in 2007, he said.

That means we know from our own analysis that the top 5% of wealth on a sticker basis begins around $1.5 or $1.6 million and, if Professor Wolff is correct, the top 1% of wealth begins at around $9 million.

If the Federal Reserve Data and Professor Wolff Indicate the Top 1% of Net Worth Cut-Off is $9 Million, Why Is the IRS Figure So Much Lower at Less than $1.5 Million?

Here is where things get really interesting.  The Internal Revenue Service, the United States agency responsible for collecting and enforcing our tax system, releases a treasure trove of data on high-income tax payers through a special division known as the Statistics of Income Division, or SOI.  They use this income to estimate household net worth of rich taxpayers utilizing a special technique known as the estate multiplier that was made popular more than a century ago when Congress became concerned about the disparity between the rich and poor.  It is fairly complex and includes things such as a buffer for estimated underreporting of taxable income but long story short, the agency looks at tax returns, capitalizes the earnings power at a reasonable rate, makes adjustments, and values taxpayers just like a businessman might value a company.

Using that method, the IRS says that as of 2004, the last year “official” data was released, there were 1,555,000 individuals in the United States who had a net worth equal to or higher than $1.5 million.  They break it down by gender and estimated net worth bracket.  You can even find out how many of these high net worth individuals live in a specific state.

That doesn’t do us a lot of good because to figure out how many 1,555,000 individuals are as a percentage of the population, we need to know the population base for the same year.  We can get this from the Bureau of Labor Statistics, which aggregates Census estimates in a publication known as the Statistical Abstract.  In 2004, according to the National Intercensal Estimates (2000-2010), Sex and Age table column G row 40, there were 219,507,563 men and women who were legally adults.   Should we include only adults?  Probably not because, after all, there are some multi-millionaire child stars but we’re more likely to get close to what we’re looking for by excluding those exceptions.

Comparing the two figures, it shows that there were 219,507,563 adults in the United States in 2004, of which 1,555,000 were estimated by the IRS SOI to have a net worth of at least $1.5 million using the estate multiplier technique.  That puts the probability at 0.71%.  Yes, this data is several years old at this point, but that means that the entry point to the top 1% of wealth would be less than $1.5 million (probably around $1.2 million).  With even minor inflation adjustments, the figure would be higher today.

The academic problems of reconciling the two methods for calculating the top 1% of wealth in the United States used by the Federal Reserve and the IRS led to Barry Johnson of the Statistics of Income (IRS) and Kevin Moore of the Board of Governors of the Federal Reserve System to co-author a paper called Using the Tax Data to Estimate Wealth for Key Segments of the U.S. Population.  The paper details the problems (e.g., figures for the Survey of Consumer Finances tend to be inflated, whereas figures for the IRS are often simplified and sometimes under-reported).  On the other hand, the IRS figures purposely exclude things such as rights to an income stream held in trust since the asset doesn’t “belong” to the person but they still benefit from it, as explained in Updating Techniques for Estimating Wealth from Federal Estate Tax Returns by Barry W. Johnson of the IRS in a paper that gives a good overview of the estate multiplier method.

The conclusion: Both tend to show the same trends therefore both are useful for augmenting an understanding of the top 1% of wealth in the United States but the estate multiplier technique allows for finer, more specific results than the Federal Reserve data, despite its limitations due to variability of death rates.  That is why it is possible for you to hear The Wall Street Journal talk about how 8% of American households, or 1 out of every 12.5 households, have a net worth in excess of $1 million, yet turn around and get a wildly divergent statistic from another government agency that puts the figure much lower.  I’m in the latter camp because taking the raw asset minus the raw liability figures is misleading and leads to gross overstatement of net worth for the top 1% of wealth.

(For those of you who are interested, the IRS SOI division also provides a lot of other great information on gift tax returns, estate tax filings, and charitable donations.)

Why I Prefer IRS Estimates for the Top 1% of Net Worth to Federal Reserve Estimates of the Top 1% of Net Worth

For reasons that are somewhat complex, I favor the IRS method to the Federal Reserve method.  Not only has it been used for the past century with sound, well-established math, it more accurately reflects economic reality in my opinion.  An example from the comments section, which caused the update to this article, might help you understand my preference.

Imagine that two men each own $10 million worth of Coca-Cola stock as their sole asset.  Neither has any debt.

• John owns his $10 million in Coca-Cola shares through a Traditional IRA.  When he takes the money out of the retirement plan, he will be forced to pay the 35% ordinary income tax rate, leaving him only $6.5 million.
• Tom owns his $10 million in Coca-Cola shares directly.  When he sells the stock, he will owe only the 15% long-term capital gains tax rate, leaving him $8.5 million.

It doesn’t stop there.  Offsetting Tom’s advantage is the fact that John can pay no taxes on the dividends he receives on his Coke stock as long as it is held within the account.  At today’s rates, that means John, despite having a lower net worth, would be able to keep all $280,000 of his yearly Coke dividends but Tom would have to give up 15% in dividend taxes, or $42,000, leaving him $238,000 per year.  Both men have the same asset with the same market value.  Both men have no debt.  The true net worth of each man is considerably different due to contingent liabilities, deferred taxes, and other factors.

The Federal Reserve sticker net worth data reflect none of this.  To be fair, it can’t.  There simply isn’t a computer large enough in the world to possess all of that information and process it in a dynamic system with countless variables and incomplete reporting. Without accounting for how much money a person could walk away with, the $9 million net worth figure necessary to enter the top 1% of wealth in the United States is simply too high, in my opinion.  Perhaps the IRS figure is too low.

This illustrates why I urge you to use the older, British method of measuring wealth where you focus on how much cash flows through your hands each year.  It is much harder to fake.  It also gets closer to utility.  If you earned $344,000 in 2009, you made more than 990 out of 1,000 of your fellow Americans.  You were the top 1%.  A lot of this income came from capital gains and dividends, yes, but while all those in the top 1 percent are certainly well off, the vast majority still go to work every day.

It is still imperfect – after all, if you held all of your money in a retirement account and earned millions of dollars a year in tax-free income that you couldn’t touch, not a penny of it would show up and you wouldn’t be considered the top 1% – but that is a tolerable fault because, again, it gets back to utility.  What counts with money is what you can do with it.  Unless you have the ability to transform an asset it into goods or services as a claim check on society, it is financially worthless.  The Germans found this out the hard way following World War I.

Dividing the Top 1% of Wealth Into Two Groups

One thing I found interesting about a college department’s website on the top 1% called Who Rules America is an article written by an anonymous wealth manager who clearly disdains the nature of economic allocation currently prevalent in our nation.  Among his observations are his belief that the top 1% can be divided in half.  As he put it:

The 99th to 99.5th percentiles largely include physicians, attorneys, upper middle management, and small business people who have done well. Everyone’s tax situation is, of course, a little different. On earned income in this group, we can figure somewhere around 25% to 30% of total pre-tax income will go to Federal, State, and Social Security taxes, leaving them with around $250k to $300k post tax. This group makes extensive use of 401-k’s, SEP-IRA’s, Defined Benefit Plans, and other retirement vehicles, which defer taxes until distribution during retirement. Typical would be yearly contributions in the $50k to $100k range, leaving our elite working group with yearly cash flows of $175k to $250k after taxes, or about $15k to $20k per month.

He goes on to explain that beyond that, you get into people who build and sell businesses, investment bankers, corporate executives, real estate developers, and a handful of other careers.  He mentions that, on occasion, a particularly intelligent physician or attorney will come in with a net worth of $15 million to $20 million as a result of wise investments but they are rare.

It is true that, using the Federal Reserve figures, almost half of the top 1% of wealth made less than $500,000 in income and 5 out 6 of the top 1% of wealth made less than $1,000,000 in income.  But that only serves to strengthen the argument that the IRS net worth estimates are closer to reality.  Otherwise, there are a lot of very rich people earning terrible returns on their capital.  You don’t get rich by doing that.

The Wrong Focus (and How to Think About Money)

The article itself is useful but the author seems somewhat disenchanted and bitter.  I don’t agree with his conclusions on the nature of the bottom half of the top 1% but I think it probably comes down to a basic disagreement about the nature of the world.  How so?  A scenario might help.

Imagine you are 50 years old.  You have a net worth of $2 million, putting you in the bottom half of the top 1% of wealth based on the IRS methodology in the United States.  You own three (3) Dunkin’ Donut franchises in the town in which you grew up.  You love your job.  You have no debt.  You wake up every morning and go in to the business to make products and oversee your operations, and to eventually experience the morning rush, which is your favorite part of the day.  You serve the same construction workers, the same doctors, the same teachers, and the same retirees.  You get to know them.  You talk about your lives and bring a smile to their face.

According to our anonymous author, you would be nothing more than “a workhorse” for the other half of the top 1% of wealth.  Those were his words.

I think that belief is asinine.  You get to do what you love every day, you get to do it surrounded by people you enjoy, and you have enough money to buy the things you desire.  Furthermore, you will have a chance to leave something to your children to help them build their own lives.  As long as you are happy, what more could you desire?

Personally, I would consider you, the donut maker, a wild success, far more so than I would an investment banker with $10 million who spent his nights worrying about the direction of the Yen relative to the Pound Sterling, obsessing over whether his bonus was a little bit bigger than the guy in the next office, chugging Pepto-Bismol, and trying to make enough money to “get out” of the rat race.

This author seems to think that more money is always better and that those who are richer must, by definition, be happier and more powerful.  It’s almost a god-like obsession with mammon.  I just don’t understand it.

As I’ve said too many times to count, money is a tool.  It is only useful for you depending on your own utility.  That is a central theme that runs through the body of work I’ve built over the past decade.  If you are the type who enjoys gold-plated dinnerware and driving a Bentley, then the admission price for success is higher.  But you are no more successful than a guy who likes McDonald’s and Cokes who has everything he wants despite a fraction of the net worth.  Wealth is a means not an ends.  Then again, maybe the fact I understand the nature of money is why it was always so easy for me.

I also suspect that for this type of personality, the real motivation is something other than money, as I explained in an article called To Have a More Successful Life, Understand the Motivations and Motives of Yourself and the People Around You.  Specifically, I told you:

If you say someone is motivated by money, it doesn’t tell you much.

• Is he motivated by a need for security due to anxiety about losing his home or standard of living?
• Is he motivated by the desire for expensive things?
• Is he motivated by the belief that money makes him valuable and desirable because he has no self-worth?
• Is he motivated by the fun of making money?
• Is he motivated by the desire to leave a legacy for his children?
• Is he motivated by money as a ranking system to help him stack himself up against his neighbors and colleagues?
• Is he motivated by the desire to build something that can improve civilization?

If you are in the top 1% of wealth and you are still dissatisfied, it’s not money you’re seeking.  (By all means, continue to make it and grow your net worth – that’s my plan so I can give it all to the Kennon & Green Foundation) but don’t think that happiness expands along with the figures on your balance sheet.  I’m just as content and thrilled with life as I was when I was 20 years old and studying Mozart and Beethoven in my undergraduate years despite enjoying a drastically higher net worth and standard of living.

More money is almost always better but only if the opportunity cost is one that doesn’t exact too high a toll on your true desires.  For example, if someone offered me $25 million after taxes to spend the next 25 years of my life logging trees in the Pacific Northwest, physically cutting down timber, being exposed to the elements, and risking life and limb, it would take no more than a fraction of a second for me to resoundingly reject their offer.  Yet, another person would be thrilled to do the same work and get paid $100,000 per year.  There is a vital lesson on the nature of happiness in there.  If you never learn anything else from my writings, I hope it is that money exists to serve you.  You should not serve it.

A Case Study and Demographic Breakdown of the Top 1% of Wealth

Who are the top 1% of wealth?  If you are interested in examining the richest of the rich, you can read more in an article called The New Elite: A Look at the Top 1% of Wealth and Net Worth in the United States.  The most surprising statistic is 80% of the top 1% practice “stealth wealth” so that not even family members or friends know about the wealth.