7 Surprising Facts About Millionaires
| September 3, 2010 | Posted by Roshawn Watson under Uncategorized |
By: Roshawn Watson
Culturally, we are plagued by images of “bling this” and “bedazzle that”; however, how many “artifacts of wealth” are truly held by real millionaires?” The commonly held myths about the wealthy are so abundant that several have made careers out of dispelling them. Here we discuss seven popular misconceptions to paint a more accurate portrait of the prototypical millionaire.
Millionaires Don’t Pay Their Taxes
A new paper by Greg Mankiw entitled “Spreading the Wealth Around: Reflections on Joe the Plumber” conducts a rigorous analysis and debunks the rumor that the “rich don’t pay taxes”, citing the Congressional Budget Office calculations.
The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent of its income in federal taxes. The middle fifth, with income of $56,200, pays 13.9 percent. And the top fifth, with income of $207,200, pays 25.1 percent. The richest 1 percent, with an average income of $1,259,700, forks over 31.1 percent of its income to the federal government.
Accordingly, he concludes that it is simply inaccurate to argue that we do not have a progressive tax system and that the “best analysis shows that average federal tax rates rise steeply with income. For more on the topic, check out Do The Rich Pay Their Fair Share Of Taxes?
Millionaires Just Inherited Their Money
We all know the story of the spoiled heiress who spends her days sipping her beverage of choice by the pool, shopping, or waiting for her next scheduled appearance at the latest club or event opening. This is the protypical “trust-fund baby.” However, inherited wealth is far less common than you might think. Eighty percent of millionaires are first-generation rich, and roughly 65% have been wealthy for less than 15 years according to a study by American Express Publishing. Also, consider that just because you come from money doesn’t mean you will inherit it. Many wealthy don’t feel obligated to contribute to their grown children’s lifestyle or net worth. Forty-six percent of children from wealthy parents never receive an intergenerational transfer of wealth: not one dollar’s worth of inheritance.
Millionaires Feel Rich
Most millionaires do not feel rich simply because they are not. Two-thirds of millionaires have a net worth below $2.5 million. Fidelity recently did a study that says one needs at least $20 million to “feel wealthy.” Thomas J. Stanley also says one needs at least $20 million and $2 million a year in income to fit into the glittering rich (affluent lifestyle and high net worth) category. Now of course, many can feel rich on significantly less, but the truth is that the vast majority of millionaires have some of the same concerns as non-millionaires: retirement-planning, educating children, taxes, etc. The primary distinctions are that they have better financial leverage and may often be better equipped (through their own efforts or through careful employment of advisers) to handle some of these challenges.
Millionaires Have High-Paying Jobs
Millionaires typically do have high incomes, but over 50% of millionaires are self-employed or business owners. In my recent review of The Thomas Crown Affair, I wrote that people who are their “own bosses… can control (their) income capacity, taxes, and expenses.” Of course, these advantages are tremendous in the accumulation of wealth. Additionally, I commented on how elusive job security is in today’s market. “No degree or amount of experience can guarantee that you won’t be out on the street tomorrow.” Imagine what will happen to your wealth-building plan if you are down-sized, given the fact that your income is your most powerful wealth-building tool. Of course, this is why I always emphasize focusing on financial security and independence.
Millionaires All Drive Fancy Cars
Thomas J. Stanley recently described the two types of drivers of premium vehicles: those who are rich and those who act rich. Statistically, which type of driver do you believe is more common? Obviously, the actors are substantially more common and struggle to pay for their artifacts of prestige, wealth, and success. You may wonder why would someone with a net worth that exceeds 99.7 percent of the population (i.e. a decamillionaire) drive a boring car. It is generally because they could care less about impressing anyone by their ability to drive a luxury car. Accordingly, Stanley’s research shows that Toyota is now the most recently acquired vehicle by millionaires. In terms of overall market share (over 10 years), Ford is the most common make. It is not a coincidence that non-luxury brands are the top picks amongst millionaires.
Millionaires Hang Around the Golf Course All Day
About two-thirds of millionaires work between 45 and 55 hours a week. Again, your income is your most power wealth-building tool, so you certainly don’t want to unplug that. Of course, millionaires typically receive portfolio and passive income as well. One could argue that they several millionaires no longer need to work. This is true for most millionaires because millionaires typically are frugal and could survive for at least 10 years or more without working. However, most millionaires also enjoy love their work. Last week, I listened to Sam’s interview (from Financial Samurai) with Consumerism Commentary. I was not surprised to hear him emphasize being able to retire but still working. If you enjoy your career, why not work. Consider that 86% of millionaires love their careers. Of course, you also have a higher probability of succeeding at something you love anyway.
Millionaires Are Elitists
Some are and many aren’t. By now, you may not be surprised to learn that many live in blue-collar neighborhoods where their wealth exceeds their non-millionaire neighbors by over six-and-one half times. Interestingly, most millionaires don’t want to be around people who have a high-consumption lifestyle either. Such neighborhoods are incongruent with their values. Side note, I deal with elitists all the time by virtue of my profession. I doubt very many of them are millionaires. You definitely don’t need to have a high net worth to think you are superior.
There you have it: your inside scoop into the real millionaire. Don’t allow yourself to be force-fed by marketers and mass media into believing that a celebrity or wall-street executive represents the typical millionaire. Stanley estimates that less than 100,000 people are financially able to build substantial wealth while adopting a very glamorous lifestyle. This means that the other 2,766,000 affluent households (investible assets at least $1 million) are decidedly more frugal and economically productive after all.
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What do you think is the most popular misconception about the wealthy?
I thought this was a very interesting comment in your post: "Additionally, I commented on how elusive job security is in today's market. "No degree or amount of experience can guarantee that you won’t be out on the street tomorrow."
Most of us think that having more more will make us more secure and is the motivation of many to acquire it. But you are correct. The unexpected can happen to us all.
Absolutely, the only security is in our skills, talents, knowledge, etc. AND our ability to market them effectively. Thanks so much for the comment Carol!
I completely agree with you. Only a naive person would relentlessly attack the rich for being rich. The way that the free market works is that one person's wealth is not at another expense. Most of us are much better off because there were Bill Gates (even if you think he's evil incarnate), Steve Jobs, Larry Page, etc….
Do you think that more and more people are learning to understand this today?
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Hey Kevin,
Very cool description of the free market. I love it! There is enough pie for everyone, so why begrudge those who have actually cut generous slices.
Personally, I think there is more resentment against the wealthy today than there has been in quite some time. With the internet, a lot of things that were private are now very accessible to the general public. Now, we know for sure that you fly private (we have the photos) or that you dine at restaurants that costs 10's of thousands of dollars. Consequently, people watch as jealousy and envy set in. I don't think the general public has an accurate image of the wealthy at all; they think that the wealthy are aloof or greedy.
I'm glad for authors who write what common sense should tell us all: the rich didn't get wealthy by being idle and wasteful in most cases. This is regardless of whether one is talking about the billionaires that you mentioned or the millionaire next door.
My recent post 7 Surprising Facts About Millionaires
Hey! You found an old one! This is quite a thorough, high quality post!
$20 million, and $2mil a year to feel rich? That has to definitely be true!
I think $750,000 a year is enough to feel rich, b/c you can save $300,000/yr after tax with it and still lead a damn good life.
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Hey Sam,
Thanks for the kind platitudes.
I certainly get where you are coming from with respect to "feeling rich." I have no doubt that one can do a lot with $750,000/year (15X median household income). It all boils down to what is one's definition of rich. If someone wants to purchase a Maybach every year (~$300-$400K), charter a private jets ($20-$100K per year and more), shop and Burberry and Louis Vuitton, purchase major bling, and be a generous philanthropist (i.e. $75,000, 10%), that $750,000 could make one feel just as financially inadequate as $75,000. Of course, this doesn't even count the cost of personal drivers and chefs, and the maintenance of your fabulous crib. I forgot the biggest expense: taxes! Of course, if you are rich, you "must be evil and need to be punished." The government is going to want a 50% slice ($375,000) of that.
If you have a more scaled back definition of rich, $750,000 can be plenty. Again, with $750,000 per year you are certainly a member of the financial elite. I think the irony is that most people who want the jet-setting lifestyle have the financial deck stacked against them because of the enormous difficulty to build wealth while glittering!
My recent post 7 Surprising Facts About Millionaires
$7 million at approx. $300k p.a. is certainly not enough to make me feel rich, but then again, if you ask any millionaire how much they would need to feel rich, they tend to say "about double" 😉
I certainly get your point and agree. I recently read that one's contentment about his wealth is often based on his peers' wealth. If he surrounds himself with people who have a significantly higher net worth, he will be miserable. Thus, it is almost always possible to feel broke if he is around someone who is richer.
Thanks for the comment,
Shawn
My recent post 7 Surprising Facts About Millionaires
Not so much my peer's wealth, more about being able to pay the bills: private school fees x 2; house in the USA; house in Aus; trips [now we COULD cut back on this one … 4 o/seas trips this year … ridonculous!] the list goes on 🙁
But, I don't imagine that I'll get much sympathy from the PF blogosphere 🙂
Yes, you probably exhausted the sympathy card with the 4 overseas vacations 🙂
I still wonder though why your spending is at this level. Since the wealth of your peers is a non-issue, it sounds like your motivation may be just an intuitive desire to live the good life and your ability to afford it. This is very interesting indeed!
Regards,
Shawn
My recent post 7 Surprising Facts About Millionaires
Yes, I read your story last night and several of your articles this morning. You have very interesting philosophies. Additionally, you are proven, which is such a rarity in the PF world.
As I understand your number philosophy, it really doesn't matter what your allocation of wealth is beyond your number. Thus, you could spend, continue investing aggressively, and give while being comfortable. I also really like your leadership video – the first follower, not just the leader, is deserving of more credit. Their following is validation for the leader and serves as the impetus of the movement. Very good stuff!
Side note, I am all for people enjoying their money. I am frugal, but only from the calculated consumption standpoint. A life of deprivation has no interest to me. Kind regards!
My recent post 7 Surprising Facts About Millionaires
Hi Shawn, Agreed! But, let's not forget, a million isn't what it used to be! Considering inflation, the reality is that a million is worth a lot less than in the past. That said, all millionaires are not the same, just as all members of any group are the same! Thoughtful post.
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Hi, about millionaires and taxes, millionaires are able to have an effective tax rate that is much lower than the federal income tax rate because much of their income is capital gains and investments. They may be "masters" of doing this but that doesn't mean that this shouldn't be counted as part of their real income when assessing what they are truly paying in taxes.
If I make $1.2mil a year (372,000 in taxes) and have $50mil invested making me $3mil capital gains a year at a very conservative 6% rate of return ($450,000 in taxes), my real effective tax rate is 19% (closer to Warren Buffet's stated rate).
That's not progressive. Regular people making <$100,000 a year, try as they might cannot have millions invested making more millions that are being taxed at just 15%.
Hello,
Very interesting comment. The type of income DOES matter, and many millionaires' effective tax rate is less than their total income if they receive portfolio and passive income. You pay capital gains taxes on paper assets when you sell or when you receive a dividend. At the core of you comment are the questions "should you pay taxes on unrealized capital gains?" and "should we tax dividend at a qualified or ordinary income level." You are suggesting that we should tax dividends at ordinary income and tax unrealized capital gains, and I have a different perspective. If you have put yourself in a position so that you can leave those investments alone for an extended period of time, why should you have to pay taxes on the gains before you are ready to sell? One year you may be down 50%, so is the government ready to collect no taxes from you in the those years? I think not. Additionally, if you purchase a dividend-paying equity, why should you have to pay a ordinary income tax when you purchased the equity with "after-tax dollars." That's double taxation at its ugliest. I don't believe that we should punish people who have been economically productive. The tax code IS progressive because people who earn the most pay the most taxes. I don't even know that an income tax is moral anyway.
I also don't see how not paying taxes on unrealized capital gains differs from home appreciation or increases in value of a 401K or Roth IRA. If you are able to sell your home for $240K more than the purchase price as a single individual, you will pay no taxes. This occurs despite earning an extra $240K that year. However, if you earn $260 as a single individual you have to pay taxes. In both cases your home increases in value and you didn't have to pay capital gains taxes until YOU were ready to sell.
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Hi your restatement of the core of my comment is not at all what I meant.
I'm certainly not suggesting you pay taxes on "unrealized" capital gains, that would be ridiculous, I agree.
But when they do sell these investments, they pay only 15% on the gains. The gains… we are not talking about the after-tax dollars used to purchase the equity.
You don't pay taxes on the cost of the equities you buy. You pay on the GAINS, how much you made above and beyond what you paid. This is pure income. These are not your after-tax dollars. This is what your after-tax dollars made by sitting around in an investment, exactly like interest. Why is money made by sitting around taxed at 15% and money made by hard work taxed at 30%?
The only good reason for this is to encourage investment in the economy, which is a decent reason, but the difference in rates is excessive I believe. A bit of a break is good, as motivation to invest. But not as much as it currently is.
Thanks for commenting again. I do understand your perspective a lot better now. I will say that I have heard some people argue that it is unfair that people can earn millions in unrealized capital gains without paying taxes until they sell,so I did think that is where you were coming from.
So the capital gains rate (presently 15% but likely 20% next year) is lower than the 40% income tax that the government demands for ordinary income from high earners. I am certainly aware of that. One issue with raising capital gains tax is that there are plenty of non-millionaires that earn portfolio income. I would argue that most people who earn portfolio income are not millionaires. Many of these people have tax rates at 25% or higher, and they are not clamoring for a tax increase on their portfolio income. Perhaps , some feel that we should give exemptions to people who earn less than $X0,000 per year. That's hardly fair either. The other issue that I have with increasing capital gains tax is that if these millionaires were to go out to Vegas every night and blow their money, they would pay less in taxes (sales tax) than if they would if they saved it or invested wisely. What a disincentive for being responsible! I think that sucks personally.
This is why I am a fan of the flat tax. The biggest problem with this tax though is that it tends to be regressive, but the big advantage is that we won't have 50% of people paying no income taxes!
I don't believe that the rate difference is too excessive. I believe a lot of us pay too much in taxes already, not just millionaires, but that is another discussion altogether.
Kind Regards,
Shawn
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Great post… very interesting. Reminds me of a book that was in high circulation a few years ago called "The Millionaire Next Door."
Question for all you millionaires: Where can I find, in your opinion, the single best summary of steps one would need to take to become a multi-millionaire?
I've got about $1 million in the bank, stocks, and a plot of land I bought outright. Most of this is in cash, though about $175K is in a 401(k) plan (down $50k from the market peak) from an old job. Another almost $150k is in a SEP plan I started three years ago.
I haven't invested the majority of it because, frankly, everything has looked so unstable of late. But I know that it's just eroding under the forces of inflation.
So now what?
I'm self-employed and average about $300K per year. I work out of home and spend a lot of time with my young family, traveling in Europe. It's a pretty sweet situation for now… but long-term, I know that being a just-barely "millionaire" isn't nearly enough.
In my shoes, what would YOU do next?
P.S. I don't have any interest in a "bling" lifestyle. But you'll notice I didn't mention owning a house anywhere. Is that really a 'must do?' We rent in a major European city instead. I have a car Stateside, but it's a '94 Honda. It's parked at a friend's house. We use it when we're over there.
Fabulous point… "Wealthy people think in terms of earning enough passive income that will pay for the lifestyle that they desire." I guess by a crude definition, that's exactly what being wealthy means: passive and portfolio income substantial enough to live off of. The inheritance belief is widespread: some people simply refuse to believe that the many of the wealthy are more economically productive than them.
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If the capital gains tax were on actual profits, then that might be okay. But, if the income is based on ten years of work that finally paid off, shouldn't there be an adjustment for the inflation that took place in between. For example: $10,000 invested 10 years ago should have nearly been worth $14,300 even at 3.5 percent inflation. To me, it would be unfair to tax the difference at all if the current value is $14,300.
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I take some issue with the first point, about the tax rate for the rich as contrasted to other brackets. The analysis is done only on federal tax rates. This focus is overly narrow – you get a completely different answer when you include all forms of taxation.