OOTS On Wealth – $407,000 Will Make Some People Feel Rich

by Ann C. Logue on June 15, 2011

photo by BrCruz/Flickr, used under a Creative Commons license

In this latest installment of our OOTS on Wealth series – in which we examine what it means and how much money it takes to feel and be wealthy in America – writer Ann C. Logue finds that $407,000  – that’s right, $407,000 – is enough to feel and be wealthy. At least it should be.

Let’s state this up front: if you make $250,000 or more per year, you’re making more money than almost everyone else, and to say otherwise is to whine. The Census Department reports that the median family income in 2009 was $49,777 and that only 3.9% of American families had incomes of $200,000 or above (the data don’t break out families with incomes over $250,000, but suffice to say that they make up less than 3.9% of the population.) Hence, it’s easy to see why $250,000 is used as a number to identify who is rich. That’s more money than about 97% of the people in this country make. If you don’t see that, you need to get out more.

Barack Obama’s budget proposal calls for an increase in income taxes on people making $250,000 per year or more, designed intentionally to bring in income from those people who are more likely to be able to afford it than, say, that median family with the $49,777 income.

And yet, people who have high incomes are complaining. The saddest story that raged in the media last fall was of a University of Chicago law school professor with no money left after spending his family’s $300,000 income on a big house in an expensive neighborhood (Kenwood) of an expensive city (Chicago), private school tuition for his three children, and the services of a gardener. With $60,000 per year in tuition, $48,000 per year in a mortgage, $14,000 in property taxes, $12,000 per year for miscellaneous utilities, $12,000 per year for groceries (as I assume that the good professor is not interested in clipping coupons or buying the store brand), another $12,000 for health care (no generic drugs or skipping dental appointments to save money), $9,000 for a gardener (assuming pay of $9.00 per hour, 20 hours per week, 50 weeks per year), and another $10,000 to maintain two cars, the professor has a pretty expensive life. Now, I’m guessing that he wants to his family to dress well, so let’s add another $24,000 for clothing rather than subjecting the Professor Family to Target or hand-me-downs. Throw in $10,000 for a week at Disney World, $5,000 to give the children an over-the-top Christmas, and the Professor Family needs $216,000 in net income to maintain their lives. We’ll assume 25% in total taxes (the property tax accounted for above is deductible), another 7% for charity and 15% for retirement and other savings (10% and 20% respectively on a pre-tax basis), and our professor needs about $407,000 or so in income for the life he apparently wants to lead.

In many cases, $250,000 doesn’t feel rich because the person who has it really wants a lifestyle that costs $200,000 more. Income isn’t wealth; wealth is what is left over after you’re finished spending. Not everyone who makes a lot of money knows how to spend it wisely. However, in this recessionary era, families having trouble keeping their kids in shoes aren’t likely to sympathize with someone who worries that he will have to settle for an Audi over a Mercedes.

There are two mathematical reasons why $250,000 might not feel like as much as it should, though. The first relates to the amount of money needed to generate a $250,000 income. With interest rates hovering at about 1%, $250,000 would be the income off of a permanent endowment of $25 million. The price of a 20-year annuity generating $250,000 per year is $4,511,388 at 1% interest – a lot less than the permanent endowment because there is nothing left after 20 years, but not exactly a bargain. Low interest rates raise the stakes for retirement savings. They hurt people who have wealth. Low interest rates also increase the present value of employee compensation. Let’s face it, not everyone making $250,000 or more is adding enough value for their employers to justify that salary, and that’s a little scary if it’s you.

The second factor is one of statistics. Indentured servitude is illegal in the United States, so the lowest decile of the income distribution has a boundary of zero. It includes income of zero to $15,000 (where 13.0% of households fall). The highest decile ranges from $200,000 to infinity, a really long tail; the highest-paid CEO in 2010, according to Forbes, was Stephen Hemsley of UnitedHealth Group, who brought in $102 million. $15,000 will buy a lot a heck of a lot more than zero will, but it’s not like anyone in that lowest decile is having an easy time of it. On the other hand, $102 million covers more vacation houses, Mercedes-Benzes, and household staffers than $250,000 does.

Whether $250,000 feels wealthy is entirely subjective. In their 1996 book The Millionaire Next Door (Pocket Books), Thomas J. Stanley and William D. Danko report that many of America’s millionaires got that way by starting businesses and saving money. They aren’t interested in the Audi or the Mercedes; they’d rather drive a Ford than let their employees think that they can afford to give out raises. Likewise, there are people on the low end of the income scale who feel rich because they are frugal. If your issue is keeping up with your neighbors rather than buying your groceries, then maybe you have it okay.

There’s another way to look at it: if you follow reasonably conservative financial guidelines and allocate 30% of your income to taxes, 30% of your income to housing, 20% to savings, and 10% to charity, you’ll have only 10% left to spend on everything else. For someone making $250,000, the remaining 10% will still be more money than 24.9% of Americans bring home in total.
The ultimate issue with taxes is that the country is broke. Somehow, we have to pay for the things we want and the money that we’ve borrowed. That means taxes have to go up, starting with those few who are most likely to be able to pay them.

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