Why bother to save and invest, if your savings produce no income?
This is not a philosophical question. It is a practical question. It’s also a question that Mr. Bernanke, the Chairman of our central bank, has yet to ask.
We shouldn’t be annoyed at Mr. Bernanke, however, because he’s not alone. The AARP, the famed protector of unfortunates still living after age 50, has yet to remark that low interest rates and low dividend yields may be a hardship for older folks such as the Solvent Seniors mentioned in a recent column.
The poverty of yield
Today, a 5-year Treasury obligation yields a mere 1.9 percent. The S&P 500 Index stocks provide a nearly identical average yield. Mix them in a 50/50 portfolio and you’re still under 2 percent. That’s one-third of the 6 percent yield of the same portfolio in 1990. If the investment world had endangered species, interest and dividends would top the list.
Absolutely no one is speaking up for the idle rich (sometimes called “the filthy rich”). These are the people who have managed to avoid the indignity of work by carefully choosing their grandparents (or parents), by having a magical IPO Moment late in the last century, or by having saved and invested in the Camelot Period of investing, when it actually produced a return.
We need to be concerned for the idle rich, if only because we will all someday be idle. When that happens it is best to be at least slightly rich because if you’re going to be idle, you’d better be rich or you‘ll have no money to spend.
The inflation of rich
The problem we all face is that “rich” is inflating fast. With interest rates still declining, it takes ever more money to produce the same amount of income. According to my Life of Riley Index, for instance, you’ll now need $3,734,300 if you want to count yourself in the top 25 percent of income in America without actually working and without collecting Social Security. This is a new record. (See chart below.)
It’s more than a bit worrisome that you’ll need that amount— roughly $3.7 million— to produce an income just under $70,000 a year. How much would you need if you want to buy some of the glitzy things advertised in the Robb Report? Or Vanity Fair? Or Vogue? Or Town and Country?
Can you say Gazillion?
We can answer the question with a visit to our friends at the Internal Revenue Service. On their website they regularly provide a distribution of income analysisthat shows the threshold income needed to be in the top 1 percent, top 5 percent, top 10 percent, top 25 percent and top 50 percent of households in America.
Describing all rich people as “filthy” rich isn’t very useful. So I have created five categories of rich that match the percentile distinctions used by the IRS. Here they are:
- The Merely Dirty Rich. This is entry level wealth, the kind you need to get to the middle of the income heap, the 50th This year, that requires $34,511 of income which, in turn, requires having $1,845,500 in savings. It’s a good reason to keep your day job because it’s like having more than a million dollars— as long as you don’t try living the way you think millionaires should live.
- The Soiled Rich. This is the entry level for the top 25 percent— the level used in my Life of Riley Index. You’ll need an income of $69,834 to join this group, which will require having $3,734,300.
- The Lousy Rich. This level, the top 10 percent of households, requires an income of at least $118,626 or capital of $6,343,600. This may seem like a lot of money, but Harvard doesn’t even consider it “middle income.”
- The Filthy Rich. This year you’re probably in the top 5 percent of households if your income is $167,983. To have that income without working you would need $8,983,000.
- The Truly Smutty Rich. Being in the top 5 or 10 percent is a bit like winning the silver or bronze in the Olympics. It’s certainly an accomplishment— way, way better than most income athletes do— but it isn’t the top 1 percent. To be there, you need an income of $430,446. That, in turn, would require a whopping $23,018,500 in savings and investments.
Today, working is close to priceless.
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The Life of Riley Index, 2010 (or, how much money you need to be independently upper middle class) |
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| This table shows how much you need in financial assets to produce an income at the 25th percentile of all American households. The actual amount could be changed by substituting investments with different yields than the S&P 500 index and 5 year Treasury note that are used in this example. | |||||
| Year | S&P500 Yield | 5Yr Treasury Yield | 50/50 Portfolio Yield | Top 25% Income Threshold | Portfolio
Required |
| 1986 | 3.49% | 7.30% | 5.40% | $ 32,242 | $597,627 |
| 1987 | 3.08% | 7.94% | 5.51% | $ 33,983 | $616,751 |
| 1988 | 3.64% | 8.47% | 6.06% | $ 35,398 | $584,608 |
| 1989 | 3.45% | 8.50% | 5.98% | $ 36,839 | $616,552 |
| 1990 | 3.61% | 8.37% | 5.99% | $ 38,080 | $635,726 |
| 1991 | 3.24% | 7.37% | 5.31% | $ 38,929 | $733,817 |
| 1992 | 2.99% | 6.19% | 4.59% | $ 40,378 | $879,695 |
| 1993 | 2.78% | 5.87% | 4.33% | $ 41,210 | $952,832 |
| 1994 | 2.82% | 6.68% | 4.75% | $ 42,742 | $899,832 |
| 1995 | 2.56% | 6.77% | 4.67% | $ 44,207 | $947,631 |
| 1996 | 2.19% | 6.07% | 4.13% | $ 45,757 | $1,107,918 |
| 1997 | 1.77% | 5.77% | 3.77% | $ 48,173 | $1,277,798 |
| 1998 | 1.49% | 5.15% | 3.32% | $ 50,607 | $1,524,307 |
| 1999 | 1.25% | 5.54% | 3.40% | $ 52,965 | $1,560,088 |
| 2000 | 1.15% | 6.15% | 3.65% | $ 55,225 | $1,513,014 |
| 2001 | 1.32% | 4.55% | 2.94% | $ 56,085 | $1,910,903 |
| 2002 | 1.61% | 3.82% | 2.72% | $ 56,401 | $2,077,385 |
| 2003 | 1.77% | 2.97% | 2.37% | $ 57,343 | $2,419,536 |
| 2004 | 1.72% | 3.43% | 2.58% | $ 60,041 | $2,331,689 |
| 2005 | 1.83% | 4.05% | 2.94% | $ 62,068 | $2,111,156 |
| 2006 | 1.87% | 4.75% | 3.31% | $ 64,702 | $1,954,743 |
| 2007 | 1.86% | 4.43% | 3.15% | $ 66,532 | $2,112,127 |
| 2008e | 2.37% | 2.80% | 2.59% | $ 69,087 | $2,667,452 |
| 2009e | 2.36% | 2.13% | 2.25% | $ 68,841 | $3,059,600 |
| 2010e | 1.84% | 1.90% | 1.87% | $ 69,834 | $3,734,300 |
| Sources: IRS, Bloomberg,Morningstar, Author Calculations | |||||
On the web:
The Bureau of Labor Statistics Inflation Calculator: http://data.bls.gov/cgi-bin/cpicalc.pl
The IRS tables of income distribution: http://www.irs.gov/taxstats/indtaxstats/article/0,,id=133521,00.html
Solvent Seniors column: http://assetbuilder.com/blogs/scott_burns/archive/2010/03/19/the-great-american-bank-robbery.aspx
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Scott Burns
(c) A. M. Universal, 2010