Dad, Are We Rich?

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Do you consider yourself rich?  Do others consider you rich?

How Rich is Rich?

A lot of us have a “Number” in mind that would provide financial freedom. It varies a lot from person to person. It raises the question, “how rich is rich?” This issue was addressed in Edward O. Thorp’s excellent book, A Man for All Markets.

An American author, John D. MacDonald, characterized wealth levels in 1970 as follows:

Adequate100K
Comfortable250K
Substantial1M
Impressive5M

 

What do you think of these now? They may still be useful, relevant cutoffs. Of course, inflation has slashed the real buying power of the dollar. Based on inflation adjustments these would be six times larger:

Adequate600K
Comfortable1.5M
Substantial6M
Impressive30M

 

Or we could look at the Dinesh D’Souza wealth version that Thorp adjusted for inflation:

Poor<15K
Lower-Middle15K-82K
Middle82K-750K
Upper-Middle750K-15M
Rich15M-150M
Superrich>150M

 

Or his version based on income:

Poor<22K
Lower-Middle22K-50K
Middle50K-112K
Upper-Middle112K-1.5M
Rich1.5M-15M
Superrich>15M

Getting Rich in America

It struck me as I reviewed these that I started out “poor.” I went to college and became “lower-middle” class based on income & wealth. In residency, I was “middle” class.

As an attending physician, I became solidly “upper-middle” class. Most physicians should be able to reach “upper-middle” income & wealth levels by middle or late-middle career.  As my example illustrates, this is achievable even when starting from poverty.  Almost none, however, will reach “rich” or “superrich” unless they access some other non-clinical cash pipeline (e.g. startup investing, T.V. show on the Oprah Network, patents, large real estate projects, etc.).

Doctors Can Get $1M

A household wealth level at the 97.5 percentile ($1.36M) is achievable for the average U.S. physician. That’s the good news. It is even achievable for a lower income worker who diligently saves and invests. For example, due to the miracle of compounding, 100K growing at 8% becomes 1M over three decades.

But a Million Isn’t That Much

The bad news is that 1M isn’t what it used to be. It would take 20M to match the buying power of 1M from a century ago. Using the popular “4% rule” 1M would generate 40K per year before taxes – hardly a way to live in style! That income is less than 80% of the average U.S. household income. The millionaire group also isn’t that unique or rare in America. There are an estimated 10M households who have a wealth level of $1M or more.

Thorp also used the Forbes 400 list and Vilfredo Pareto’s “power law” to estimate the number of U.S. households at each wealth level. It is fun to peer into the wallets of this rarefied group of Americans:

Number of U.S. Households per Wealth Level

>1M9.3M
>5M1.03M
>10M400K
>20M155K
>50M44K
>100M17K
>250M4.9K
>500M1.9K
>1B730
>1.55B400

 

Before reading, this I thought I knew or had met a lot of rich people in my life. Laughably some consider me “rich.” It highlights the relative nature of income and wealth. It is fun to peek behind the curtains of our rich neighbor’s bank accounts, though isn’t it? It is much like slowing down to look at a car accident. We can’t help ourselves no matter how much we may not want to be a voyeur.

Those Evil One Percenters

This also brings up the issue of “the 1%.” There was a political backlash against this group after the 2008 financial collapse. Just who are these 1% and how much clout do they have? The top 1% of households – assuming 125M U.S. households – would represent the top 1.25M households. Per the above-mentioned power law and data that wealth level is 4M. Are you in the 1% based on this? If so, congratulations! You likely have reached financial freedom if your spending is reasonable (under 13K per month. (4% of 4M = 160K/year). Nevertheless, as you are undoubtedly aware, you do not have much political clout.

It is Really the 0.01%

It is the top 0.01 percent who wield power. As an elite hedge fund manager, you may be able to get Congress or the IRS to consider some of your income capital gain (lower tax rate) rather than ordinary income (highest tax rate). Senior politicians will return your call and give you their ear. That provides invaluable influence. This elite group represents 12.5K households. They each have >$125M. Now that is rich by any measure!

Now, let’s get back to you and me.

Dad, Are We Rich?

My kids have asked me, “Dad, are we rich?” How should I answer that? I don’t want to say yes since I don’t want them going around bragging how they are from a rich family. Plus, I grew up poor and still have some financial insecurities. No future is guaranteed. Besides, I don’t want them asking for more presents and trips thinking that they deserve to be “spoiled.”

I don’t have the answers when it comes to great parenting, but I’m sure I can answer the question objectively. The answer is yes, we are rich – at least on a world scale. We are lucky to be not just in a developed nation but in the USA where per capita income is high and taken for granted.

Rich Doctors

During a typical day, we tend to hang around other “rich Americans” or other “rich doctors.” We don’t concern ourselves with the indigent in rural China or India daily. We get a skewed view of the world where most of the people we associate with have beautiful homes, cars, educations, and vacations. The basics like health care, comfortable housing, indoor plumbing, reliable roads, and stable electric power are always available and taken for granted.

Rich Residents

How do I know we are rich? Well, let’s say you are the average American household or a resident. You feel you can barely make ends meet. You haven’t saved much for retirement and can’t afford the vacations and cars that your neighbors have. Nevertheless, you make 60K per year. What is that on a world-wide scale? Well, you are solidly within the top 1% in the world.

Even Richer Attendings

What about a primary care doctor making 200K? You may feel poor since your friends in subspecialties seem to have an infinite amount of cash for big houses, new cars, country club memberships, private schools etc. You must work long, hard hours just to maintain an upper-middle-class lifestyle. Although that comparative pain is real, consider where you are on the global income scale. That salary puts you in the highest earning segment in the U.S. (top 5%) and even more so on the world scale (top 0.04%).

These numbers are based on income. Using net worth totals usually yields similar results.  Type in your numbers here and see where you rank. I’m betting you will be surprised at how rich you already are.

So, what do you think?  Are you rich?

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21 Comments

  1. Xrayvsn said:

    It is absolutely amazing how the purchasing power has declined via inflation from the 70s to now.

    I am firmly in the upper-middle class based on the above criteria (I do think that it is a very wide swath of wealth levels/incomes though and could have been divided further.

    I’m in. 01% by income and. 1% by wealth. Very cool interactive tool you provided.

    November 12, 2018
    Reply
    • Xrayvsn,

      Inflation is one of those insidious silent killers. Each year the prices don’t seem that much higher. But I remember seeing ads for new cars for $3K when I was a kid. They are ten times that now. Matt Manero argues that the cost of many of our routine expenses have gone up more than 30% just since the year 2000. It is a cautious reminder for those of us who feel good about living on $100K per year now and choosing to FIRE. $100K may not be much in 25 years.

      Yes, I think socio-economic layers can be sliced and diced a lot. I have seen some that list 14 different layers. I’m sure that is true. But I think breaking people into 5 major levels is a pretty good guide about how they live their lives. Most physicians end up upper-middle during their working career.

      I’m impressed at how high on the economic stratosphere you sit. Please remember that when I ask you to buy me lunch at FinCon19.

      November 12, 2018
      Reply
  2. planedoc said:

    I guess I had the opposite problem…when my son was in high school…he asked me “dad, why are we poor?” Bear in mind, we had 2 cars, a solid retirement fund…..and a 3 BR house. His friends at school, had much more….so he thought we were poor!

    I tried explaining…to no avail…that the amount of “stuff” sitting in your house/driveway did not in any way reflect whether or not you were wealthy.

    November 12, 2018
    Reply
    • Planedoc,

      That is hilarious!

      And that is a very good sign that you are raising “grounded” kids. I tell my kids we don’t know how much the neighbors have or make. We only know they spend a lot. They may also owe a lot.

      I had this discussion with Rachel Cruze (Dave Ramsey’s daughter). She felt one of the most important things a parent (with a high income) can do is to not spoil their kids. Her dad never spoiled her and she appreciates that – now.

      You know you have practiced “stealth wealth” when your own kids don’t know! Congrats!

      November 12, 2018
      Reply
  3. I’ve always felt like I was rich, even in medical school. I never seemed to “go without.” I always had enough. I never felt deprived. I was told in medical School that I qualified for food stamps. I said, “no thanks, leave those for the people who need help.” Rich is a state of mind, not a number. Growing up, my family was no where near rich, but we always had enough. We were never hungry. We always had shoes. I can look back and see the difference from where I am now, but enough was always enough, it just became bigger with time.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

    November 14, 2018
    Reply
    • You are wise, Cory.

      I know people who feel deprived and poor no matter how much they make.

      I too have felt blessed my whole life. I grew up in extreme poverty. I had a clue that we had less than others, but most of our friends and relatives were also broke so it wasn’t a big deal. TV and celebrities and social media weren’t the forces they are now so our comparisons were more local. Wealth is a very relative thing. It depends on the comparison group.

      I think my Dad knew that instinctively. He must have wanted us kids to feel grateful, blessed, and rich despite our circumstance. He was continually correcting us if we said we were “starving.” “No, you may be hungry but you are not starving” was his response. “There are people in the world who are starving or who have no house or who are in a war zone…” He would remind us that we have food in our belly and a roof over our head and an unlimited future. He was so right.

      November 14, 2018
      Reply
  4. In the grand scheme of things, physicians in the US are at the very top. I feel blessed and lucky everyday to have the life I have. Gratitude will change your perspective.

    November 15, 2018
    Reply
    • That’s a great attitude Millionaire Doc.
      It is amazing how sensitive we are to our reference groups. When I was in private practice and my partners had 10,000 square foot houses, airplanes, and hotels I felt poor. When I then took a huge pay cut to go into academia I ended up feeling rich. I was spending most of my days around residents, staff, and medical students who would have loved to have my big “doctor income.”

      November 15, 2018
      Reply
  5. While we don’t act rich, my kids (8 & 10) understand that we have enough money for my work to be optional. I believe they’ve also asked if we’re millionaires and we’ve been honest with them.

    Every time a question like “are we rich” comes up, I take that opportunity to repeat that the reason we’re in good shape is that we have saved a substantial portion of our income. “It’s not what you make; it’s what you keep” is a great lesson that can’t be stated too often.

    Cheers, my sorta rich friend!
    -PoF

    December 28, 2018
    Reply
    • That’s a great perspective, PoF.

      I have heard another answer recently that I kind of like: “No, ‘we’ aren’t rich. Your mother and I are doing well though. You just get to live with us until you are eighteen!”

      That reminds them that they will ultimately need to become independent on their own.

      December 28, 2018
      Reply
  6. Crispy Doc said:

    The will always be someone with more. It’s rare they will realize it’s enough.

    Financial insecurity is hard to shake, but most of us plan on such conservative withdrawal rates that we build in a buffer.

    Great history lesson on perspective, thanks WD.

    Fondly,

    CD

    December 28, 2018
    Reply
    • Hey CD.
      Thanks for stopping by.
      Yes, it is all about the comparison group.
      To quote H. L. Mencken, “A man’s satisfaction with his salary depends on whether he makes more than his wife’s sister’s husband.”

      December 28, 2018
      Reply
  7. Great summary Wealthy Doc! Seeing this data makes you wonder why the average American thinks we are loaded but I guess we sorta are AND we are accessible to the general public due to the nature of our jobs. I have time (Jack is 15 months old) but I wonder how I will handle his questions about money while instilling in him a desire to work hard.
    Miss Bonnie MD recently posted…ICE: The Legacy Binder Everyone NeedsMy Profile

    January 6, 2019
    Reply
    • Miss Bonnie,
      I agree that instilling them with a desire to work hard is important.
      I’m not sure I’m succeeding in that. Most days it takes bribery and threats to even get my kids to empty the dishwasher.
      We don’t know how successful we are as parents until we look back later in life. Time will tell.

      January 6, 2019
      Reply
  8. I think a decent answer would be to talk about the ways in which you are rich besides money: opportunities for them to go to a good school, participate in sports, rich in family and in friends. I faced a similar statement when someone told me straight up that I was rich (as I considered myself a broke college student at the time, I balked) https://financialmechanic.com/2018/06/16/privilege-and-money/
    But it was true, I was most likely richer than most people in the entire town. It was humbling, and an opportunity to reflect that my privilege doesn’t make me better than anyone else, and a LOT of it had to do with the luck of the draw, where I was born, my race, etc.

    January 6, 2019
    Reply
    • Financial Mechanic,
      As Warren Buffett has pointed out: we won the lottery by being born in the right womb.
      It is hard to continuously keep in mind how blessed we are. We are all so sensitive to our “reference group.”
      International travel has helped me and my kids with the perspective. To see how people live in places like rural China was eye-opening to me and my kids. We came back to our normal life feeling blessed and very rich.

      January 6, 2019
      Reply
  9. Joe said:

    We’re not rich, but that’s not my goal anyway. It’s okay to be upper middle class or even solid middle class. That’s already a comfortable lifestyle 🙂
    BTW, I used to think 10M is rich, but I guess I’ll have to update my definition to 15M.
    We won’t get there anyway so it doesn’t really matter to me whether it’s 10M or 15M.

    February 1, 2019
    Reply
    • Joe,
      I agree. Despite my moniker and finance MBA and obsession with personal finance, getting rich has never been my goal either.

      There is a “diminishing marginal utility” of money for sure. I’ve read the happiness studies proving this. More importantly, I have experienced it. Adding 20K to my income going from 30K per year to 50K was huge. Going from 210K to 230K wasn’t noticeable at all – especially after the increased taxes.

      Increases in net worth are even less noticeable than income increases.

      And it is all relative. We have to be careful of our peer groups and social comparisons. Felix Dennis who got rich and wrote a book about How To Get Rich thought rich is having $30M to $80M.

      February 1, 2019
      Reply
  10. Hmm... said:

    I, too, like getting financial advice from convicted felons like Dinesh D’Souza.

    June 6, 2019
    Reply
    • Thorp wasn’t taking ‘financial advice’ from D’Souza. Nor am I recommending that.

      Besides, D’Souza was given a full presidential pardon. Harvard law professor Alan Dershowitz felt that the charges were unfair: “The idea of charging him with a felony for this doesn’t sound like a proper exercise of prosecutorial discretion … I can’t help but think that [D’Souza’s] politics have something to do with it.”

      June 7, 2019
      Reply
  11. Solo said:

    First off, I dont know #$%&. But I know we all need three things in life. Food, shelter, and sleep. Any of those three in excess or in addition to that would be considered rich by definition. But, I know Steven Hawkins was richer than me. So was Christopher Reeves, heroes of youtube, etcetera you get my point. I think besides those three things, health, a healthy environment which includes family and friends, love and or companionship, and the least amount of stress need to be considered. Those things seem to be worthy of being rich. I guess its a matter of perspective. And no matter how rich someone is by their wealth/money or how good there life seems to you. We all, all of us end up the same. Just think about how you want to live everyday. Like from the moment you wake up till the moment you go to sleep. How do you like spending your time… The three main things and whatevers important to you after that right? Also all the so called rich people trying to find the answer to cheating nature and life, good luck. Doctors still dont know #$%& or they just dont want to give us cures, or we’re actually still learning which we always are. You only get one life and body. Good luck to all.

    June 10, 2019
    Reply

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