Dad, Are We Rich?

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:

Adequate 100K
Comfortable 250K
Substantial 1M
Impressive 5M

 

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:

Adequate 600K
Comfortable 1.5M
Substantial 6M
Impressive 30M

 

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

Poor <15K
Lower-Middle 15K-82K
Middle 82K-750K
Upper-Middle 750K-15M
Rich 15M-150M
Superrich >150M

 

Or his version based on income:

Poor <22K
Lower-Middle 22K-50K
Middle 50K-112K
Upper-Middle 112K-1.5M
Rich 1.5M-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

>1M 9.3M
>5M 1.03M
>10M 400K
>20M 155K
>50M 44K
>100M 17K
>250M 4.9K
>500M 1.9K
>1B 730
>1.55B 400

 

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?

8 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
    • Wealthy Doc said:

      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
    • Wealthy Doc said:

      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
    • Wealthy Doc said:

      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
    • Wealthy Doc said:

      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

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