21 January 2015

Millionaires Common

The percentage of the population in 917 metropolitian and micropolitan area who have $1,000,000 or more of financial assets is substantial, ranging from 2.11% in small town Kentucky to 11.62% in Los Alamos, New Mexico, in each case, small towns at either extreme of the range.

For the nation as a whole 5.2% of households at at least $1,000,000 in financial assets, and 1% have a bit more than $5,000,000 or more each.  In Maryland, the state with the most millionaires on a percentage basis, 7.7% of households have financial assets in that amount (about the same a Boulder, Colorado).

Washington D.C. is the large metropolitan area with the highest percentage of millionaires: 8.81%.

In greater San Francisco, the rate is 7.28%.


It is worth a moment to consider what these statistics mean in practice:

* A financial millionaire is now upper middle class (the percentage of millionaires and the percentage of people with earned graduate degrees is similar), but no more.

* Married couples in the bottom 99% are not subject to the estate tax if non-financial assets make up less than half of their net worth.

* For the upper middle class, particularly in governmental centers and homes to big businesses, a very large percentage of the total financial assets are in retirement plans.  But, financial assets in retirement plans are inflated by design, because typically 20%-40% of those assets will be paid in income tax when withdrawn, a tax that the step up in basis at death that President Obama proposed to eliminate in his State of the Union address yesterday, does not eliminate.

* Wage and salary earners with upper middle class jobs are better at saving financial assets that are hard for them to touch than others, and they reap the rewards of this when they retire.

* Wage and salary earners are also helped in accumulating financial assets because they can't make risky investments not available to them in their retirement plans (in addition to investing and being evaluated based upon before tax funds and having little access to retirement funds during their working lives for consumption purposes).

* The flip side of the limited investment freedom of people with retirement savings, is that retirement assets provide much less economic power prior to retirement, than other financial assets.  They can't be used for consumption, can't be used to invest in a closely held business, and can't be used for a major current charitable initiative.

* The new rule of thumb in the financial planning industry is to assume that financial assets can support a 4% of asset value income stream (the old rule of thumb was 5%).  Thus $1,000,000 of assets is a fairly modest $40,000 a year. Even rent free and supplemented by Social Security cheks, this supports only a fairly middle class lifestyle for a retiree's household.

* The $5,000,000 of financial assets of a one percenter household is about $200,000 a year, comfortable to be sure, but hardly opulent, again, even rent free.

* A traditional monthly defined benefit pension typically sounds much more modest than it would if converted to the financial asset portfolio amount necessary to generate that income stream.  A meaningful defined benefit pension translates into substantial financial affluence.

* At the time that the word millionaire came into wide usage, $1,000,000 nominal dollars was worth about $10,000,000 to $25,000,000 in today's dollars adjusted for inflation, at a threshold where today, estate taxes are likely to be due at death without substantial estate planning work and enough to generate a genuinely affluent lifestyle income stream.  This is also roughly the threshold where, in my professional experience, it becomes are for a typical person with a comfortable but not decadent lifestyle to spend money on consumption faster than they earn money on investments; lots of consumption items for people in this wealth bracket, like vacation real estate and art, tends to appreciate in value or maintain its value, rather than losing value over time.

* The average social security benefit for retirees ($1,300 a month) is roughly equivalent to about $325,000 of retirement savings.  The maximum Social Security retirement benefit at normal retirement age (66 years old) is $2,642, which is equivalent to about $700,000 of financial assets for someone who would have had to have been an upper middle class wage earner (or spouse of a wage earner) for almost their entire life.  While there is no minimum Social Security retirement benefit, in practice, almost anyone who has worked for most of their lives has an income stream in retirement from Social Security equal to something in the low hundreds of thousands of dollars, even when they have a below average monthly benefit.  Almost no American senior citizens are really destitute, and few are in poverty, as a result, something that the U.S. does not replicate for its children.

* A large share of millionaires are retirees or people late in their careers getting ready to retire.  A 66 year old with $1,000,000 in financial assets is merely middle class, because modest retirement consumption needs will absorb almost all of it before death.  A 20 years old with $1,000,000, in contrast, is quite affluent, because that person can still work and has lots of time to earn investment returns before needing to rely on investment income to live from day to day, and is also likely to have much greater access to those funds for consumption purposes (since they are almost surely not retirement funds) than a new retiree with the same financial asset value.

* For most households, their main non-financial asset is real estate, typically starting with a primary residence that may or may not include a farm.  In small town America and even decent sized cities in the South and the American heartland, a paid off upper middle class residence may have a fair market value of as little as $100,000.  In expensive big city and resort housing markets, a comparable upper middle class residence may cost two or three million dollars.

* The percentage of millionaires in term of financial assets seems to be only mildly related to housing costs, and then, with places with more expensive housing costs having somewhat higher percentages of millionaires (perhaps in part to the financial assets of people who cash out equity in their homes late in life).  Higher compensation in places with higher housing costs more than compensates for the higher housing costs, on average.  Also, primary residence mortgages, like retirement savings, force people to save in a way that they can't easily access for consumption purposes.

* Fitting the distribution to a Gaussian Normal Distribution curve from roughly 3 standard deviation tails suggests that the distribution of percentages is about 5.2 +/- 0.9%, with a symmetric rather than the expected asymmetric distribution (one would expect a higher upside than downside).  This is surprisingly even geographically, and very few data points differ by more than a factor of +60% or -60% from the mean.  The regional disparity in wealth is driven more by real estate values (which doesn't impact asset use value), than by financial wealth at this level.  There are very few extreme outliers.  The data points are skewed somewhat towards lower as opposed to higher values with a longer low end tail than the high end tail.

* People in areas with high value real estate have much more of their total wealth in real estate.  It is unclear how much large real estate holdings by farmers modify the regional variation in financial wealth.

* The amount that a judgment creditor can collection from someone is on average from their financial assets is frequently much lower than their financial assets due to creditor protected retirement accounts and similarly protected assets either in special kinds of accounts or in trusts inherited from someone else that are not subject to creditors.  Homestead exemptions also limit the available real estate equity, although real estate equity is frequently the most collectible asset of an affluent individual.  The number of people capable of paying a $1,000,000 judgment from non-exempt assets is much smaller than the number of millionaires.  As a result, in lawsuits against individuals, very large money judgments are often a merely academic exercise.  This is not true, however, of big business that can often afford to pay such large sums.

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