The Grand Illusion
Maybe I’m old-fashioned, but when people talk about rich, I get an image of someone who has a 10,000 square foot mansion or an enormous penthouse in Manhattan, or their own private jet, who drives a car that costs more than our house and whose vacations are often on private islands or on yachts the size of a Navy destroyer. That’s what it means to be rich. And I think most people have similar ideas.
That may be why more than a few people I know were incredulous when President Obama declared that couples who make more than $250,000 a year were “rich.” The general consensus among them was that families that made $250,000 were comfortable, even in some cases fairly well off, and possibly upper-middle class… maybe. But rich? No way.
One couple pointed out that while their house was paid for, it had taken 20 years, and that it wasn’t exactly a mansion, but a raised ranch of 3500 square feet with a modest two-car garage on a half-acre lot in a nice neighborhood, but certainly not one filled with mansions or even McMansions… and that she and her husband had only taken one vacation in the past ten years, and that their cars, a four year old GM Denali and a twelve year old RAV, while also paid for, were not exactly luxury vehicles… and that the rest of their possessions were similar… and that what they had saved for retirement might provide them with a comfortable but even more modest lifestyle than what they now enjoy.
Another couple just laughed. They both work in Manhattan, and their combined income, I’d estimate, is probably a little over $200,000. They can’t afford to live in New York itself, not in anything other than a shoebox, and instead own an 1800 square foot co-op apartment – definitely not a luxury one — in the suburbs north of the city and commute to work by train. Again, they’re certainly not starving or impoverished, but any reasonable person might find it difficult to insist that they are on the borderline of being rich.
I could give example after example of similar instances, of couples making $200,000 – $300,000, who may be well-off, but are anything but rich. They don’t own a Mercedes or a Rolls-Royce. They don’t travel first class on the Queen Mary, or have luxury skyboxes at the Superbowl, or millions – or even tens of thousands of dollars – stashed away in Switzerland. And they don’t squander money on anything.
Now, I know that the IRS statistics say that only something like two percent of the population makes more than $250,000, and only one percent makes more than $450,000, but those numbers can be misleading. To begin with, there’s a significant difference between income and wealth, and between sources of income. For example, compare a businessman or a doctor, or a two income family that makes $250,000 a year to an heir or heiress getting the same income from sitting on $20 million in tax-free municipal bonds. A couple that averages $200,000 in income for 40 years would have to save 25 % of their pre-tax income every year [and closer to a third of their after-tax income] to put away two million dollars… and even with compounding of those assets, they’d likely only provide a retirement income of $50,000- $75,000. That’s certainly comfortable, but rich? And even with Social Security on top of that, it’s barely middle-class in places like New York, San Francisco, and other high-cost cities.
Rich at $250,000 a year? I don’t think so, not unless someone can explain how you can have a mansion, a Mercedes, and a private jet on that… and not end up in jail for theft or tax evasion.
You are in my TBR pile but I have say that I like you. I know that you are going to get some heat about this but you knew that before you posted it. Have a good one.
I think it all comes down to your definition of “rich”. Apparently, the current administration thinks that 5X median income equals rich, or that rich is defined by the amount made by the top 2% of Americans. Of course, when you factor in location, things start to look weird. But then, the IRS doesn’t change your tax bracket based on where you chose to live; they set it based on what your income is (and not wealth). You have to draw a line somewhere.
Then again, it isn’t black and white, either. It’s fuzzier than that. There are different levels of “rich”. $250K I would put at the lower portion of the bucket called “rich”, which is just a hair above the bucket I call “upper middle class”.
Although I must admit that I am biased; I make about median income, and I never seem to have much left over from paycheck to paycheck; I put myself in the bucket I call “working class”, which is just below the bucket called “middle class”. My personal definition of “middle class” includes the ability to save for retirement and the ability to save for your kid’s college fund, neither of which you can easily do when you live paycheck to paycheck.
So in a sense, a lot of it is subjective; my definitions would probably be laughed at by a professional economist! But they work for me to describe economic life situations.
You’d think they could factor in cost of living in your area when determining your tax bracket. I live in the Bay Area and yes, a couple can make $200K combined here and still struggle, depending on where exactly you live.
Rich means that you do not need to work. Simple.
Within those who could meet this criterion, there are more levels.
One of my friends managed to save enough to book first class on cruise on a P&O liner (probably not the Queen Mary). They said that it became very clear who was invited to the Captain’s table and who was not. It was a distinction between ‘old money’ and ‘new money’.
Old Money means hundreds of millions of $ or £.
That is rich.
From my experience, you do not define normally define ‘Rich’ by income, but by assets. Alternatively there is the apocryphal story that if you need to ask the price, you cannot afford it.
I wish….
I probably should have qualified that first statement.
Rich means that you have never needed to work. Simple.
Otherwise all those who have worked all their lives to buy their properties, settle their offspring etc and are now on Pensions would scream at me! And rightly so – for I am there.
You have commented on this subject recently, and I commented on the income of truckers who were quite upset to discover their new place in society, according to the current administration. The president and his closest advisors betray their origins. They equate income with wealth, and don’t seem to realize that there are expenses in life that devour most of that income, leaving little for anything else. Of course you can forgive the Pres, if you take into account that he has never held a job, and had to provide for himself like the rest of us. Those Marxist mentors taught him that the proletariat needs to be taken care of, and only social control can provide that. I know Im rambling, but I glad that you see the fatal flaws in their logic. What happens when they decide that anyone making over the poverty line is “wealthy”?
I would appreciate it if we could ever get the point across to the masses the difference between wealth and high income. It is the classic “bait and switch” where you demonize the rich with tax breaks and loopholes, but in actuality, you punish the highest earners and most productive. While I disagree with this following policy, it would be humorous to see it play out: Actually push for a law that would tax a % of net wealth. Now all the trust fund babies, inheritors, and other people “who have their money” are actually going to be affected. Again, disagree with it, but would be fun to watch some of the worst demagogues in congress squirm since this would actually affect them.
This also is one of the beauties of a consumption style tax (which has some downsides). It rewards savers and punishes the spenders. If you have a high net wealth, and want to blow it, you get taxed more. For the really beautiful aspect though, it doesn’t matter how you earned your money, legally or illegally, you pay the taxes regardless.
Manhattan and the Bay Area are two of the most extreme examples in the US. $250K doesn’t just provide a reasonable lifestyle in a handful of cities, it provides an extraordinarily comfortable lifestyle in most cities in the US because most households will never come close to making that much.
Even in the case of New York, the overwhelming majority of New Yorkers have household incomes of $70K or less. There are plenty of affordable places in the Bronx and Brooklyn by market necessity.
A $50K-$75K per year retirement is indeed a rare luxury that most of the populace will not be able to enjoy as things stand. Half of all people have no retirement savings at all. Most who do have nowhere near enough to actually live on.
I don’t think the alleged problem of misconception exists at all. None of my working class friends think that people in the hundreds of thousands of dollars range own yachts and vacation homes. People making tens of thousands of dollars a year often worry about how to afford basics like food, rent, education, child care, medical care, and retirement. They correctly believe that if they made hundreds of thousands they wouldn’t have to constantly grapple with the basics and they would have some fun money left over too.
The upper class who are not yet mansion-rich get minimal sympathy because if you gave any responsible adult surviving on $40K-50K a $200K raise they would no longer have any financial worries.
To give some ballpark figures for context: engineering is being heavily promoted as a challenging but safe college major right now due to the demand and pay. Petrochemical engineers have historically been the richest of the engineers and even they rarely break $150K. A senior software engineer might make $100K(probably closer to $130K in the Bay Area unless they work for a giant like google. $250K is vastly more than most people will make and it is vastly more comfortable even if people making that much don’t feel like it. If it doesn’t feel luxurious and idle enough they should try living at $60K like an average person and see how that feels in comparison.
There should be more tax brackets above the $250K level. I don’t think someone making $250K should be taxed the same as someone making $10,000,000. We also need capital gains reform. It’s ludicrous to think that a day trader is so helpful to society that they should be taxed less than a doctor or engineer on their income.
I have to disagree slightly. When you make the point that $250,000 will provide an “extraordinarily comfortable” lifestyle in most cities, you’re ignoring the fact that in most places where it would provide that kind of lifestyle, there are very few jobs that provide that income. I live in Cedar City, where the cost-of-living is about five percent lower than the national average, and where salaries wages are more than 40% lower, if not more, than in the nearest cities — Salt Lake and Las Vegas. The majority of people in the $200,000- $300,000 income range live in places where the cost-of-living is much higher. The very few — and there are very few — people who live in Cedar City with that level of income do in fact live far better than they would in any major city… but they are few because the economy won’t support those kind of jobs.
In my years as a consultant, I spent time in most major cities in the United States, and with the exception of the suburbs of a few Texas cities, I found, and the statistics support this, that the cost of living in the vast majority of major cities is far higher than the national “average” [which makes me wonder if the small towns and rural areas are weighted disproportionately].
You’re absolutely right that, comparatively, even in high cost-of-living areas, those in the $200,000-$400,000 income range do have a much better lifestyle. There’s no question about that. That wasn’t the point. The point was that it’s extraordinarily misleading to lump families making $250,000 a year in with the “rich.” They’re not.
And don’t tell my senior aerospace engineer friend who lives in a Los Angeles suburb [and definitely not a luxurious one] in an 1,100 square foot two bedroom house with one car and wife and child that their lifestyle is extraordinarily comfortable.
I grew up with a father who made ~$60,000 when I was born, and now my parents are making more than a few hundred thousand combined (dad’s in sales, tends to vary). For the latter half of my childhood my father was working in Silicon Valley and other San Francisco Bay Area locations (mom invested his money and has done very well with it).
I am currently working in South San Francisco making ~$50,000 with my partner and her daughter not currently working. Most of my coworkers are in similar positions. So I am in a rather good position to see the differences. And the amount of stress and worry and pain caused by money problems is pretty astounding.
It’s all well and good to say that people making a few hundred grand in San Francisco aren’t “rich”. But the vast majority of people in San Francisco aren’t. And what that means is that as a price of leaving in California and San Francisco in particular, just like those making $200,000 in San Francisco aren’t living in mansions the way they would if they lived in the middle of Wyoming, the people who make $50,000 sure as heck aren’t living in the kind of housing they could afford in Wyoming either. The argument cuts both ways.
The part that gets me isn’t that people have that kind of money. My parents worked damn hard for it, seized the right lucky breaks at the right time, and didn’t get greedy when their house doubled in value. Pretty much the American Dream right there.
It’s that they insist that everyone else isn’t working hard enough, making the right choices, or have no idea what most people live through.
My mother, for instance, has suggested any number of times that I should go into sales, like my father, because that’s what is highly compensated, despite the fact that there are any number of jobs that need to be done, and should be done, that given how our current society works will never be compensated that way. Teaching at the elementary school level, for instance.
In addition, she has complained to teacher friends of hers, any number of times in my hearing, about how difficult it is going to be to pay for my sister’s college. What she means is that it will be difficult to do without changing their lifestyle in any significant way or reducing the amount of money they put into savings every year. When most people say paying for their child’s college will be “difficult”, they mean something radically different.
Similarly, she has stated more than once that it is “impossible” to live on less than $80,000 in the Bay Area, despite the fact that many people have to.
And this is from someone I love and care for. You can imagine how irritating it is from pundits and politicians suggesting that a small business owner who cuts his employee’s effective wages by refusing any cost of living increases is “not rich” when he eats out every week and those employees eat out once a year.
There’s a significant difference between rich and super-rich, of course, but that doesn’t mean the rich aren’t rich. Maybe they wouldn’t have counted as rich twenty years ago, but as you have pointed out any number of times, effective wages have been falling. A lot.
In many cases, based on my own experience, to get that $200K to $250K income, both spouses are working. Often well over 40 hours a week. And often with lengthy commutes. In the DC suburbs… that sort of income nets you nice house, in a good neighborhood — just a bit outside of having to worry about your expenses every month. It’s generally both spouses in senior positions, so probably fairly far along in careers. It’s definitely not “only working ’cause you want to.”
And it’s not looking at the expenses to get there… Like college loans that are just being paid off. (Which can eat up a huge portion of a apparently high early income, like for a lawyer or doctor.)
I think that you and and others have hit the point quite well: there’s a big difference between income and wealth. I don’t make even $100K a year, with a fair bit of overtime. Most of what I make goes out again to bills, mortgage, groceries, and the like… If I made $200K a year, and made NO OTHER CHANGES in my lifestyle — I’d be quite comfortable. Except there are changes I’d love to make, like a somewhat larger house.
I think that Kannonfodder has the right of it: high income and wealth are not the same thing.
When income is from active income, high “income” in general equals high “outgo.” Only when someone manages to turn passive income into something that actually manages to equal a high income EARNER, then that’s wealth.
And that’s why the top 0.1% are very different from those in the 99.9%.
Rich is a matter of perspective. To someone with a who sleeps on the sidewalk anyone with regular meals and a roof over their heads is rich. More the point is can someone with an income of 250,000 dollars a year easily afford to have their taxes go back to their full rate? The answer to that is almost certainly.
As much as I admire your opinion in most instances, I have to disagree on this one. I make about $48K a year in Southern California (Riverside). I can’t buy a house because my income won’t qualify me to buy anywhere safe. I struggle to save more than 2% of my income for retirement and my father, who makes $36K a year, can’t pay for his medication because the copay is $700/mo. In contrast,when I was married w/a combined income of $105K, we could afford multiple cars, a large house, 1K/mo for retirement. I never cared about taxes because whatever they were, we would afford it. They made zero difference in lifestyle. To me, that was rich. I didn’t worry each month about making rent; I could buy new clothes when I felt like it, without having to save up; a new car every 5 years instead of praying over my 14year old vehicle; I didn’t cry every time my dog got sick because I couldn’t pay the vet more than $20/mo; I didn’t feel like vomiting every time my landlord raised my rent, because I couldn’t afford to move (because I had the luxury of owning).
To me, this is a massive difference. Rich means having enough to have the choice of a luxury, not making choices about which necessity to go without.