Take The Money And Run

When I was in high school I received a mark in a class that, to this day, I think was an error. An error in my favor.

It was really high. I remember mentally tallying up all of in-semester marks to try to estimate my score on the final exam. When I realized it was probably near 100% and might even have exceeded it I did something strange.

I immediately stopped thinking about it.

I felt horribly guilty and was terrified someone might find out. At the same time, I wasn’t about to turn myself in to the principal’s office because I got an unfair deal on the upside. All I wanted was for everyone to forget about it so that number would stick on my transcript.

With that in mind, have a read of this article that breaks down the top 1%. This part refers to the top half of the top 1%:

Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting.

Recently, I spoke with a younger client who retired from a major investment bank in her early thirties, net worth around $8M… I asked if her colleagues talked about or understood how much damage was created in the broader economy from their activities. Her answer was that no one talks about it in public but almost all understood and were unbelievably cynical, hoping to exit the system when they became rich enough.

By the way, I’ve heard this line before. The majority of people in these businesses figure out pretty quickly that they’ve hit the jackpot and immediately focus on the exit. They’ve won the lottery and want to extract everything they can as quickly as they can and then GTFO.

Without ruinous leverage distorting the financial system, you’d wind up with the top half of the top 1% filled exclusively with people who have build businesses and sold them. Much of those would be tech businesses (ie the drivers of innovation in our economy). I’d argue that’s just.

For the bottom half of the top 1%, life is like this:

The 99th to 99.5th percentiles largely include physicians, attorneys, upper middle management, and small business people who have done well.

Since the majority of those in this group actually earned their money from professions and smaller businesses, they generally don’t participate in the benefits big money enjoys. Those in the 99th to 99.5th percentile lack access to power. For example, most physicians today are having their incomes reduced by HMO’s, PPO’s and cost controls from Medicare and insurance companies; the legal profession is suffering from excess capacity, declining demand and global outsourcing; successful small businesses struggle with increasing regulation and taxation. I speak daily with these relative winners in the economic hierarchy and many express frustration.

I’ve had many discussions in the last few years with clients with “only” $5M or under in assets, those in the 99th to 99.9th percentiles, as to whether they have enough money to retire or stay retired. That may sound strange to the 99% not in this group, but generally accepted “safe” retirement distribution rates for a 30 year period are in the 3-5% range, with 4% as the current industry standard. Assuming that the lower end of the top 1% has, say, $1.2M in investment assets, their retirement income will be about $50k per year plus maybe $30k-$40k from Social Security, so let’s say $90k per year pre-tax and $75-$80k post-tax if they wish to plan for 30 years of withdrawals. For those with $1.8M in retirement assets, that rises to around $120-150k pretax per year and around $100k after tax. If someone retires with $5M today, roughly the beginning rung for entry into the top 0.1%, they can reasonably expect an income of $240k pretax and around $190k post tax, including Social Security.

While income and lifestyle are all relative, an after-tax income between $6.6k and $8.3k per month today will hardly buy the fantasy lifestyles that Americans see on TV and would consider “rich”. In many areas in California or the East Coast, this positions one squarely in the hard working upper-middle class, and strict budgeting will be essential.

So much of the burden of retirement is borne by pensions and health care. The top physicians and lawyers in the country enjoy the retirement of a high school teacher. Not saying that’s a problem, but it ain’t rich.

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