There are some really simple reasons why “High Net Worth” people get richer faster than middle or lower net worth people. Much of this disparity has to do with the tax system we’ve had for years now. In addition we continue to get confirmation that, “high earners” save a much higher % of their earned income and are less effected by inflation over the years. Those still working that earn more today will probably earn much more tomorrow, those down the income scale will see flat increases.
Conclusion – the faster you build your net worth to a higher level, the better off you are in having that net worth increase faster than people with lower net worth. Also being a high income earner isn’t necessary enough!
High Net Worth is defined as having $1 million – $10 million in liquid assets, we won’t include home equity is this definition since it is anything but “liquid”. Notice I’m also differentiating between “high income earners” vs. “high net worth”.
Let’s first look at some anomalies in our tax system and understanding how to build wealth. Here is an example.
A CEO makes $300,000 in annual income, a retired high net worth person shows $300,000 in income. Do they pay the same amount of tax this year? Absolutely not, the working person’s income is taxed based on normal brackets and pays over TWICE the amount of tax on the same amount as the retired person. Why, the retired person is holding his money is tax beneficial vehicles. His income is a combination of Social Security (only taxed at 85% max.), capital gains, qualified dividends, muni-bonds, inheritance, etc.
Right after World War II the top dividends tax was between 70 – 80% (wow!). Then President George W. Bush’s tax cuts dropped the top rate on dividends by half.
See the table below to see how taxes on Investments has drastically changed over the years. Today we have a pretty good thing going.
The old adage “the more you make, the more you spend” isn’t true for everyone. The richest American’s save a far higher % of their income than the bottom 90% of our population. As a matter of fact, 90% of our income earners by and large don’t save anything at all.
In mid-September the Census Bureau released its annual report on household income data for 2016. Last year, the median (middle) household income rose to $59,149, a 4.1% increase over 2015 and a record high. The mean (average) household income set a new high of $83,143.
So, you would think that we are all doing pretty well then, everyone is getting “richer”, these are all time high’s. But wait, let’s adjust for inflation using the Consumers Price Index based on 2016 dollars. Now we see a much different picture of wage earners in different quartiles. Even if your household is in the 2nd Quartile, making $95,000 in 2016, your after inflation “income growth” has been flat for many years. If you are in the $200,000 – $400,000 income range you have seen much higher growth!
No wonder Warren Buffett, CEO of Berkshire Hathaway said, “Through the tax code, there has been class warfare waged, and my class has won”.
So what is the bottom line? Earn more money, save more money, smartly invest more money and get to High Net Worth as early as possible. The 1st million of Liquid Net Worth is much harder to reach than the 2nd million, 3rd million etc.!
Jim Hammond's Blog 