# Why is the gap between income and net worth so large for the top 1%
**URL:** https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710
**Category:** Miscellaneous and Personal Stuff I Must Share
**Created:** [February 10, 2020, 3:27am UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710 "2020-02-10T03:27:24Z")
**Posts on this page:** 12
**Page:** 2
### Author:  [@Riemann](https://boards.straightdope.com/u/Riemann)
#### Post date: [February 11, 2020, 6:00pm UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710/21 "2020-02-11T18:00:53Z")
> [@Shalmanese](#):
>
> The amount of success you need in business to reach a $10.4M net worth is pretty low. Having a successful plumbing company, owning a chain of franchise restaurants, being a partner at a regional law firm, all of these at the top end of success can easily reach that number.
>
> As a very rough estimate, small businesses are normally valued at ~2x revenue on the higher end and a 50K salaried employee might cost the company $100K with all other expenses and might be expected to generate 50% margin so a plumbing company owner with ~30 plumbers working under them who started the company from scratch with no debt might easily sell their business for $10M.
I looked at this before, and I was not convinced how large a contributor this is to the top 1%, but I can’t find a reliable source of statistics. There are about 13 million households in the top 1%. There are about 30 million small businesses in the U.S., and from googling related statistics I think it’s probably only a few percent of those businesses, say around 1 million businesses, that are worth \>$10 million. So maybe small business ownership accounts for the wealth of around 10% of the 13 million households in the top 1% by wealth.
---
### Author:  [@Riemann](https://boards.straightdope.com/u/Riemann)
#### Post date: [February 11, 2020, 6:06pm UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710/22 "2020-02-11T18:06:19Z")
Oh, duh, 13 million households is the top 10%. It’s 1.3 million households in the top 1%. So scratch that - yes, small business ownership is probably a very significant component.
---
### Author:  [@Riemann](https://boards.straightdope.com/u/Riemann)
#### Post date: [February 11, 2020, 6:16pm UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710/23 "2020-02-11T18:16:28Z")
> [@Machine\_Elf](#):
>
> You can see though that if a borderline 1% earner over the past 30 years was willing to tolerate a little more risk than an index fund, they could have easily hit the $10M mark today with substantially smaller deposits over that period of time.
Yes, I don’t know how we’d figure out statistically if the number of people who took on a higher risk investment profile is likely to be a significant proportion of the top 1.3 million households, but with what some tech stocks have done it seems like a plausible source of wealth for a significant number.
---
### Author:  [@Wesley\_Clark](https://boards.straightdope.com/u/Wesley_Clark)
#### Post date: [February 11, 2020, 6:20pm UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710/24 "2020-02-11T18:20:31Z")
nm
---
### Author:  [@Ruken](https://boards.straightdope.com/u/Ruken)
#### Post date: [February 11, 2020, 6:21pm UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710/25 "2020-02-11T18:21:37Z")
Poking around federal reserve data, it looks like total net wealth and total real estate value (both nominal) track each other pretty well, with some disparity around the recession.
---
### Author:  [@Hampshire](https://boards.straightdope.com/u/Hampshire)
#### Post date: [February 12, 2020, 7:27pm UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710/26 "2020-02-12T19:27:12Z")
The article doesn’t define annual income very well. Is that limited to someone’s annual base salary or does it include total annual compensation?
I’ve seen plenty of CEO types annual compensation broken down into for example a base salary of $400K and then bonus compensation of $1.5million and a bonus compensation of $500K in company stock shares.
---
### Author:  [@Lightnin](https://boards.straightdope.com/u/Lightnin)
#### Post date: [February 12, 2020, 8:29pm UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710/27 "2020-02-12T20:29:31Z")
Bad game design.
Seriously. The problem is that large amounts of money \*create \*large amounts of money. You rarely get that game loop in video games- because if the point of the game is to make money, and all it takes to make money is to have money, the rest of the game doesn’t matter at all… especially if some of the players \*start \*the game with large amounts of that money.
---
### Author:  [@ftg](https://boards.straightdope.com/u/ftg)
#### Post date: [February 12, 2020, 9:33pm UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710/28 "2020-02-12T21:33:02Z")
> [@bump](#):
>
> Someone like a Warren Buffett owns a lot of highly valued stock, but that “worth” is totally dependent on what the market is willing to pay at that moment for a similar share of that stock. So right now, people are buying and selling Berkshire Hathaway stocks for $340,900 per share. Buffett owns some preposterous number of those shares.
>
> But until he actually sells any, that value is somewhat illusory- it can fluctuate up and down, and so will his net worth, without any actual money exchanging hands, or that value being realized.
>
> Meanwhile, Buffett’s actual income is presumably derived from his actual job at Berkshire Hathaway, and that’s roughly $100k a year.
I’ve thought it was Buffett who said this but it turns out to be Sam Walton after the crash of October 19, 1987 erased $1.7 billion of his net worth: “It’s paper anyway. It was paper when we started and it’s paper afterward.”
---
### Author:  [@DinoR](https://boards.straightdope.com/u/DinoR)
#### Post date: [February 12, 2020, 10:09pm UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710/29 "2020-02-12T22:09:20Z")
> [@Riemann](#):
>
> Oh, duh, 13 million households is the top 10%. It’s 1.3 million households in the top 1%. So scratch that - yes, small business ownership is probably a very significant component.
While not probably the 1%, a friend I wargamed with is a prime anecdotal example. He was a genuinely **small** farmer. He grew a pretty common corn/soybean rotation and kept some sheep on the part of his land that wasn’t well suited for tilling. His land wasn’t far outside Lansing, Michigan which is the state capital. It was close to a highway exit. That gave it more value since it was the kind of place someone might consider buying him out to build yet a another subdivision as the suburbs crept out.
He easily had a net worth of multiple millions. One year farm prices were down quite a bit and he had a lot of unexpected costs. That year he was both wealthy and income poor. He couldn’t pull value from his high net worth without metaphorically eating his seed corn.
---
### Author:  [@Caldazar](https://boards.straightdope.com/u/Caldazar)
#### Post date: [February 12, 2020, 10:17pm UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710/30 "2020-02-12T22:17:30Z")
> [@Hampshire](#):
>
> The article doesn’t define annual income very well. Is that limited to someone’s annual base salary or does it include total annual compensation?
> I’ve seen plenty of CEO types annual compensation broken down into for example a base salary of $400K and then bonus compensation of $1.5million and a bonus compensation of $500K in company stock shares.
Income is anything of value for which you realize a gain. If your employer pays you to do a job, that’s income. If your friend gifts you a $20 gift card, that’s income. If you clean someone’s house in exchange for receiving three chickens, the chickens are income.
All three of your examples would be income of one sort or another.
Re: the OP, compounded rates of return add up. As an example, $150,000 annual contributions to an investment earning 6% is $5.5M after 20 years.
---
### Author:  [@actualliberalnotoneofthose](https://boards.straightdope.com/u/actualliberalnotoneofthose)
#### Post date: [February 13, 2020, 2:52am UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710/31 "2020-02-13T02:52:05Z")
> [@Machine\_Elf](#):
>
> Someone who was willing to pursue riskier single stocks (Apple, Microsoft, Amazon, etc.) could have reached a far higher net worth in that same time frame with much smaller deposits.
I’m not in the 1% of anything but I acquired some Amazon stock from working at Amazon. It was around $700/share when I started and 3x that at my 2 year mark. There are plenty of examples like someone who had $10,000 in Walmart in 1972 would have $5 million 45 years later. So anyone taking those risks as you mentioned would have a chance to get that lucky with huge returns without ever needing a high income. My 401(k) is averaging around 11% over its lifetime and it’s relatively small but compared to my income and amount invested it’s quite a return. If I had been able to max it out every year during my working career (which would not even require a 6 figure income on my budget) it could be well into the millions.
---
### Author:  [@robardin](https://boards.straightdope.com/u/robardin)
#### Post date: [February 13, 2020, 6:47pm UTC](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710/32 "2020-02-13T18:47:56Z")
> [@Wesley\_Clark](#):
>
> [What Is the Average Net Worth of the Top 1%?](https://www.investopedia.com/financial-edge/1212/average-net-worth-of-the-1.aspx)
>
> Income to be in the top 1% is about 515,371. Well and good, that is about the income of a pair of physicians, or highly paid couple who work in law or business.
>
> But the cutoff for the top 1% of wealth is 10.4 million. I guess I don’t understand how thats possible, unless the people in the two groups (top 1% by income vs wealth) are 2 totally different groups.
The thing is, in an annual survey report like this, “wealth” = assets you hold at the end of the year, but “income” = how much money you earned in a year.
Yes, things like capital gains and inherited fortunes are certainly a big chunk of that “national top 1%” of wealth (though it’s not clear if realized capital gains, i.e., you sold and made a profit, shouldn’t count as “income” for the year - it does for my local and state taxes…).
But even aside from that, you shouldn’t be surprised that high earners would eventually accumulate a lot of wealth, simply by
(a) not spending all their money every year, and
(b) doing something with their “extra” money that appreciates in value (real estate, stocks or funds, etc.).
And by “eventually” I don’t even mean over a lifetime, like on your deathbed - more like a 15-20 year window.
Let’s say you were paid an annual 500,000 (barely missing the 1%), and after tax, that figure came to around 325,000. You live pretty darn well, spending $15,000 a month on “stuff” - that’s 180,000 a year, and after tax. Well that’s still leaving you with 145,000. Go, you!
What do you do with that? Let’s say you put the bulk of it in an index fund.
And oh, some portion of that $15,000 a month is spent paying the mortgage/interest and some prepayment on an increasingly valuable property. Like a house in Palo Alto you bought for a couple hundred thou back in 1995 that is now worth multi-millions, as an obvious example, but it could work in many other areas of the country.
After 20-25 years of being a 1% income earner, your 30 year mortgage would now be paid off with the prepayments, and you might be around 50-55 years old (or possibly even younger) and have “wealth” of many millions of dollars.
[Previous page](https://boards.straightdope.com/t/why-is-the-gap-between-income-and-net-worth-so-large-for-the-top-1/847710.md?page=1)