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.
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.
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.
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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.
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.
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.
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.”
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.
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.
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.
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.