Monday, April 14, 2008

Inheritance is NOT The Main Driver: Rich Aren't Getting Richer, They're Getting More Numerous

WSJ--Study after study shows that most of today’s multi-millionaires made their wealth themselves, as opposed to inheriting it from their parents. PNC Wealth Management recently polled 1,500 Americans with $500,000 or more in investible assets and found that 69% of respondents made most of their fortune through work, business ownership or investments. Only 6% made their wealth by inheriting it, while 25% made it through a combination of inheritence and earnings (see chart above).

Other examples (also from WSJ):

1. According to a study of Federal Reserve data conducted by NYU professor Edward Wolff, for the nation’s richest 1%, inherited wealth accounted for only 9% of their net worth in 2001, down from 23% in 1989. (The 2001 number was the latest available.)

2. According to a study by Prince & Associates, less than 10% of today’s multi-millionaires cited “inheritance” as their source of wealth.

3. A study by Spectrem Group found that among today’s millionaires, inherited wealth accounted for just 2% of their total sources of wealth.

Each of these stats measures slightly different things, yet they all come to the same basic conclusion: Inheritance is not the main driver of today’s wealth. The reason we’ve had a doubling in the number of millionaires and billionaires over the past decade (even adjusted for inflation) is that more of the non-wealthy have become wealthy.

So it’s not just that the same old rich folks are getting richer. The more-important shift is that the rich are getting more numerous.

12 Comments:

At 4/14/2008 8:47 AM, Blogger Ironman said...

The data for income earned by individuals in the U.S. confirm the upward shift in the distribution of income in the U.S. In looking at the shift in individual income distribution from 1995 to 2005, not only are there more high income earning individuals, there are much fewer low income earning individuals.

This chart, taken from the post above, shows the percentage changes in the number of individual income earners at all income levels from $0 to $95,000 in constant 2004 U.S. dollars. Since the 95th percentile for individual income is $97,656 for the U.S. in 2005, I estimate this chart effectively represents about 93-94% of all U.S. income-earning individuals.

 
At 4/14/2008 9:47 AM, Anonymous Kevin said...

I think you may be drawing a conclusion that the study may not actually be able to make.

Suppose I have a zero net worth and then suddenly inherit $1,000,000 today. If you ask me next week what the source of the bulk of my wealth is, I'd have to say "inheritance".

Now suppose I invest my $1,000,000 and get a 10% rate of return on it. Within 10 years I have more than doubled my net worth. Ask me then what the number one source of my wealth is and the answer is "investments" because the amount I inherited is now less than the amount of wealth I have built using that inheritance.

Hard to say how much role inheritance plays from this survey.

 
At 4/14/2008 10:57 AM, Blogger Walt G. said...

I wonder why they asked people with over $500,000 in investible funds about multi-millionaires. Those are two distinct groups.

 
At 4/14/2008 12:38 PM, Blogger juandos said...

"Suppose I have a zero net worth and then suddenly inherit $1,000,000 today. If you ask me next week what the source of the bulk of my wealth is, I'd have to say "inheritance"."...

O.K. Kevin what do you think as a percentage of people worth a million bucks are people who actually inherited the money are?

"I wonder why they asked people with over $500,000 in investible funds about multi-millionaires. Those are two distinct groups"...

Well walt I'm guessing here but isn't someone with a half million cash to invest probably a multi-millionaire if all assets are considered?

I don't know the answer to either questions hence the reason I ask...

Ahhh, you just gotta love the MSM and their collective inability to come to grips with reality...

Fools!

Post Pulitzer Winner: Ignore CEOs, Treat Them 'Like Social and Political Pariahs'

Business columnist Steven Pearlstein says he advocates pursuing class envy, admits to ignoring CEOs in his reporting.

 
At 4/14/2008 1:14 PM, Blogger Walt G. said...

"Well walt I'm guessing here but isn't someone with a half million cash to invest probably a multi-millionaire if all assets are considered?"

No. It's not that difficult to have that much in a 401(k) and IRAs, and still have a mortgage on a moderate house. Compound interest and stock appreciation over 30+ years is like magic.

 
At 4/14/2008 1:18 PM, Blogger juandos said...

"No. It's not that difficult to have that much in a 401(k) and IRAs, and still have a mortgage on a moderate house"...

Ahhh...

Good point walt...

Thanks for that insight...

BTW ironman thanks for those links...

 
At 4/14/2008 2:24 PM, Anonymous Kevin said...

Juandos: Honestly, I don't have any idea, but my point is that you may not be able to tell from this survey either.

You'd really need to ask something like:

What percentage of your net worth is due to inheritance or through investment of money derived from an inheritance?

At the same time, I do expect that a large number of the wealthy acquired the bulk of their wealth outside of inheritance. Of course, having a little something to get you started makes it much easier to become wealthy (e.g.: seed money for education or starting a business), but with a bit of ambition and an unflinching willingness to work for it, wealth is fairly easy to acquire if you started in the middle class.

That's not saying it's impossible for the poor to become rich, just that the hurdles are higher.

 
At 4/14/2008 2:25 PM, Anonymous Anonymous said...

Having a million dollars in assets at the end of one's working career is not that unusual any more. I know folks who have that by their 40's. These people generally don't think of themselves as wealthy and live relatively modest, comfortable lives.

Sure, there are the 4% of sub-prime borrowers & folks in Louisiana who are having a rough time however, the vast majority of Americans enjoy very high standards of living...higher than they grew up with.

 
At 4/14/2008 4:05 PM, Anonymous Lars said...

It's a testement to our system that more people are getting rich in spite of government's best efforts to take the money.

 
At 4/14/2008 4:12 PM, Blogger Walt G. said...

"Having a million dollars in assets at the end of one's working career is not that unusual any more."

As long as you are healthy, you should not end a career without substantial assets. I would not trust the government to feed me for the rest of my life, nor would I want to.

Your best asset, and best investment, is the ability to provide for yourself regardless of what others do. Wealth is made by that type of thinking; not sitting around waiting for someone to die so that you can get his or her money

 
At 4/14/2008 10:42 PM, Anonymous Anonymous said...

Walt g,

Kudos. Cannot agree more. There are many things we cannot control in life but we can set our own course in life. We choose to create our own lives. We decide what is of value in our lives and what is not. At the end of the day, our lives reflects what we value and who we are.

 
At 8/03/2008 10:22 AM, Anonymous Anonymous said...

Neither this article nor the WSJ's poll really takes into account all the important factors. You don't have to have directly inherited your wealth or even just had inheritance augment your earnings to be helped by you financial position in society. A lot of being successful is contacts and networking, and the foundation of that for most well off people was school (college/university) and social clubs associations etc. You don't even have to have done well in college to get a huge boost from having been to a "good" school. There are a lot of college drop-outs who made it big like for instance, Bill Gates. It's a CLASS thing. Despite the rags to riches stories that are so well publicised in the media, poor and middle class people are at a huge disadvantage from the start and when you factor in the way the tax code, etc. has been fixed to give the rich an advantage it's no wonder that the ranks of the super wealthy have grown.

 

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