Wednesday, January 12, 2011

Rich, or Just Well-Off? It's All Relative

I thought this was a very interesting piece from the Economix blog of the New York Times.

I work with a number of clients who, by most statistical measures, could be termed very well off, if not wealthy. And yet most of them do not in their own minds feel rich.

I suppose there are a number of reasons for this. Many of my clients, for example, came from relatively modest backgrounds to achieve financial success in their chosen fields. However, they still remember those days of living on very tight budgets, struggling to make ends meet, and find it hard to leave their frugal habits behind.

However, as the Times piece indicates, there could be another reason. In the very high income brackets, the differences in income become much more pronounced (I have added the areas of emphasis):

... for the bottom 90 to 95 percent of Americans, the income distribution is relatively flat. For an American household in bottom 30 percent of the distribution, a move upward of five percentiles (to the 35th percentile) would mean an increase in cash income of a just few thousand dollars. Same goes for a family at the 40th percentile, and at the 60th percentile.

But... around the percentiles in the mid-90s...the monetary divisions between percentiles grow much greater. Those in the middle earn a little less than people a few percentiles up from them, whereas those at the top earn a lot less than their counterparts in nearby, higher percentiles. For example, those who aspire to hop from the 30th percentile to the 35th percentile would need in increase their cash income by $4,000 annually (or by about 17 percent); those who aspire to hop from the 91st percentile to the 96th percentile would require an increase of $324,900 (or 171 percent).

In other words, at least in dollar terms, there is much greater inequality at the very top of the income scale than at the bottom or in the middle.

Why So Many Rich People Don't Feel Very Rich -

In other words, a high net worth client in comparison to the general population is considerably better off, yet in comparison to the group they might socialize with in tony places like Nantucket or Palm Beach the same client feels - dare I say it - poor.