Why the rich don’t feel rich

7/17/2019

The Dr-ess and I had an interesting talk earlier this year after doing our taxes.

It went something like this:

The Dr-ess: “Holy crap! We made a lot of money last year!”

Me: “You’re right! But where the heck did it all go? And why don’t we feel rich if we’re making that kind of money?”

To recap, I racked up $300,000 in student debt while in medical school and residency. Luckily, during that time my wife was dutifully working and saving money. Her parents also contributed a lot of money towards our first house, which we purchased near the bottom of the market in 2010.

With the help of an unprecedented bull market, our stock investments in 2018 eclipsed over $1 million. Together, we also make a great income, allowing us to call ourselves part of the “1%”. We definitely feel lucky.

But we don’t feel rich. Especially in Los Angeles, we feel decidedly middle class and far from financially secure.

*cue the world’s tiniest violin*

Hate and scorn

If this scenario doesn’t elicit a lot of sympathy in the depths of your soul, you’re not alone. There have been a lot of people annoyed about the phenomenon of rich people claiming they’re middle class, or just not admitting that they’re rich.

These articles pop up with regularity in the press and media:

Check out this one from 2017 in the NY Times:

“The rhetoric of “We are the 99 percent” has in fact been dangerously self-serving, allowing people with healthy six-figure incomes to convince themselves that they are somehow in the same economic boat as ordinary Americans…”

Stop Pretending You’re Not Rich by Richard V. Reeves

I readily admit that on paper, my financial situation look pretty peachy. But for many reasons, I don’t feel rich.

According to a new survey in USA Today from Ameriprise Financial, I know that I’m not alone in feeling this way.

This survey of over 3000 high net worth Americans found:

Only 18% of millionaires felt wealthy
60% percent of the millionaires felt they were upper middle class
25% felt they were middle class

So not many millionaires actually feel rich! What could explain this phenomenon? I believe there are three main reasons:

Paper wealth is different from financial independence
Home equity doesn’t produce cash flow
There are poor 1%-ers and rich 1%-ers

Paper wealth is different from financial independence

If you’re a high income professional, you may have plenty of money coming in via your paycheck each month. You might also have a lot of money stashed away in your retirement accounts.

But if your expenditures are massive, even a sizeable war chest can be rapidly depleted with a job loss.

I believe this is a primary factor that keeps high income professionals from feeling rich, even if they have plenty of money stashed away in their retirement accounts or investments. Without the constant stream of income from their day job, their lifestyle can quickly grind to a halt.

“Rich” people are supposed to have the financial means to live the life they choose, without having to rely on others. If you can’t support your lifestyle without the income from your job, you are not financially independent. This dependence on the job translates into a feeling of financial insecurity that the truly rich are not supposed to have.

I’d be in trouble if I were fired

If I were fired tomorrow, I’d be in trouble. Our cost of living currently is quite high, and unless I got another job lined up fairly quickly, we’d have to quickly dip into our savings to cover our costs.

I’m trying a grand experiment to keep our lifestyle intact while simultaneously working towards moFIRE, but it’s a work in progress. Only time will tell if we’ll be able to pull it off.

This is of course a great argument against having high living costs. It’s much easier to get through a job transition when your living costs are low.

Home equity doesn’t produce cash flow

Another factor why the rich don’t feel rich is the way their wealth is typically stored.

As I pointed out previously, the super rich do things a bit differently, with most of their wealth concentrated in business and real estate.

Check out this great chart again:

The mere mortals (net worth between $471k – 10.3M), still hold most of their money in:

Equity in their primary home
Retirement accounts
Stocks, securities, mutual funds and trusts

The biggest chunk of money, even in this group, is still concentrated in the primary residence. But even if you own a 14 bedroom mansion in the middle of Beverly Hills, your equity in the home is not readily accessible when sh!t hits the fan.

Likewise, there are costs and penalties, both monetary and psychological, to accessing stocks and retirement accounts.

The “ultra rich,” on the other hand, have 49% of their wealth concentrated in business and real estate, two areas which typically can generate significant cash flow.

This diversification of income and cash flow sources protects the ultra rich from financial risk.

Without cash flow producing investments, wealth as measured by home equity and stock investments can feel remarkably imaginary.

My wealth seems ephemeral

I feel this to some extent when I check my net worth on Personal Capital.

The pixels on the screen change from month-to-month but my wealth feels ephemeral as ever.

I’m trying to remedy this issue by moving more assets into real estate, but it’s also definitely in the experimental phase.

Read more:

There are poor 1%-ers and rich 1%-ers

Finally, wealth stratification amongst the 1% is a real phenomenon. If you are just barely qualifying for membership into the 1% club, you’re like that frumpy high school kid trying to hang out with the better dressed cool kids. It’s not a comfortable position.

This article from 2015 from the Mic website explains this point:

“The rich themselves are extremely stratified, and the higher up the ladder you go, the wider the gulf between the rungs.”

Why Do So Many Rich People Think They’re in the Middle Class? by Zeeshan Aleem

There’s definitely evidence for this. An article from CNBC looked at the difference in the income required to be in the 1% in various cities around the US. It then compared this to the average 1%-er income in each of those cities.

Let’s look at California:

Annual income required to be in the top 1 percent: $514,694
Average annual income of the top 1 percent: $1.69 million

The 1% are not all alike

Even though the Darwinian Dr-ess and I are technically part of the 1% by virtue of our dual income, we are nowhere near the average income for the 1% in Los Angeles.

If I tried to lump myself into the same pot as all the other 1%-ers, I may feel that we should all go to the same schools, drive the same cars, and live in the same neighborhoods.

But if the average 1%-er is out earning me by a factor of three, it’s not so easy to keep up with the Joneses.

We ran into this issue recently when we considered moving our 5 year old from his current private school to a “better” one across town. The cost of his annual tuition is already about $25,000 / year. The other school is about $35,000 a year (yes, for kindergarten).

We didn’t make the move for a number of reasons, including cost. For your average Los Angeles 1%-er, the extra $10,000 wouldn’t have been an issue. It certainly was a consideration for us, though.

Conclusion

Perhaps like me, you make a good income and have socked away a respectable nest egg. But at the end of the day, you don’t feel rich and don’t know why. Perhaps now you know why.

I know that I’m never really going to feel rich until I achieve these 3 things:

Financial independence
Cash flow producing investments
More comfortable membership in the 1% club

It’s going to be a long and bumpy road on my journey to get there.

Until then…

— TDD