What Does it Mean to Be a One-percenter?

The phrase “one-percenter” can be an ambiguous term.  What does it take to be in the top one percent? In the United States, we look at it by income or net worth.

The top one percent by income

According to the most recent data released by the IRS, if your household income topped $515,000 in 2017, you ranked in the top 1% of income in the U.S. It took an additional 7.2% to reach the 1% mark from the prior year, equal to an additional $37,106 of income.

While the IRS’s national household figures provide valuable insight, relying on them to rank wealth does have some limitations.  For instance, households might have several people working, and governmental transfer payments including social security, Medicaid, and other federal, state and local subsidies are included in the mix.  Also the national ranking fails to account for the spending differential and varied cost of living in different parts of the country.  After all, a household earning $150,000 a year in rural Ohio or southwest Virginia feels and spends a lot differently than one in Cincinnati or Washington, D.C. 

Interestingly, of the 138,945,000 individual tax returns filed in 2017, 1,432,952 returns fell into the top 1% category. The top 50% tax earners were, on the other hand, more representative of taxpayers across the country, with an income threshold of $41,740. There were over 71 million taxpayers in the top 50% in 2017. While many individuals and households in the U.S. have zero or negative net worth, the same is not true for income.

The top one percent by net worth

The top one percent of household net worth begins at approximately $10,000,000.  Ranking by net worth is a more useful way to determine the top one percent than using household income. Think of it as the difference between accumulated wealth and current disposable income.

Net Worth of the 10%, 2%, 1% and 0.10% Households

‘Net worth’ millionaires are not considered in the top 1%; they are closer to the top 10%. A household with $1,000,000 in net worth needs approximately 10x their wealth to be in the top 1%. And those are 2017 numbers – expect the numbers to increase with the 2020 releases.

Note that moving from the top 10% to the top 1% of net worth wealth requires a significant jump while doing the same with income requires a smaller bump. In other words, net worth has a more extreme spread than income does.

The data does support some correlation between income and net worth, but it can change with age.  Americans 55 and older hold 3 times the wealth of millennials. 

America’s wealthiest households now hold almost as much wealth as the upper and middle class combined.  And the wealthier one becomes, the more opportunities to benefit from specialized investment advice and vehicles that are unavailable to many.

Regardless of how much one earns, wealth is determined by how much one is able to keep.  Real wealth is determined on the balance sheet.  Alexander Green, chief investment expert of the Oxford Club offers this formula for those interested in increasing their wealth ranking: “Maximize your income (by upgrading your education or job skills). Minimize your outgo (by living beneath your means). Religiously save the difference. (Easier said than done.) And follow proven investment principles.”

Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice. Sources: IRS, Bloomberg © Madison Wealth Management 2020