In 1900, it required a net worth of $39,000 to be classified as America’s top 1%. The median factory worker earned just shy of $500 per year. At the end of the Gilded Age, it would have been a fair claim to suggest that the United States resembled an aristocracy, as over half of America’s richest 1% received at least $20,000 in inheritance. Statistically speaking, if you were at the top crest of America’s wealth distribution, it was more likely than not that your wealth could be tied to receiving something from your parents.
Modern America, with all of its hand-wringing over the role that intergenerational wealth transfers play in creating systemic unfairness at a minimum and consolidated political power at a maximum, overstates the extent to which calcified wealth is present in the United States today.
The best work I’ve encountered that really dives into the data points is “Whatever Happened to the Great Inheritance Boom?” by New York University professor Edward N. Wolff and Maury Gittlemann from the U.S. Bureau of Labor Statistics.
According to his research, the top 1% in America requires a net worth of $6.8 million. Only 14.7% of wealth transfers in the United States involves a wealth transfer of $1 million in more. This still requires additional work to reach the top 1% status, but gives us a glimpse of the role that a meaningful inheritance plays in making someone a member of the top 1%. Only 2.27% of the top 1% reaches that status through an inheritance of $6.8 million or more that automatically puts them there. Assuming conservatively that a third of those receiving at least a $1 million inheritance don’t increase it six fold, this means that only one in ten of those with a $6.8 million net worth or higher received that the bulk of their funds through inheritance.
Now, as baby boomers age, it is also likely true that the figure will creep back up above the current 14.7% figure. With $22 trillion in wealth that needs to be doled out from those born between 1935 and 1955, it would not surprise me to see a return to the early 1990s ratios in which 20-25% of the wealth in the top 1% comes from an inherited source.
Even this does not bother me. Why? Because the top 1% of wealth in America is not a static group. As of 2007, the average American that reaches the top 1% status only remains there for 8.2 years of his life. That is a function of compounding, which tends to give the greatest returns near the end of one’s life once the snowball has had decades to build up while rolling down the hill.
For the aspiring wealthy, this creates a problem. The point at which you reach the status of glittering rich is also the point at which your physical ability to enjoy the wealth is diminishing. The best solution I have is to work your rear off early in life to get your hands on a block of stock that generates present income and grows it at a fast rate. If you got your hands on a $25,000 block of Chevron stock in the 1990s, you would have collected over $1,000 then and would be collecting almost $5,000 per year now–even while spending every single dividend check for the past two decades. It allows wealth to serve by giving you a little something every three months to allocate as you wish, but you also keep the golden goose intact so that greater wealth awaits you.