Last week MarketWatch published the following article: Opinion: Social Security benefits too low? It?s mostly your own fault. Now I don?t want to be too critical of this article ? it makes the valid point that Social Security benefits are reduced by early retirement. I don?t agree with their premise in all circumstances, but it?s mainly the title I want to focus on. (Though the criticism I will level is that in typical financial media fashion, the article completely ignores the fact that a lot of people who collect benefits before 66 or 67 do so because they?ve been effectively expelled from the workforce.)
But to the main point, the collective thinking of the financial media is commonly it?s your fault you?re not rich. The MarketWatch article is just one example.
They?ll cite the boilerplate list of reasons why this is ?self-evident?:
- Didn?t try to make more money.
- Chose the wrong career.
- Changed jobs too frequently.
- Didn?t save enough money.
- Didn?t invest enough or invest the right way.
- Spent too much (a claim that?s often true).
- Made bad life choices.
And on and on. It?s similar to when we hear that someone comes down with cancer, and the first question we ask is did he/she smoke? What we?re really trying to determine is that we won?t face a similar fate because we don?t smoke. We?re trying to assure ourselves that we?re thinking/living right, and the other person isn?t. It?s a comforting assumption, even if it?s mostly wrong.
The Tyranny of the ?Just World Hypothesis?
The above are examples of the just world hypothesis. The hypothesis holds that the world is basically a good and just place, where people “get what’s coming to them”. If you’re smart, you’ll be rewarded. If you’re not, you’ll be punished.
It’s a neat theory, usually practiced unconsciously, that enables the successful to reward themselves for their brilliance, while blaming others for their own stupidity. This is why it’s so easy to either say or imply it’s your fault you’re not rich.
Now I don’t want to paint with too broad a brush, and say this is never true. The reality is that some do lead destructive lives. We all know people who do. Reader/commentor Tim Keefe described communities that have fallen into a death spiral. I?ve expanded that to include individuals. People can go into an economic death spiral. Many do bear much of the blame for that condition, but many also have been forced into it by circumstances. In fact, anyone can fall into that spiral given the right mix of bad events.
While it’s true enough that in life we can overcome many traumas, it’s certainly not the case every time around.
A person displaced from a career late in life may be forced to deplete savings just to survive. Unless you’ve been in the position of being unemployed after 50, you may not be able to conceive of the Catch-22 that person is trapped in.
Others have done the right things in life, but life got in the way. It may have been the onset of a serious illness, either to the person or a close family member. In either case, both life and finances are materially disrupted.
And sometimes a crisis can be so traumatic that full recovery isn?t possible.
Words of Wisdom from The Greatest Showman
There was an excellent line by Jenny Lind (played by Rebecca Ferguson) in the movie The Greatest Showman. (If you haven?t seen this movie, I strongly recommend it. Not just for the music and entertainment value, but also to get a sense of what a brilliant entrepreneur PT Barnum really was).
She said, It?s hard to understand wealth and privilege when you’re born into it.
What she seemed to be saying is that wealth and privilege don?t understand their own wealth and privilege because they?ve never known any other life. I?ll offer a paraphrase, by saying it?s hard for wealth and privilege to understand the middle and working classes because they weren?t born into them.
F. Scott Fitzgerald said something very similar: ?Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them?unless you were born rich, it is very difficult to understand. They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves??
Now it’s true that there are some people who have worked themselves from the lower classes up to upper middle class and even serious wealth. PT Barnum himself was a prime example.
But by and large, the cherished American idea of upward mobility is mostly a myth, and always was. The saying ?money goes to money? is much closer to the truth. In fact, an article in the Washington Post even suggests downward mobility may be the new reality.
The point is, when you’ve achieved a high degree of success in life, you often develop biases that make you unsympathetic to people who haven’t.
The Financial View From the Top 10%
In America?s Nine Classes: The New Class Hierarchy, Charles Hugh Smith describes the two wealthiest classes as the Oligarchs and New Nobility, who represent the wealthiest 1% of households, and have the lion?s share of the nation’s assets.
Just below the top two classes are the Upper Caste and the State Nomenklatura. These groups represent about 9% of households, and largely constitute what is commonly understood to be the upper middle class.
He described the Upper Caste as ??the technocrat/professional class that manages the Status Quo for the upper classes.? These are the people who work in corporate America and various government agencies, and earn incomes well above the national average. They’re usually college educated, often with advanced degrees, and hold positions in the most respected occupations, such as engineering, IT, medicine, law, and mid- to upper-management.
The State Nomenklatura are well paid government administrators, functioning as something akin to mid- to upper-management in the public sector.
Together, these four classes comprise about 10% of US households.
Let?s put some income numbers on the group.
According to the US Census Bureau, the median household income in the US was $60,336 for 2017.
The median household income for the top 10% of households was $178,793.
In other words, if you?re a top 10% household, your income is roughly three times the median for the nation at large.
The Unacknowledged Advantages of the Top 10%
I think it’s safe to say your view of life will be considerably different if your income is three times the national average. But I’m not sure people who are in the top 10% can appreciate the full value of that advantage.
Many in this group don’t consider themselves to be rich, particularly those outside the top 1%. But if you?re in the top 10% you?re rich by virtue of being at or near the top tier. After all, everything is relative, no matter what your perception of your circumstances may be.
But membership has its privileges, and many nonetheless enjoy the perks of being in the top 10%. These can include:
- Stable employment.
- Generous health insurance coverage.
- Employer sponsored retirement plan participation ? complete with a very generous employer matching contribution.
- Often a reliable forward career track.
This is in stark contrast to the bottom 90%, many of whom are forced to change jobs every couple of years, just to remain employed. Many don’t have employer sponsored health insurance, and are forced to rely on the overpriced government health insurance exchanges. Still others have employer sponsored health insurance, but pay a large share of the monthly premium, and have deductibles of many thousands of dollars.
Many also work without the benefit of an employer sponsored retirement plan, if they can even remain employed with the same employer long enough to get the full benefit. And not nearly everyone gets an employer matching contribution. Even if you do, if you don’t stay with the employer long enough to be vested, it’ll be forfeited.
And finally, perhaps for the majority of people in the bottom 90%, there is no career track. You’re hired to do a certain job, and that’s as far as you’ll ever go.
Why Most in the Bottom 90% Can?t Become the Top 10%
It may be assumed by those in the top 10% that those in the bottom 90% can and should become part of their club. But there are several reasons why that’s not possible.
The first is a mathematical limitation. If 100% of the population becomes the top 10%, then there’s no top 10%. There’s only the 100%, and we?d all be roughly equal. Human nature and the physical limits of the world make that impossible.
More particularly, in any human endeavor, some people will sit at the top, but the majority won’t. That’s precisely why the top is the top – by definition it doesn?t include the majority of people. 100 people may work in a company, each trying to attain one of 10 managers jobs. But in the end, only 10 will achieve it, and the other 90 won’t.
But apart from statistical limitations, there are also factors that have to do with financial considerations.
For example, if you’re born into a prosperous family, you have an inside chance of becoming prosperous by the time you’re an adult. Your family’s financial status may enable you to attend a top college, and even to do so without the burden of student loan debts weighing you down clean through middle age. There may also be family connections that enable you to land one or even a series of important positions.
These advantages are not unsubstantial. If they cause you to earn in excess of $100,000 by the time you?re 30, you have a built-in advantage over the person who’s making $50,000 at the same age. If you’re even reasonably careful in managing your money, it will be much easier to build a large financial nest egg than for the person with a more limited income.
The Direct Financial Aid Factor
When I was in the mortgage business it was common for parents to front down payment money. Among the more prosperous families, the gift might’ve been 20% of a $400,000 house ($80,000). Among families of more limited means, it might have been 5% toward the purchase of a $200,000 house ($10,000).
There are two factors at work in this imbalance:
- If property values double in 10 years, the higher priced house will rise to $800,000. The poorer buyer?s house will rise to $400,000. The wealthier buyers will benefit from twice the capital gain, creating far greater long-term wealth.
- Relative to the value of the houses being purchased, the buyers from the wealthier family will have a lower house payment.
Not everyone who is in the top 10% has enjoyed these advantages. But the majority certainly have. The combination of a top education, an absence of crippling student loan debt, a higher initial income and a more predictable career path, plus the capital accumulation that results from a higher income and the purchase of a more expensive home, make the ability to remain in the top 10% much more likely.
There?s also what we might refer to as soft factors. Chief among them are the general attitudes toward life and wealth. If you were raised in a prosperous household, you adopt the mindset of the prosperous. But if you?ve been raised in a household that’s barely been able to survive, your mind may be set primarily on simply getting by.
The difference between the two thought processes is subtle, but incredibly powerful. One comes up believing she can conquer the world ? because she grew up surrounded by people who did ? and the other hopes mainly to survive ? because that?s what the people in her world did.
Who the Financial Media are Speaking To
The basic problem for those in the bottom 90%, is that the financial media is specifically targeting the top 10%. This isn’t some sort of conspiracy theory either. It makes sense for them to target the upper tier because that’s where the money is.
But the Get Rich Gospel also appeals to those who are not rich. After all, who doesn’t want to be rich? That?s the whole reason people buy lottery tickets. So the bottom 90% follow programs and advice aimed squarely at the top 10%, understandably hoping to glean some inside information.
But still another factor is that many who are in the financial media are themselves in the top 10%. In their world, all things financial are possible. And if you’re not reaping the harvest that’s out there, it’s your fault.
In fact, much of the financial media deals with issues that don’t apply to the survival class. They talk about which way the financial markets are headed, specific investments to buy, how to diversify your portfolio, and how to minimize income taxes, among related topics.
The problem is, while much of this information does have value for the entire population, it’s primarily the language of the rich. After all, managing a large investment portfolio is a rich person?s problem.
To use a TV analogy, it?s like Dallas vs. Rosanne.
The Early Retirement Movement
Being a blogger, one of my pet peeves is the early retirement movement. Financial blogs are awash in this concept, and for some it’s the primary reason for their existence.
My own feeling is that everyone of us should do all we can to move towards financial independence. For some, that may mean building a seven-figure investment portfolio. But for others the goal can be much closer to the ground.
There are some who will say everyone should shoot for early retirement. A few years back, I even got a comment from another financial blogger on this website asking the question if you don’t have $1 million saved up by the time you’re 50, what have you been doing with your life?
Now I realize that in such a person’s mind, money is the measure of all things. That’s a concept I categorically reject, but I realize it’s fairly normal in our culture.
But aside from that, it?s actually fairly easy for people in high income situations to accumulate that kind of money, and to retire early. My issue is that it’s not relevant to the average person.
The Numbers Don?t Work Out for the Average Person
In the typical early retirement scenario, the person advancing the strategy is straight out of the top 10%. It?s usually somebody making something like $150,000 per year ? in their 20s or early 30s.
Now I certainly congratulate people who manage their money successfully. But it’s one thing to save 20% or 30% of your income when you’re making $150,000 a year, and quite another when you’re making $50,000.
For example, if you make $150,000, and pay $30,000 in taxes, you have $120,000 left over. You can save 30% – $45,000 per year ? and still have $75,000 left over for living expenses.
For such a person, saving at that level isn’t a true sacrifice. It’s still very possible to live on $75,000 per year, and to do so quite comfortably. And if you’re saving 30% of your income each year, you will have about $1 million in 10 to 15 years.
Let’s contrast that with someone who’s making $50,000. With about $10,000 taken out in taxes, you’ve got $40,000 left over. If you save 30% of your gross income, that’s $15,000. That will leave you just $25,000 to live on.
Now we’re talking serious sacrifice. To live on that kind of money, you?d have to share a house or apartment with at least three other people, live close enough to work that you could ride your bike, and probably go without health insurance. In 15 years maybe you’d have $300,000. Just don’t have a family in tow.
It may be easy to build a seven-figure investment portfolio when you’re earning $150,000 per year. Not only is the goal doable, but you can still live a fairly comfortable life in the meantime. For the masses, who aren?t earning anywhere near that kind of money, it’s an impossible dream.
That’s why it’s not your fault you’re not rich.
None of this Should be Taken as an Excuse to Give Up Trying
The whole idea of getting rich, no matter how desirable it may seem on the surface, as well as the implication that it’s your fault you’re not rich, isn’t without negative consequences.
First, if you have no realistic chance of being rich ? and most people don?t ? you may give up on the more achievable goal of better managing your finances (under the ?all or nothing? doctrine). Second, it can cause you to expend a lot of energy on a project that can take a lifetime, and still never be achieved.
And third, perhaps most significantly, it can result in mental anguish. Most people have financial problems of one sort or another. But if you believe the solution to eliminating them is to become rich ? and you never accomplish it ? you may internalize what are essentially external problems. That can lead to all kinds of negative consequences, like depression and substance abuse.
Getting rich should never be the goal. But financial independence should always be on your radar.
For most, financial independence can be reached by an ongoing process of a series of financial behavior modifications, like:
- Lowering your cost of living.
- Gradually increasing income (increasing job skills, building a side business or engaging in some sort of gig).
- Saving more money.
- Investing at least some of the money saved.
- Getting out of debt.
You don’t need to come from a prosperous family background to do any of that. You don’t even need to earn a high income. But you do need to modify your financial behavior, and that?s a worthy priority.
In time, you’ll achieve a measure of financial independence, and that might be just what you need to live the life you?ve always wanted.