I wondered why. By any reasonable measure he was doing very well. Then in his mid-fifties, he had a successful practice, an income over $300,000 a year, a $700,000 house with no mortgage, and investments approaching $1.5 million. By the Wealth Scoreboard, he was comfortably into the top 5 percent.
That level required a net worth of about $1.4 million in 1998. But he was well shy of the $5.8 million needed to be in the top 1 percent.
I asked what could possibly depress him about his financial situation?
"I'll never be in the top 1 percent," he answered. He sounded genuinely disappointed.
In fact, membership in the top 1 percent is usually limited to people who own a business or have inherited wealth. That's the way it is. We talk a lot about saving and investing to accumulate wealth but the blunt fact is that you need to own a business to accumulate major wealth--- the kind owned by the top 1 percent.
Fortunately, there is another kind of wealth for the rest of us--- the other 99 percent. This wealth does not appear in the Survey of Consumer Finances because it is so difficult to measure. It is our implied wealth in future income benefits. Social Security (or its equivalent) is one source and virtually all workers have it. Another source is private pensions, which nearly 40 percent of workers will have.
Social Security won't do much for the very rich. But it does a lot for anyone who isn't at the top of the wealth scale. Indeed, the lower you are on the conventional wealth scale, the greater the importance of implied wealth.
Think I'm crazy?
Then consider these examples.
• Two women meet at their 40th college reunion. They talk about their careers and concerns for the future. One is self-employed and saves aggressively. Her tax-deferred investments now amount to $420,000. That's about 6 times her $70,000 income. The other works for a large company with a defined benefit pension plan. She has the same income but very little in savings. She will receive a lifetime pension of $35,000 a year based on her 40 years of service. Which is better off? (Answer: the one with the pension. Valued at 17 times income, it's worth nearly $600,000.)
• A man who was born after 1943 receives his annual Social Security statement. Based on his earnings record, he will be eligible for monthly benefits of $1,300 a month at age 63. Valued as an inflation-protected annuity, his annual $15,600 is worth about 24 times as much, or $374,000. That's about double the median household net worth by most measures. In addition, if he works another 3 years, his benefits will rise at least 8 percent a year (more if his earnings record improves and for inflation adjustments) to $1,638 a month. That's an increase of $338 a month or $4,056 a year. The increase, like his initial benefit, is worth about $97,300--- far more than most people are likely to save in three years.
In 1997 economists Arthur B. Kennickell and Annika E. Sunden examined the impact of this implied wealth on the distribution of conventional wealth. Dr. Kennickell is at the Federal Reserve Bank in Washington, DC. Dr. Sunden is now with the Center for Retirement Research at Boston College. "Overall", they found, "the results indicate that Social Security and pensions constitute a substantial fraction of household wealth, comprising 82 percent of total net worth."
In other words, implied wealth--- the stuff not counted in most measures of wealth--- is about 4 times as great as conventional wealth.
"…the bottom 90 percent", the two researchers concluded, "hold the overwhelming majority of pension wealth and Social Security wealth."
Will any of this pay your bills? Will it make your retirement more secure?
Yes, in fact, it will. Social Security is real. So are corporate pensions. That's why both deserve a lot more attention in our financial planning.
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