Tired of the indignity of work?

Long to be free of the employment tax?

Well, take heart!

The cost of being independently well-off has declined for the first time in decades. By my calculation, the portfolio you need to be better off than 75 percent of the Joneses in America will clock in at $2,162,000 this year, down nicely from the $2,504,000 required when the amount peaked in 2004.

This miracle has been brought to you by the Federal Reserve and higher interest rates. From the early '80s until very recently, the yield on a portfolio of stocks and bonds has steadily declined. Compound this by the rising cost of living, and the amount of money it takes to quit working has soared.

The size of the proverbial "Take your job and…" portfolio, for instance, rose from a mere $430,000 in 1985 to its $2,504,000 peak in only 18 years. Now, thanks to two years of steadily rising interest rates, investment yields are no longer a cause of embarrassment.

So you'll need less money to be independently well-off.

Needless to say, many will take issue with the idea that such a piddling amount of money will allow you to join the leisure class. Even back in 1999, those with only $1 million to $10 million in financial assets were categorized as the "semi-affluent." It's unlikely that a $2 million nest egg will cause much excitement in the money management community.

But let's talk about real people.

Our friends at the Internal Revenue Service regularly examine our tax returns to see who has what. Their figures give us an idea of where we stand. In 2003, the last year for which they provide official figures, a household needed an Adjusted Gross Income of at least $295,495 to be in the top 1 percent of all earners. A household was in the top 5 percent with $130,080, the top 10 percent with $94,891 and the top 25 percent with $57,343. You were right in the middle with an AGI of $29,019. Many urban readers will be surprised at how high on the hog they are because it sure doesn't feel that way.

I've estimated the income figures for 2004, 2005, and 2006 by growing the income threshold at the 3.49 percent rate that prevailed from 1985 to 2003. That may turn out to be a bit high, or low, but it won't change the main point of this column--- the tide of investment income has turned. It's now rising, after decades of falling. As top quartile income was rising at 3.49 percent, inflation was running at a 3 percent annual rate (see table below).

At Last! The Cost of Being Wealthy Declines.

This table shows the size of portfolio you would need to produce the income of a household in the top 25 percent of all households if you invested 50 percent of your portfolio in 5 year Treasury notes and 50 percent in the S&P 500 Index.

Year

S&P500 Yield

5Yr Treasury Yield

50/50 Portfolio Yield

Top 25% AGI Threshold

50/50 Rentier

1985

4.25%

10.12%

7.19%

$30,928

$430,452

1986

3.49%

7.30%

5.40%

$32,242

$597,627

1987

3.08%

7.94%

5.51%

$33,983

$616,751

1988

3.64%

8.47%

6.06%

$35,398

$584,608

1989

3.45%

8.50%

5.98%

$36,839

$616,552

1990

3.61%

8.37%

5.99%

$38,080

$635,726

1991

3.24%

7.37%

5.31%

$38,929

$733,817

1992

2.99%

6.19%

4.59%

$40,378

$879,695

1993

2.78%

5.87%

4.33%

$41,210

$952,832

1994

2.82%

6.68%

4.75%

$42,742

$899,832

1995

2.56%

6.77%

4.67%

$44,207

$947,631

1996

2.19%

6.07%

4.13%

$45,757

$1,107,918

1997

1.77%

5.77%

3.77%

$48,173

$1,277,798

1998

1.49%

5.15%

3.32%

$50,607

$1,524,307

1999

1.25%

5.54%

3.40%

$52,965

$1,560,088

2000

1.15%

6.15%

3.65%

$55,225

$1,513,014

2001

1.32%

4.55%

2.94%

$56,085

$1,910,903

2002

1.61%

3.82%

2.72%

$56,401

$2,077,385

2003

1.77%

2.97%

2.37%

$57,343

$2,419,536

2004e

1.72%

3.43%

2.37%

$59,344

$2,503,966

2005e

1.83%

4.05%

2.58%

$61,415

$2,385,049

2006e

1.92%

5.10%

2.94%

$63,559

$2,161,871

Sources: www.irs.gov, Economic indicators, Federal Reserve Bank of Dallas

Needless to say, being in the top 25 percent of the national distribution of income will feel a lot better in some spots than in others. Trotting around Palm Beach, Naples, Jackson Hole, Aspen, Palm Springs or La Jolla is likely to feel pretty shabby on $2.1 million. On the other hand, it could feel pretty plush in places that still lack BMW dealerships or don't yet have at least 12 varieties of goat cheese in the local supermarket.

How much lower can the portfolio requirement go?Try this. If stocks were to return to more normal dividend yield levels, say 3.3 percent, and intermediate-term

Treasurys were to yield about 5.5 percent, the yield on the 50/50 portfolio used here would rise to 4.4 percent. The amount of money required to yield $63,559 would drop to "only" $1,444,522.

On the web:

Tuesday, October 12, 1999: The next revolution in financial advice

Sunday, October 24, 1999: Are you "semi-affluent?"

IRS Tax and income statistics