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On Changing Definitions

By Rick Kahler CFP® http://www.KahlerFinancial.com

The surest road to financial success and independence is a long one. That path includes working hard at a career you enjoy, living on less than you earn, taking educated and appropriate risks, and building wealth gradually through diversified investing.

The American Dream

I know many people who have followed this route successfully. Their achievement—what has long been described as the American Dream—should be something to be proud of.

The Associated Press

Apparently, in today’s world, that isn’t the case. At least not according to an Associated Press news article published in the Rapid City Journal on December 9, 2013. The headline was straightforward enough: “Rising riches: 1 in 5 in US reaches affluence.” The article stated that 20% of Americans will have household incomes of $250,000 or more at some point in their lives. This includes those with high incomes for only one year or a few years. During those periods of affluence, they are in the top 2% of earners.

AP Inaccuracies and Assumptions

Beyond that, the piece was filled with inaccuracies and assumptions.

First, its writers confused “affluence” and “wealth.” Someone with a high income in a given year is affluent. Anyone with a basic grasp of finance, however, understands that wealth is associated with net worth. When only 2% of Americans have a net worth of $1 million or more, 20% can’t be accurately described as wealthy.

A One Time Affluent Deal

Some high earners are two-income couples, or professionals like physicians, at the peak of their careers. For others, affluence is a one-time deal.

Consider this example: A couple in their 50’s have always earned around $40,000 a year (adjusted for inflation). The husband inherits a $250,000 IRA from his parents. The couple decides to distribute the money in the IRA, pay the income taxes, and use the balance to pay off their mortgage. For that one year only, their income exceeds $250,000. That certainly isn’t enough to earn the label of “new rich.”

The article notes these “new rich” tend to be “much more fiscally conservative” than other Americans and “less likely to support public programs, such as food stamps or early public education to help the disadvantaged.” This makes anyone who ever receives over $250,000 in any one year look like Ebenezer Scrooge before his transformation. but it is true.

Windfalls

Ask anyone, no matter how liberal, who received a windfall in 2013 and watched 25% to 50% of it disappear to federal and state income taxes, whether they are happy about this income redistribution.

The AP also notes the number of people reporting income of over $250,000 doubled since 1979, leaving the impression that the rich are getting richer while the poor are getting poorer. While this is technically correct, the figures are meaningless because they are not adjusted for inflation.

Accenture’s Institute for High Performance and Research

The article also cites Paul F. Nunes of Accenture’s Institute for High Performance and Research, in support of its contention that those who are newly or temporarily affluent aren’t spending enough. Their “capacity to spend more will be important to a U.S. economic recovery.” Instead, they “spend just 60 percent of their before-tax income, often setting the rest aside for retirement or investing.”

Taking Care of Business

In other words, these successful Americans are doing exactly what the American Dream says they should do. They are taking care of themselves and planning for the future by working to build their short-term affluence into lasting wealth and financial independence.

Assessment

For this, they should be applauded. It would be more helpful to our country, economically and socially, to see them as role models rather than part of the problem. Instead of trying to bring successful people down, we would achieve more by using their example to lift others up.

More:

• Financial Windfalls
• Economic Crisis Management
• On Inherited Money

Conclusion

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Filed under: Financial Planning | Tagged: Accenture's Institute for High Performance and Research, AP, Associated Press, Financial Planning, household income, new rich, Paul F. Nunes, Rick Kahler CFP®, US affluence, Wealth, windfalls | Leave a comment »