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Income Mobility: Rich or Middle Class?

This is a discussion on Income Mobility: Rich or Middle Class? within the Politics forums, part of the US Discussion category; Quote: Originally Posted by Polk Quote: Originally Posted by Skull Pilot Over a lifetime even one with a modest income can live off his investments ...


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  #46 (permalink)  
Old 01-07-2012, 05:58 AM
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Quote: Originally Posted by Polk View Post
Quote: Originally Posted by Skull Pilot View Post
Over a lifetime even one with a modest income can live off his investments eventually

Lets say a horribly average guy makes a horribly average income of 45K for his entire life. We'll assume no raises and that he works from age 22 to age 67

If he saves 20% of his gross income every year and makes an average return of 8% ( not outrageous over a 45 year span) he would have saved 4.375 million dollars

If he then earns 5% after age 67 and lives on 3% he will have an income of nearly 11K a month and his nest egg will still grow every year by 87,500 dollars.

And he did it all on 45K a year.

So you see wealth and multi-generational wealth is not out of the reach of the so called middle class.

And there are endless possibilities here. Let's say he retired when his nest egg was 2 million. If he withdrew only the 45K a year and still earned our assumed 8% not only would he be living off his investments which would make him rich by your definition but his nest egg would still be growing by about 6% a year.
Your statements do show that wealth is very much out of the reach of the middle class. Even accepting 8% returns as realistic (which is highly doubtful), it would take a pre-tax income of about 60k to have 45k in post-tax income (this was a back of a napkin sort of estimate, assuming no state taxes would roughly equal the amount of deductions created by savings vehicles). An income of 60k a year would place someone in the 80th percentile of the U.S. income distribution. And even then, you're talking about saving $750 out of a total paycheck of $3,750.
Over a 40 year time frame an 8% return is more than doable. And I'm not talking after tax. Saving 20% of your gross income should be the goal for everyone.

I used 45K because the last time I checked that was the median income in the US.

You'll also notice that I kept the income the same for the entire length of the hypothetical career.

5000 of that 9000 a year can be saved in an IRA thereby reducing the tax burden, the rest could be saved in a company retirement account if offered again tax deferred.

So the tax burden will only be on 36K of the 45K in income.

Of course if you can save after tax you do better in the long run because you pay a lower capital gains rate and the government can't tell you how much money you have to withdraw every year as it can with IRAs and other retirement savings.

Now a single guy can certainly do this. And a married couple certainly can save 20% of one income. I know a couple who lived entirely off of one salary and saved 100% of the net of the wife's income.

They raised 3 kids and retired at 50.
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Last edited by Skull Pilot; 01-07-2012 at 06:00 AM.
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  #47 (permalink)  
Old 01-07-2012, 07:59 AM
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Quote: Originally Posted by Dragon View Post
Something that people don't really understand (because it's not intuitive) is that moving from a working-class to a middle-class income is a very different process than moving from a middle-class income to a rich one.

As a working-class person, you work at a lowish-income job. As a middle-class person, you work at a higher-paying job. In both cases, your income is derived from pay for your work.

As a rich person, in almost every case (pop stars, movie stars, TV stars, and sports stars aside), your income isn't just higher but derived from a different source. Rich people derive most of their income from investments, not from pay for their work. It's either from profits of businesses which they own (outright or, more often, partly own in the form of stock), or from interest and capital gains on financial instruments.

What this means is that there are two types of income mobility: moving up in job pay, which can turn a working class person into a middle-class person, and moving from paid work to profit income, which can turn a middle-class person into a rich person. These are completely different processes.

What's more, these two types of income mobility are antithetical. In order to make it easier for people to move up from the working class into the middle class, we need high-paying jobs in abundance, and easily-affordable education so people can prepare themselves to do those jobs. But in order to make it easier for people to move from the middle class to true riches, we need high profits on business and high returns on investments, together with low taxes on upper income levels, all of which are hurt by the exact things that make moving into the middle class easier.

So in the end, we have to choose which kind of income mobility we want. Do we want to make it so as many people as possible can live a middle-class lifestyle? Or do we want to make it so as many people as possible can become truly rich?

We can't do both.
NOt if we are measuring weath BY COMPARISON, I quite agree.

However we can make the nation wealthier, and by doing so we can make the rich even richer and the workers better off.

How did we do that last time we did it?

LABOR UNIONS.

They not only created the middle class, but by creating that more affluent class, they insured that this nations WEALTHY were the weathiest people in the world.

We're actually migrating back to the THIRD WORLD macro-economic model where the wealthy are BY COMPARION much wealthier than the national working class, but less wealthy overall.
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  #48 (permalink)  
Old 01-07-2012, 08:24 AM
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  #49 (permalink)  
Old 01-07-2012, 08:29 AM
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Quote: Originally Posted by Skull Pilot View Post
Quote: Originally Posted by Polk View Post
Quote: Originally Posted by Skull Pilot View Post
Over a lifetime even one with a modest income can live off his investments eventually

Lets say a horribly average guy makes a horribly average income of 45K for his entire life. We'll assume no raises and that he works from age 22 to age 67

If he saves 20% of his gross income every year and makes an average return of 8% ( not outrageous over a 45 year span) he would have saved 4.375 million dollars

If he then earns 5% after age 67 and lives on 3% he will have an income of nearly 11K a month and his nest egg will still grow every year by 87,500 dollars.

And he did it all on 45K a year.

So you see wealth and multi-generational wealth is not out of the reach of the so called middle class.

And there are endless possibilities here. Let's say he retired when his nest egg was 2 million. If he withdrew only the 45K a year and still earned our assumed 8% not only would he be living off his investments which would make him rich by your definition but his nest egg would still be growing by about 6% a year.
Your statements do show that wealth is very much out of the reach of the middle class. Even accepting 8% returns as realistic (which is highly doubtful), it would take a pre-tax income of about 60k to have 45k in post-tax income (this was a back of a napkin sort of estimate, assuming no state taxes would roughly equal the amount of deductions created by savings vehicles). An income of 60k a year would place someone in the 80th percentile of the U.S. income distribution. And even then, you're talking about saving $750 out of a total paycheck of $3,750.
Over a 40 year time frame an 8% return is more than doable. And I'm not talking after tax. Saving 20% of your gross income should be the goal for everyone.

I used 45K because the last time I checked that was the median income in the US.

You'll also notice that I kept the income the same for the entire length of the hypothetical career.

5000 of that 9000 a year can be saved in an IRA thereby reducing the tax burden, the rest could be saved in a company retirement account if offered again tax deferred.

So the tax burden will only be on 36K of the 45K in income.

Of course if you can save after tax you do better in the long run because you pay a lower capital gains rate and the government can't tell you how much money you have to withdraw every year as it can with IRAs and other retirement savings.

Now a single guy can certainly do this. And a married couple certainly can save 20% of one income. I know a couple who lived entirely off of one salary and saved 100% of the net of the wife's income.

They raised 3 kids and retired at 50.
If you are lucky to be well off enough to be able to save 20% of your income at those figures what will you be left with when you take into account the inflation rate. The rate that is obviously around 8-9%.

What if you are in the lower income side of the coin, and you bring in 30k a year...

See how pointless savings and even trying is?? The system is broken.
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  #50 (permalink)  
Old 01-07-2012, 10:24 AM
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Quote: Originally Posted by WatertheTree View Post
Quote: Originally Posted by Skull Pilot View Post
Quote: Originally Posted by Polk View Post

Your statements do show that wealth is very much out of the reach of the middle class. Even accepting 8% returns as realistic (which is highly doubtful), it would take a pre-tax income of about 60k to have 45k in post-tax income (this was a back of a napkin sort of estimate, assuming no state taxes would roughly equal the amount of deductions created by savings vehicles). An income of 60k a year would place someone in the 80th percentile of the U.S. income distribution. And even then, you're talking about saving $750 out of a total paycheck of $3,750.
Over a 40 year time frame an 8% return is more than doable. And I'm not talking after tax. Saving 20% of your gross income should be the goal for everyone.

I used 45K because the last time I checked that was the median income in the US.

You'll also notice that I kept the income the same for the entire length of the hypothetical career.

5000 of that 9000 a year can be saved in an IRA thereby reducing the tax burden, the rest could be saved in a company retirement account if offered again tax deferred.

So the tax burden will only be on 36K of the 45K in income.

Of course if you can save after tax you do better in the long run because you pay a lower capital gains rate and the government can't tell you how much money you have to withdraw every year as it can with IRAs and other retirement savings.

Now a single guy can certainly do this. And a married couple certainly can save 20% of one income. I know a couple who lived entirely off of one salary and saved 100% of the net of the wife's income.

They raised 3 kids and retired at 50.
If you are lucky to be well off enough to be able to save 20% of your income at those figures what will you be left with when you take into account the inflation rate. The rate that is obviously around 8-9%.

What if you are in the lower income side of the coin, and you bring in 30k a year...

See how pointless savings and even trying is?? The system is broken.
Excuse me but inflation has not been 8 or 9% in decades

The past 30 years inflation has fluctuated between 1 and 4% so how you got "obviously 8 - 9%" is beyond me.

everyone I ever worked with when I was a financial planner used to tell me they had no extra money to save. I always and I do mean always could find at least 10% of their gross income to save.
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  #51 (permalink)  
Old 01-07-2012, 05:26 PM
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Quote: Originally Posted by Skull Pilot View Post
Quote: Originally Posted by WatertheTree View Post
Quote: Originally Posted by Skull Pilot View Post

Over a 40 year time frame an 8% return is more than doable. And I'm not talking after tax. Saving 20% of your gross income should be the goal for everyone.

I used 45K because the last time I checked that was the median income in the US.

You'll also notice that I kept the income the same for the entire length of the hypothetical career.

5000 of that 9000 a year can be saved in an IRA thereby reducing the tax burden, the rest could be saved in a company retirement account if offered again tax deferred.

So the tax burden will only be on 36K of the 45K in income.

Of course if you can save after tax you do better in the long run because you pay a lower capital gains rate and the government can't tell you how much money you have to withdraw every year as it can with IRAs and other retirement savings.

Now a single guy can certainly do this. And a married couple certainly can save 20% of one income. I know a couple who lived entirely off of one salary and saved 100% of the net of the wife's income.

They raised 3 kids and retired at 50.
If you are lucky to be well off enough to be able to save 20% of your income at those figures what will you be left with when you take into account the inflation rate. The rate that is obviously around 8-9%.

What if you are in the lower income side of the coin, and you bring in 30k a year...

See how pointless savings and even trying is?? The system is broken.
Excuse me but inflation has not been 8 or 9% in decades

The past 30 years inflation has fluctuated between 1 and 4% so how you got "obviously 8 - 9%" is beyond me.

everyone I ever worked with when I was a financial planner used to tell me they had no extra money to save. I always and I do mean always could find at least 10% of their gross income to save.
People are prisoners of their own mind, not anything else. You will never convince dufus that inflation is not 8-9% a year. You will never convince pea-brain that they can easily get ahead with frugal living and regular investing.
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