Nearly all Americans, no matter their wealth or their views on money, share the goal of crossing the retirement "finish line" on their own terms. Saving and investing is critical to achieving that goal, and having a steady, high-paying job can greatly enhance your ability to save and invest.
Within the U.S., we have a huge range of income levels. According to CNN, 42% of the world's millionaires live in the U.S., and about half of all people who might be defined as the "super rich" (those with $50 million or more in assets) reside in the United States. The U.S. is often viewed by the business world as a land of opportunity, and these overwhelming millionaire statistics essentially prove this point.
At the same time, an inordinately high number of Americans continue to live in poverty. Based on U.S. Census Bureau data from 2013, 14.5% of all Americans --more than 45 million people -- were living below the federal poverty line of $11,490 for a single person or $23,550 for a family of four. Since 2000, the number of Americans as a percentage of the population who live under the federal poverty line has risen from a low of 11.3% to a peak of 15.1% in 2010. This growth in poverty somewhat coincides with a drop in median household income, which peaked in 1999 and has been sinking in most years since then.
The average American household earns this much in a year
You might be wondering what it takes to be in the upper-half of American households in terms of annual income? We have our answer thanks to the U.S. Census Bureau's 2015 Current Population Survey and Annual Social and Economic Supplement.
As you can see above, the median point in terms of household income is $53,700, with the curve showing that 40% of all American households earned between $12,300 and $53,700 in 2014. By comparison, to be in the top 10% of American households in 2014, per U.S. Census Bureau data, your household would have had to bring home $157,500.
But don't let this chart fool you. Although it suggests strength in numbers for low-income and middle-income families, both groups combined control very little real wealth in the United States.
Kiplinger, which aggregated data from the Internal Revenue Service from 2013 (the year prior to the U.S. Census data you see above), found that the top 10% of income-earning Americans generated essentially 46% of all U.S. income. If we back this figure out to include the top 50% of U.S. wage earners in 2013, we have 88.5% of all income earned.
Why income inequality is increasing
In even simpler terms, it appears income equality is growing in this country -- and it's likely being fueled by three factors.
First, the well-to-do are taking advantage of one of the most lucrative tax advantages afforded to Americans: long-term capital gains taxes.
Capital gains on stocks, bonds, and other assets, are taxed either one of two ways: short-term or long-term. Short-term capital gains include any asset held for a year or less. If you buy a stock and sell for a profit in a year or less, you'll pay ordinary federal income tax on your capital gain that's equal to your peak marginal tax bracket. In other words, if your last dollar earned was in the 28% marginal tax bracket, you'll be required to pay a 28% tax on your capital gain. Because ordinary federal income tax brackets extend all the way to 39.6%, you could owe up to 39.6% on short-term capital gains.
Comparatively, long-term capital gains of assets held for a year and a day or longer are taxed at three levels. People in the 10% or 15% peak marginal tax bracket owe nothing on long-term capital gains. Those in the 25%, 28%, 33%, or 35% peak marginal tax brackets owe 15%, and the highest income bracket pays 20%. For multi-millionaires, being able to pay 20% as opposed to 39.6% is a major advantage, and it's a big factor that allows their money to potentially compound many times over.
Secondly, we're just not seeing much in terms of real wage growth. Pew Research data showed that nominal wage growth on an hourly basis grew by 727% between 1964 and 2014. It sounds like a lot on paper, but with inflation factored in wages have only grown by 8%. Comparatively, the price to go to college and healthcare expenses have grown considerably faster, making it tough for lower- and middle-class families to make ends meet and/or go to college to get the skills they need to have an opportunity at socioeconomic advancement.
The final issue likely lies with Americans' understanding of their cash flow. A 2013 Gallup survey found that only 32% of Americans prepared a detailed monthly budget -- and without a budget it's very difficult to understand your cash flow and optimize your savings. To be clear, no income decile had anything close to a passing grade, however households with incomes above $75,000 prepared a detailed budget 39% of the time. This compared to only 30% of households with incomes of between $30,000 and $74,999, and 32% of households with less than $30,000 in annual income. This is a big enough difference that it's allowing the well-to-do to put more of their money away for investments and widening the wealth gap in this country.
Turning the tables isn't tough
The great thing for households that aren't in the top income deciles is that turning the tables and mimicking the actions of the wealthy to improve your own socioeconomic status isn't difficult. It simply takes some resolve on your part.
For American households it all starts with putting together a working budget. Utilizing budgeting software you can, within probably 30 minutes or less each month, put together a budget that'll allow you to optimize your saving habits so you can begin investing for your future. A trick you might consider using is automatically depositing money into an investment account on a weekly, bi-weekly, or monthly basis to keep from spending extra money, as well as to hold yourself and your household accountable for your budget. Remember, a budget can always be adjusted as your priorities and income change, but financial discipline is something you'll always need.
Once you have a working budget, you can consider putting the money saved to work over the long-term. Investing for the long-term has obvious tax advantages as you saw above, and it requires minimal effort to sit back and let high quality companies do the work for you. One tool you may want to consider, though, is the Roth IRA, which allows your money to grow tax-free over the long-term. The vast majority of Americans meet the income requirements to contribute to a Roth, and it can be a nifty way to reduce/eliminate how much you'll pay in taxes come retirement.
Last, consider taking some of what you save and put it toward classes, conferences, or seminars that'll help you build the skills needed to climb the socioeconomic ladder within your industry or profession. College, which was once an exception to the rule, is now an expectation by a lot of employers. Without desired skills, it can be tough to work your way up into the top 50% household income decile.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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