I thought this was an interesting study. Bloomberg did a survey on household income in various locations, and then determined how much of that income came from passive sources.
Anyway, turns out that people in the richest places make $100k+ from passive sources. I feel like I am lagging here (especially in terms of ratio of passive income to total income). I wonder if this is primarily a function of net worth, or are these people just smarter about finding extra income sources. Also, families in Hillsborough or Atherton “only” make about $400k? Wait, isn’t this kind of hacksaw for these places?
It’s a function of net worth. The best part is they pay 15% effective capital gains all day then complain to Mr. Everyman about their unfair 60% tax bracket or whatever while the average American who works for cash pays 35%. Not one of the wealthy elite makes their money from salary, it’s all from other sources to circumvent income tax (ie Steve Jobs’ $1 salary). These tax rate differentials compound over time with pretty serious consequences.
I have first hand experience with this, my parents (and their friends) pull in low 7 figures typically (sometimes higher) and probably pay an average effective tax rate near 20%. I’m not complaining in that regard but my parents would be the first to say the system is messed up and there’s nothing fair about people in that bracket paying 20% on passive income while working mothers pay 35%.
No my Dad did. I grew up on a farm. Not a rich area, but we weren’t poor. We didn’t have that kind of money growing up though. My parents really hit their stride as investors in the last 15 years or so.
Well, let’s say these guys are making 3-4% yield on investment in today’s environment. So, the Atherton people are worth on average $5 million (on top of the house), which I guess sounds about right. It seems like it would take a while to accumulate these assets if they are “only” making $400k total though. So, they are probably all late 50s, 60s, or older.
Anyway, to make a long story short, I think I need to look into making more side income. This hacksaw stock market is taking too long.
It depends on the investments, my parent’s IRR is probably closer to 15% because most of their stuff is more PE like with barriers (legal, logistics, etc) and niche factors that basically remove some of their investments from easy access of broader capital markets.
Case in point. One of their investments is a beach house in one of the ultra elite islands used by super and mega yachters. They had to set up the legal structures, hunt the proper architect and source the right peice of land which are hard to find, but the architect fortunately had already sort of had in mind. They were able to finish the thing for roughly $5M a few years ago and it’s been rented about 40 weeks a year since launch at about $30k a week. Now they have taxes and expenses they take out, but they’re now looking to sell it with a market based valuation placing it around $9M. All in, their IRR should come out about 15%, but this isn’t a common form of investment easily available to you and me so they get compensated.
Their portfolio is full of eclectic stuff like that that they come up with as they travel around. The guy’s down in Chile with a group of people looking at opportunities / having fun traveling right now. So it’s sort of like a fun job.
To add perspective to the trajectory, my Dad was dirt poor and started as a kid who trapped fur (muskrats, racoons, foxes, mink) out of the creek in his back yard living in a house with no heat. I was born in a double wide trailer, by high school we had a largish house. I went to a community college and now I work on the buy side and my parents are doing well in their own right.
Starting a business seems to be a great way to become poor from rich as well. I also disagree a little bit that you can’t get rich working for someone else. Jamie Dimon doesn’t own JP Morgan.
Anyway, it would be great to be a hundred millionaire, but that’s unlikely to happen. Generating $177k in passive income, however, is a realistic, attainable goal. At that point, you can be effectively retired, and maybe just add more safety buffer through your job. Why risk everything on a moon shot when comfortable certainty is within grasp? If there are realistic steps that one can proactively take to build that income, that’s more interesting to me.
The complaint is based on what they perceive as relative fairness. Even the 15% capital gains tax rate, which is 20% for the really wealthy, feels relatively high when a significant portion of the population has an effective rate of 0%, perhaps even negative. Layer onto that the fact that the money that funded those investments was ordinary income at some point and was taxed as such, I can understand the rationale for complaining.
The single mother you mentioned in your other post would have to have ordinary income of approximately $575,000 to have an effective rate of 35%, including SS tax, so I don’t really feel sorry for her.
From what I’ve seen, the risk is very real, but much diminished for hard working, smart people with conservative risk profiles (most succesfull entrepreneurs I know). This could also apply to most intelligent MBA types if they were properly educated on small business ownership with realistic expectations. One of my issues with the MBA model is that they tend to equate entrepreneurship with tech and future billionaires so if people lack that home run idea they just don’t try.
In reality most big stories had no idea they’d be big and there are many making low seven figures as just Reasonably Intelligent People Performing Little Effectively Simple business models or RIPPLES business models since I’m likely talking to an MBA audience and that requires an acronym. So instead of teaching good swing mechanics and putting a bunch of grads out their geared up to consistently get on base, they try to teach everyone to be Babe Ruth (high risk, high failure rate) setting themselves up for failure by prematurely seeking private investment before the idea is even proven while missing the fact that most Babe Ruth’s don’t graduate from MBA programs so you’ve got a bit of a self selection issue.
Most true entrepreneurs have little or no debt and try out their ideas on a shoestring budget with a low hurdle rate and low cost of failure which requires and creates resourcefulness and creativity (key skills), unfortunately for an MBA grad saddled with debt and rushing for the finish line after a lifetime of following the carrot on their parent’s perscribed path, they lack all of these advantages and traits and will fail with almost near certainty, ultimately winding up back in IB where they belong.
? But that is true for almost any job right? Most people who say, work for Google and accumulate a few million dollars in savings over a couple of decades are smart, hard working, and do not take unnecessary career risks.
Rereading my post, I meant low 7 figures. In other words, many small business owners that fit that bill wind up making a few million a year, not having a few million in savings after several decades. Ergo, the difference. I’m fixing it.
You can also make six figures as an independent business, but those I feel are no less stable than a regular job.
Not to mention the higher quality of life that comes from being your own boss.