Who are the rich?

Updated: Jan 14

Luc Brunet - 13 October 2020

We regularly read articles or analysis using the term "the rich" to identify the privileged people within the word population. The term is however completely abstract and impossible to intuitively define, at the difference of terms like "the elderly" or the "car owners".

Indeed, the perception if "being rich" is spread over the whole population, and everyone if somehow both the rich and the poor as seen from other layers of the population. A person making 800$ a month considers someone making 2000$ as being rich. The latter shall claim that people making 5000$ are actually the rich. The latter believe that a person making 10,000$ a month is really rich, and so forth and so on.

This paper is an attempt to better define what is required to be categorized as "rich". My call is relying on a traditional definition of a rich person in the 19th century, when the term "rentier" in French or as defined by the Cambridge Dictionary: "a person whose money comes from investments and who therefore does not have to work". I shall also add some comments on the very emotional feelings people have when talking about "the rich", largely based on my personal experience, as I had the chance to meet and befriend people in all categories of wealth, from billionaires to the ones having tough time to finish the month.

Starting from such a definition, lets try to assess how much assets are required to live very well, and with limited risks to lose most of the assets (thus using a prudent investment policy), without needing any type of additional revenue.

In the 19th century and for most of the 20th century, those investments were all "tangible", physically identifiable items, like real estate, revenue farms, production sites, as well as non revenue generating items kept for security in case of economic crisis or war, like paintings, gold and jewels, etc. Of course, totally secure investments do not exist and such assets could be reduced to almost zero during major wars, and rich people could lose almost everything during major geopolitical events, like the invasion and/or destruction of a country, major repression against a part of the population etc. Just remember what happened to a big part of the Russian rich after 1917, or to wealthy Jews in Germany after 1933.

Since the large development of the financial sphere into a digital entity including a constantly evolving set of financial assets, many of them very complex and difficult to understand for non professionals, the assets of the rich have changed a lot and in most cases are a combination of "physical" assets, like real-estate and " virtual" assets based on a investment portfolios of various levels of complexity, including stocks and complex sets of derivatives.

Lets now assess what is the minimum volume of assets to be able to live very comfortably and only based on revenues from those assets. The overall framework for that is defined bellow.

1- first we assume that the accumulated wealth is not based on a heritage from rich parents, thus comes from accumulated personal revenues only

2- all money numbers used in the analysis are NET revenues after taxes, to avoid discrepancies due to local tax policies. Obviously 100,000$ net income shall require around 120,000 gross revenue in Russia, but around 130,000 in France for a family of 3, or 145,000 for a single person

3- we assume that the person reaches the "rich" status at around 45 years old, and started to accumulate revenues after age 25, thus over a period of 20 years

4- we assume that the required net revenues from assets have to reach 300,000$ a year to get a comfortable life. What we call comfortable like includes ability to travel regularly, pay for the operation of 3 real-estate goods for personal use (see bellow), cars, and a wealthy life style

5- we assume that the revenues generated from the accumulated assets are based on a 3% yearly return. This figure can of course vary, but we excluded more risky, speculation style investments, keeping in mind that security should be kept to a maximum. The investment portfolio is also increased by 20% to reach such level of safety, allowing for the revenue stream to be maintained even with 20% of bad investment.

6- outside of the revenues generating assets, we assume that the following assets are used for personal comfort, and do not generate revenues: a main residence, a secondary residence and an oversee residence, with respective values of 2M$ each for the first assets and 1M$ for the third one, as well as 500K$ assets in cars and other non real-estate assets

7- finally we assume that the net revenues used for personal comfort during the period of 20 years is 250K$ a year in average

As a result calculation shows that:

- the required total accumulated assets must reach around 17.5M$, including 12M$ of revenue generating assets, the rest being assets used for personal comfort

- this means that the total revenues over the 20 years period must be around 1.125M$ a year, or around 93K$ a month.

It is immediately clear that many people usually categorized as "rich" shall hardly qualified to be a "rich" based on our definition of "rentier". 93K$ a month NET revenues mean quite more that 100K$ gross revenues per month, a number unreachable for the vast majority of mid and even top level managers, doctors, lawyers, shop owners and many others. If you worked in international companies, you understand that such salaries are very rare, even when bonuses are very good, may be at the exception of key roles at the HQ of very large corporations.

In fact most people who managed to reach such level of wealth or higher, did not rely on salary type revenues only. In most cases, the wealth came from for example:

- large attribution of free or low cost stock for key HQ level top managers. This was essentially true a few decades ago, much less today

- golden parachutes offered to managers to leave large corporations, sometimes after ruining the business, but in many cases due to changes in company's strategy. Unfortunately, the most published cases are the ones of people who failed and were kicked out, with examples from the IT industry like Leo Apotheker (HP, SAP) or Carly Fiorina (HP). But we shall leave them alone in the rest of this article as they are the black sheep in the social group we discuss here

- creation of a company followed by the successful sale of that company. The amount we are talking about can easily be matched by the sale of small or mid-sized company. The virtual financial bubbles even allowed for much bigger amounts, even for start-ups of little real value, as seen in 2000 at the time of the .com bubble, where lucky owners could collect sometimes several 100M$, while others lost it all after the implosion of the bubble. But it is important to understand that bubbles are an exception, and that the vast majority of those people worked hard to create a valuable and sane business, then sold it, getting a financial reward for their years of hard work, endless worries and also the associated risk you take in running your own business, as many can feel now, when the COVID crisis can take away in a few months the result of their entrepreneurship.

Now, lets address another hot discussion when we talk about the "rich". What is their role in society and what about the so called "trickle-down theory" assuming that the money of the rich automatically generate more revenue and a better life for the others, based on the fact that the rich consume a lot of good and services.

Lets make it clear that the "entry-level" rentier that we defined above fairly respects the trickle-down theory. First, such people/families with an investment based revenue of around 300K$ a year usually run a life quite similar to their neighbors getting revenues from salaries only. Such rentier families are still integrated and fully part of the real world of working people (of course with a higher salary range). They mostly spend money in consumption of goods and services like maintaining real-estate and cars, buying products and food, traveling, etc. Their money is constantly re-injected in the real life world and all types of people live from it, from home designers to cleaning personnel.

Again, the vast majority of those "entry-level" riches play a positive role in society and asking for their disappearance is a big mistake that many are making, when asking for a more fair social system. Most people in that entry-level of wealth are the ones creating value and creating an environment allowing for all members of the society to have their chance to live comfortably.

Looking at history, this group of people fit well with the group of "rentier" of the 19th century, integrated in their community. But a new type of wealth appeared, mostly after world war 2, and largely based on the globalization and digitization of society. Although the trend started earlier than 2000, the implosion of the .com bubble was a first symptom of the problem created by the financialization of the economy. The .com bubble was a surprise for many, when they realized that millions of $ capitalization could be based - to simplify - on a well designed PowerPoint presentation.

All over the period, we saw enormous amount of wealth created, based on financial leverages, speculation and other tools designed to minimize risk and increase all types of benefits.

We are already very far from our entry-level rentiers with their 15 or 20 M$ total wealth. Now we are talking about the actual 1% or even 0.1% of the population with assets close to 1B$, and often much much more. The people we are talking about now do not even know their own wealth and the size of that wealth makes in impossible for them to manage it themselves. Teams of specialists work for them, constantly looking for new opportunities to increase gains and reduce costs (meaning avoid taxes). And they are very good at that.

What about the trickle-down theory for those people - let call them super-rich? Essentially not much more in volume than for the entry-level rich. Their real-estate may cost 10M$ instead of one or two, they may have a private jet and a large yacht, but essentially most of their money goes and stays in the international digitized financial market, in a universe light years away from the real economy. Money is not trickling down - it is sucked away in the black hole of finance, and never comes back.

The wealth of the super-rich is almost disconnected from the real world, and the recent very large gains of billionaires during the COVID crisis is a good example. American billionaires only got richer by 454 B$ over the March-May period. Is it the result of well planned investment, or of wild speculation? You answer for yourself.

The reality is that there is not a single type of wealth. The wealth of the super-rich is virtual and it could be wiped-out in the next hour, and nobody would really get hurt in the real economy. In fact most of us would never notice, and the economy would certainly go better without them.

But the other type of wealth, the wealth of entry-level rich, largely the result of real investment and hard work in the real economy is on the contrary the blood and the oxygen of our society. Unlike the Bezos of this world, if you bankrupt the crowd of entry-level riches, the real economy collapses in a few weeks.

At a time when right and left no longer exist in politics and when big political and economic decision may be taken in the next years, the ones still believing in collectivism and equality in revenues should thing about that. Entrepreneurs are the ones creating the value that spreads (trickles-down) into society. Entry-level rich entrepreneurs and high level managers should also realize that they are in the same boat as the workers, they win or loose together. The illusion for entry-level rich is to believe that they are close to the super-rich - it is a big mistake, as the super-rich do not care about a 15M$ assets families more than they care for the garbage man.