Inherited Money
From Zanecorpwiki
I've been trying to research "inherited" and it turns out to be rather hard. There are two big problems. First, all the data seems concerned with millionaires... which is interesting, but not where the real action is. Second, the analysis of the data is terrible.
Millionaires Don't Matter
A lot of the studies highlight the declining importance of inheritance. The commentators eat this up, drawing the conclusion that we're all pulling ourselves up by our bootstraps and touting the self made man. The problem is that a millionaire in 1989 is not the same as a millionaire in 2001[1] Depending on how you calculate it, $1M in 1989 is the same as between $533K and $760K in 2001. So, you're not comparing apples to apples by asking "millionaires" in the two periods. A millionaire in 2001 isn't nearly as rich as a millionaire in 1989.
It's the Acorn Stupid
"Inherited money accounts for only 10% of the wealth of millionaires"[2] So if you didn't inherit anything, don't complain! Go make your millions!
Bullshit.
The problem is this: say it costs around $50 a day live a regular, frugal life. If you make $50 a day, then you're never going to get any wealthier because all your money goes to getting buy. If you make $55 dollars a day, you can save $5/day. By making good investments, that $5/day grows and multiplies so that by the time you're ready to retire, a $1M nest egg is entirely plausible. The guy making just 10% less, however, has to work till the day he dies penniless.
The difference in wages is small, but the effect on wealth is enormous. This is the way we need to look at the effect on inheritance.
If the millionaire poll find that only 10% of the wealth is from inheritance, then are we to conclude that they earned 90% of their wealth the old fashioned way? Not at all. It's the same thing as before. Take two people, the same in every way earning subsistence wages. Give one guy an extra $100,000 when he's 20, and by the time he's 60, he'll have the opportunity, with basic management, to double his money 4 times and turn that $100,000 inheritance into $1.6M.
Does that mean that 6% of his net worth came from inheritance? Not at all. In fact, 100% of his net worth came from inheritance because it was the inherited money that was the seed of all of the net worth.
When these studies say that 10% of the net worth comes from inheritance is like saying that only 0.01% of an oak comes from the acorn because the oak is 1,000 times more massive. In fact, all of the oak comes from the acorn.
Don't get me wrong, I'm a big free marketeer, but we have to be honest here. The ra-ra capitalism crowd's naive understanding of how wealth is made is damaging.
If we go back to the Wall Street Journal article (which I'm claiming is a fair representation of the mainstream understanding on the subject) and dig into the numbers, I claim that not only is the conclusion that "Inheritance is not the main driver of today’s wealth" is not only inaccurate, but 100% backwards.
Let's take the average millionaire in 1989. According to the WSJ, claim, 23% of his wealth is inherited, so $230,000. From 1989 to 2001, the S&P index rose 171% so that same person should be worth around $2.71M in 2001.[3] So, by doing nothing but putting his surplus money in plain old investments (and spending 100% of his income) our average millionaire in 2001 can claim that only 8.4% of his wealth came from inheritance...
Which is almost exactly the number from the WSJ article. Meaning that, in fact, there is no "decrease in the reliance on inheritance" at all, just a fast growth period of investments. The real conclusion is that inheritance in 2001 is just as important as inheritance in 1989... which is to say very.
References
- ↑ http://blogs.wsj.com/wealth/2008/01/14/the-decline-of-inherited-money/; why don't people cite their primaries properly? I couldn't find the Wolff study referenced here, though some of his other work available on-line.
- ↑ Same Edward study, though, at the time of the writing, you can find this statistic all over the place so there may be multiple sources.
- ↑ Most millionaires have a small investment in the stock market, about 10% of their net worth. I'm using the S&P rise as shorthand for the expected return vis-a-vie other opportunities. It's not a good indicator, but "the increase in value of all good investments" or something is impossible to find and I don't have the time to do much better at the moment so I'm taking the easy way out.
