The argument could go that the low income families simply cannot afford to put anything into investments since they are forced to live hand-to-mouth. Unfortunately, the data does not support this position since (a) obviously 10 to 20 percent of low income families do still find a way to participate in the stock market so it is clearly not so much a question of being unable as being unwilling and (b) there are stories in the news all the time about ordinary working class people such as maids and gardeners who pass away. Their heirs discover that they have been dutifully socking away 10% of their income into investments throughout their life and leave behind millions in their portfolios even though they had very modest incomes all their life.
But the stark reality that is mostly ignored when income inequality and distribution of wealth is being discussed is that -- mostly -- wealth does not come from occupational income but rather from investments. With all the brouhaha over the outrageous salaries some CEOs earn, what is rarely mentioned is that 90-95% of those outrageous salaries are in the form of stock options. Since stock options become worthless when the company is not doing well, senior managers can only collect this extra "bonus" and make ten times their regular salary if they're doing a good job. I might also add that at most companies, the average workers generally are also given attractive opportunities to purchase stock as part of their employment contracts but, unfortunately, most choose not to use this.
At $75,000/year, this is not the 1 percenters or even 10 percenters but more like 20 percenters who do very well because 90% of them are regularly and actively investing. The 99 percenters (not to mention the 70 percenters noted in this presentation) would also do very well if they did the same. It's not a difficult exercise to put a minimum-wage earner on a spreadsheet applying the discipline of investing just 1% of each paycheck in a simple index fund. You will find that even at that small a level, the minimum wage earner will have over $1 million dollars in their portfolio after just 19 years. Do the same exercise now with a 1-percenter making $215,000/year. They reach the million dollar mark after 11 years. This is rather remarkable. It proves that investing is where most wealth comes from since, even though the minimum wage earner is making less than 20 times the 1-percenter, it takes them only 40% longer to join the millionaire's club.
I've used the 1% level just to prove how powerful investing is. If instead you're more realistic and do the standard 10% of each paycheck, the results are much more dramatic and happen much more quickly. Investing works for everyone, low income and high income alike. There are no special deals offered to high-income earners from which low-income earners are excluded. Investing is a level playing field. As the chart very clearly shows, the only difference between the high-income earner and the low-income is a willingness to participate.
I have always believed that one of the biggest problems in this country is an almost total lack of financial literacy among almost all Americans outside the occupations of finance and business administration. One thing I hope to do as I make the journey to become a CFP is to change that by educating my clients as to how they can have very comfortable and secure retirements. One thing this graphical representation expresses loud and clear is that income inequality and distribution of wealth is not nearly so much a problem of inherent flaws in our laissez-faire economic system as it is an inability or unwillingness among the less prosperous to participate in that system. Why this failure? It is very simply due to fear. I sometimes think that brokers are deliberately trained to make investing seem enormously complicated so as to intimidate clients into throwing up their hands and just trusting the broker. But your average working class stiff will not do this; rather than trusting the broker, they'll just throw their hands up and say "no thanks."
That is where I hope to make my contribution. I intend to teach people how to remove the fear from the investing process. Stay tuned.
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