Jackpot

Michael Mechanic at the 2019 Pebble Beach Concours d’Elegance. Photo by Jen Werner
Jackpot An excerpt from Michael Mechanic’s Jackpot: How the Super-Rich Really Live ― and How Their Wealth Harms Us All
By
May 13, 2021

Click here to read Red Canary Magazine’s interview with author Michael Mechanic.

What do we mean by “wealthy”? I’m old enough to remember when having a million bucks meant you were crazy rich. Now it won’t even get you into the wealthiest 10 percent. Decades of growth in the public equities markets and tax policies that favor investors over workers have turned millionaires into zillionaires and upper-middle-class Boomers with retirement accounts into multimillionaires. Tech IPOs, exotic Wall Street investments, and soaring regional real estate prices have minted even more millionaires. In 2016, researchers from the Federal Reserve Bank of St. Louis calculated that if you were college educated, middle-aged, and white or Asian, your odds of being a millionaire were greater than 1 in 5—though only about 1 in 15 if you were Black or Hispanic.

To make it into the top 10 percent, according to the latest (2019) numbers from UC Berkeley economists Emmanuel Saez and Gabriel Zucman, and Thomas Piketty, their mentor, your family needs at least $1.1 million in net assets, the combined value of everything you own minus your debts. You will be among 18.3 million U.S. households better off than most. But you’re small fry, because you don’t have enough net investible assets. That would be your net assets minus whatever money you’ve got tied up in your home. To get wealth ad- visors excited, you need net investible assets of $1 million or more: that’s the 5 percenters.

Why the cutoff? Well, that spare $1 million makes you an “accredited investor.” In 1933, Congress passed the legislation that created the modern stock market. The Securities Act set forth rules for companies that wanted to offer shares to the public. Among other things, they would have to register their stock offerings with the newly created Securities and Exchange Commission and disclose, in a prospectus, all the information a reasonable investor would need to evaluate the offering’s merits.

Say Vinod Khosla is launching a new venture capital fund and doesn’t want the government looking over his shoulder. He can raise that capital privately, in which case the law dictates that only accredited investors can take part. You and your spouse either need $1 million in the bank or a joint annual income of at least $300,000 for two years running. The government, in other words, protects the little guy by cutting him out of the action. “Reward and risk are absolutely balanced,” one financial professional told me. “You are not going to make a lot of money unless you risk losing a lot of money.” Conversely, if you can’t take the risks, the big money is off-limits. Without accredited investments, says Jerry Fiddler, a businessman we’ll meet in the pages to come, there’s no way he could reliably get such solid returns on his portfolio: “To take your entire asset base and grow it by 7 percent a year, very few people could do that. Whereas I probably could.” A close friend of mine who made a fortune trading stock options and investing in real estate told me he considers his accredited investments a less-risky bet than publicly traded stocks and bonds.

Ernst & Young predicts that accredited investors in North America will hold nearly $29 trillion in combined assets by 2021—a 24 percent jump over 2016, with the lion’s share going to the wealthiest 1 percent. But let’s touch on the 5 percenters, because that’s where true privilege starts to kick in. With at least $1.9 million in net assets, 5 percenters are comfortable, though not flashy. One needn’t stress about the bills. As a 5 percenter, you can afford nice cars and cushy vacations, though you’ll probably fly coach. Perhaps the biggest perk is your ability to easily pay your kids’ way through college. And though you can’t actually buy them admission to Yale, you can afford the private schools and private tutors, SAT and essay coaches, and all of that. Your children will start on second base, and you’ll have a nice cushion for yourself.

Now let’s meet the legendary 1 percent. The 1.83 million American families who comprise this wealthiest sliver are unequivocally rich. But those at the category’s lower threshold—a tad over $5.6 million in 2019—aren’t that rich. They are basically 5 percenters with a nicer house and a bigger security blanket, and who can afford first class.

When we hear the term “rich people,” we tend to think more about the top 0.1 percent, families with assets of $29.4 million and up. This is the realm of elite private schools, private travel, stunning houses, extraordinary vacations (and vacation properties), luxury cars, and concierge doctors. At this tier, unless you enjoy mind-numbing financial arcana, you will need professional help managing your wealth. But if your advisors are worth their salt, you can supplement your substantial employment earnings with dividends and investment profits. By now, you are probably considering home security beyond your golden retriever. Estate planning is getting serious, too, because you and your spouse have assets of more than $23.4 million—the maximum, as of January 2021, that a married couple can pass to their heirs without paying any federal gift or estate taxes. To further avoid those taxes, you could put your excess assets into a tax-exempt charitable foundation or establish trusts for your children that will circumvent the tax and have the added benefit of shielding your financial legacy from lawsuits and creditors. You might even transfer some of that wealth to your grandkids through a generation-skipping trust. But will the money ruin them?

That question becomes more pressing as we move into the 0.01 percent, a cluster of 18,300 families with at least $157 million apiece—a level of wealth at which one’s affairs grow substantially more complicated. In most cases you will have businesses and complex investments to oversee, philanthropic strategies to think about, and properties and personal employees to manage. Hedging, diversi- fying, and insuring your assets are a greater concern now—as is navigating the minefield that this level of wealth can lay down in your family relationships. You are furthermore entering a realm of legal planning focused heavily on circumventing that $23.4 million estate tax exemption. Very doable, but you’ll have to keep a close eye on your accountants, lawyers, and money managers to make sure they aren’t bleeding you dry.

Further up the ladder, the top 0.001 percent families, all 1,830 of them, are worth $805 million and up. Now we’re talking about far-flung private and public investments and real estate holdings. Helicopters, private jets, yachts, rambling estates, fine art, Rolls-Royces, private islands—that whole fantasy is yours for the taking. Your kids will attend private school if only because your security consultants deem public too risky. Now you can afford to donate a building to Harvard—no guarantees, but your child’s chances of getting in will improve dramatically. There’s also a pretty good chance you have established a company whose sole purpose is to manage your own per-sonal and financial affairs, where your minions will push the envelope of tax avoidance (if not evasion), because tax strategies at this level fall into lots of legal gray areas. If you’re worried about the IRS, don’t be. You can just call your senator and ask them to defund it further. They’ll call you back.

Billionaires? They’re just the 0.001 percenters with the biggest yachts.

The above was excerpted from Jackpot: How the Super-Rich Really Live—and How Their Wealth Harms Us All.

Copyright © 2021 by Michael Mechanic. Reprinted by permission of Simon & Schuster, Inc., NY.

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