We should always be grateful for small things. This year I am grateful to French economist Thomas Piketty and his best-selling book, Capital in the Twenty-First Century. I haven’t read the entire 700-page tome yet, and I have some questions about how he translates the wealth concentration of 19th-century landed gentry in France to the wealth creation/destruction maelstrom of the United States, but I’m still grateful.
Why? Piketty has re-introduced the word rentier to the English language! Once again, we’ve learned that there are people (not very many) who live on “rents” — income they get from the ownership of assets such as land, buildings, stocks, bonds, mineral rights, etc. This income, which makes them people who live on rents, is known to most of us as “mailbox money” because we really like the idea of checks that arrive at our homes without the inconvenience of leaving them to earn the money.
And this year, for the second in a row, I can proudly announce that the cost of being independently upper-middle class has declined. The combination of modest inflation and an uptick in fixed-income yields has reduced the amount of assets you need to be a full-time mailbox money person to only $4,184,483.
Doesn’t that just make your day!
The basis for this figure is my Life of Riley Index, an effort to track the cost of being a person of independent means at a level of income that is comfortable, but not conspicuous. Here’s how it works:
Every year we imagine a portfolio that is a 50/50 mixture of the S&P 500 and five-year Treasury notes. We calculate the yield on the portfolio (about 1.78 percent right now). We also check with the IRS to estimate the amount of income you need to be at the threshold of the top 25 percent of all earners.
The most recent actual figure from the IRS is $70,492 from 2011. Then we adjust income for inflation in subsequent years. Our estimate for 2014 is $74,449.
With those figures in hand, we then calculate the capital you need to produce that income. We do it three different ways.
First, as a careful and conservative rentier, we ask how much you would need in investments to produce that $74,449 at current yields. Answer: $4,184,483.
Second, noting that many financial planners have identified a 4 percent annual withdrawal rate as “safe,” we do the calculation again. Answer: $1,861,225. That’s quite a bit less, but still far more money than most people have.
Third, we do the figure for retirees by assuming that Social Security and/or a pension will provide 40 percent of the required income. The rest has to come from capital — “rents.” How much is that? Answer: $1,116,735. (To see how all of this has changed over the last 30 years, examine the attached table.) However you slice it, you need a lot of money if you want to be a rentier and actually pay all your bills with your “rents.” It also adds a pretty dowdy perspective to what it means to be a millionaire or small-number multimillionaire.
What does having a million bucks get you? Not that much. It may pay the rent, but it won’t buy the chateau, let alone get a dormitory or hospital building to carry the family name. It may even be wise to keep driving that minivan and shelve those plans for the 3,000-square-foot addition to your bedroom closet.
All that said, if you are in this fortunate group I urge you to be discreet, not showy. Remember, you’re closer to the top of the heap than most.
Is there any good news here? Some. It appears that the long fall in interest rates and dividend yields is bottoming. After two decades of rapid increase, the amount of money you need to live the Life of Riley hasn’t changed very much since 2011. That’s not a long time, but it provides some hope that modest yield increases and equally modest future inflation will keep a lid on the capital required to join the independently pretty-well-off.
SCOTT BURNS is a principal of Plano-based investment firm AssetBuilder Inc. His email address is email@example.com.