By: Richard W. Sharp

Wealth has a way of justifying itself. Once someone has a lot of it, it tends to become evidence of its own deservedness.

The flip side must also hold: If you don’t have money, it’s your own fault. You’re probably just one of “those that are just spending every darn penny they have, whether it’s on booze or women or movies.”

Naturally, Chuck Grassley’s comments on the estate tax were “taken out of context,” and what he really meant was that it is better that the children of one hundred 1-percenters not suffer the burden of irksome taxation of their hardly earned fortunes than to have any sympathetic (but elusive) “family farmers who have to break up their operations to pay the IRS following the death of a loved one.”

The question

Of course the trick is getting any money in the first place.

Taxes, rent, food – there are some pretty strong headwinds standing between you, the median household of Jane & Joe Public, and that $11 Million you’ll need before your heirs have to worry about breaking out the estate tax calculators.

Hypothetically, let’s say you don’t spend every darn penny on benders in Vegas. How much would you have after a lifetime of saving?

The method

To estimate how much a typical household could save over four decades of work,¹ we dusted off our Nanci Pelosi personal saving model and updated it. As with any model, we had to make a few assumptions… 

• You start from zero. No trust funds or inheritances: your initial household wealth is a big far $0.
• You are employed for 41 years (1975-2016, conveniently, the exact years present in this study of household income from the census bureau).
• Each month you make the median household income (and you get paid in actual dollars that have not been adjusted for inflation).
• Your take-home pay is your income less fedaral taxes, estimated by using the effective federal tax rate, as published by the Tax Policy Center.
• You’re lucky enough to save a percentage of your take-home pay. We ran two scenarios: 10% savings (above average) and 25% savings (you are a shining example, a meek and tidy soul, living your life just as Mr. Grassley expects you to).²
• You earn a rate of return on those savings. We consider two possibilities for your portfolio: all stocks (S&P 500 historical returns) and all bonds (10 yr. Treasury Bonds).
• You are super lucky. Nothing bad ever happens to you. You’re never out of work, you get a raise every year, your portfolio has more in it than Enron, Long-Term Capitol Management, and Beanie Babies, your kids go to a college that doesn’t impact your savings rate, and nobody suffers any kind of serious illness that would financially cripple most families (that only happens to morally defective people who obviously deserve it, right?).

Note that we’re computing peak wealth before retirement. One can safely assume that your overall wealth goes down during retirement, unless your nest egg is big enough that you can live off of the interest (in a savings account) or growth (in an investment account).³

Results 

We ran a few scenarios under the model and found that it’s basically impossible for regular people to trigger that dastardly estate tax. Visit our datasets & downloads page for the raw spreadsheet if you’d like to play with the numbers yourself.

• Lifestyle: You’re a slightly better than average saver (10% of your take-home goes to the bank) and in Uncle Sam you trust, putting it all in 10-year Treasury Bonds.
  • Outcome: You have $229,000, retire, and eat the fancy cat food. Sadly, you didn’t even enjoy the booze and women when you had the chance. Time to go to the movies to take your mind off these things.
• Lifestyle: You’re an all-star saver (25% of your take-home) and a high-flying index-fund investor (S&P 500).
  • Outcome: You have $3.02M, retire, and watch the private jets from your porch just south of the runway. Still, your kids get whatever is left, tax-free, without having to sell off the back forty. 
• What lifestyle would you need to hit the $11M limit and trigger the 40% marginal rate? You’d need to be a great saver (25%), invest it all in the stock market (hope you didn’t want to retire in 2008), and make four times the median income for your entire working life. That’s about $250,000 in 2016: sorry teachers, construction workers, food service workers… Well, basically everybody except doctors and lawyers (maybe). 

Conclusion

We asked Math, and the glowing cloud of sentience replied: Most people who work for a living (you know, who alienate their labor) will never come close to triggering the estate tax because rent, food, and a ride to work make it impossible long before they get a chance to blow it on booze, women, and movies.

It turns out that Mr. Grassley himself is unlikely to trigger the tax. His net worth is estimated at about $3.8M based on his financial disclosure forms. Interestingly, that number is pretty close to the one from our perfect saver/investor scenario. Of course he makes a lot more than median income (senators currently make $174,000 per year). 

The idea that poverty is an indicator of a moral flaw is nothing new. Andrew Carnegie had a bad case of “it’s their own fault if they’re not making it”-itis. His solution was to sprinkle libraries about where his workers could better themselves (just like him) when they weren’t busy getting shot by their job creator. But America put the breaks on the era of the Robber Barons and was better off for it.

Notes:
  ¹ 41 years to be exact, and yeah, 41 years is a strange number and we admit to picking it because that’s how far back the medina income data goes. However, it’s a reasonable number for a household with a couple that starts saving in their twenties and who work until 65.^
² A substantial amount of those savings might actually be going into real-estate, i.e., your home as you pay off the mortgage. For the sake of the model we only consider stocks and bonds. Generally speaking, stocks out-perform real estate, so we expect the stock scenarios to over-estimate your actual experience, however, real-estate is nutso (I’m pretty sure that’s an industry term) and you only bought one house, so all bets are off if that one house was purchased in ’75 in the middle of San Francisco.^
³ To keep a 2016 median $57,617 household income and overall wealth constant or increasing, one would need to retire with at least $694,185 in an S&P 500 index fund (assuming that the S&P average stays at 10%, which it has been just under over the last 20 years and that the inflation rate stays at around 2%).^