By various statistical measures, financial inequality among Americans is increasing. In short, research indicates rich Americans are getting richer, while the poor and middle class Americans are losing ground. Since the recession, rising economic tides are not floating all boats.

On a macro level, the apparently increasing divergence between rich and poor prompts many questions. Does greater financial inequality help or harm the broader economy? Does it change the political and cultural dynamics of our society? What are the demographic or behavioral factors that impact financial inequality? Should the government attempt to change this trend through regulations or policy initiatives?

On a personal level, the questions are much simpler:

• Financially, am I where I want to be?

• If yes, how do I stay there?

• If no, how do I get there?

Defining “Wealthy” in the United States

There’s an old saying that the wealthy are people who earn or own more than you. From a personal perspective, this may be true; our definition of wealth is relative to our standard of comparison. (As CNBC reporter Robert Frank said, “I often hear from older millionaires in Palm Beach or Carmel who insist that $8 million is not ‘rich’ where they live.”) Setting aside subjective standards, here are some metrics for the definition and distribution of wealth in the United States.

Annual Income

One of the ways to measure wealth is by annual income. The Internal Revenue Service provides annual income reports based on individual tax returns. Usually the figure used is Adjusted Gross Income (AGI). The most recent data come from 2010 returns and show the following:

Median household income was $34,338. This means half of all Americans in 2010 had more than $34,388 in AGI and half had less. Those above the median threshold are considered in the “top 50% of all earners,” and this group comprised 67.5 million households. The table below (using IRS data in a December 2012 Kiplinger’s worksheet) shows the AGI threshold for each level of earners:

In most assessments, the top 1% of all earners qualify for designation as “wealthy.” Given the likelihood that adjusted incomes have increased a bit since 2010, it is reasonable to assert that any household with an adjusted gross income over $400,000 can be considered wealthy. (Coincidentally, the recent increase in marginal income tax rates to 39.6% from 35% affects single filers with AGIs in excess of $400,000, with a threshold of $450,000 for joint filers).

Net Worth

Some assessments of wealth argue that annual income isn’t the only relevant factor; net worth is just as important. Net worth calculates the value of a household’s financial assets (including personal residence) minus its liabilities. Using information for 2010, a January 17, 2012, New York Times article calculated the following parameters:

To be in the Top 50%, your 2010 net worth must be at least $121,00

To be in the Top 1%, your 2010 net worth much be at least $8,400,000

Using the 2010 numbers, the threshold for being in the top 1% is roughly 10 times greater than the median AGI. With slightly different data, the NYT article put the difference at 7.5 times. Whether this 7- or 10-fold difference between the top 1% and the median is too high is debatable. Of greater concern are numbers that show the gap is getting larger. A September 28, 2012, National Journal article reproduced this chart from the Congressional Budget Office.

The three-decade trend is clear: The magnitude of the gap between the annual income of the top 1% and everyone else has increased dramatically. And the effect of this gap would appear to be cumulative. For, while the difference in annual income is only 10 times ($340,000 vs. $34,000), the difference in net worth is 69 times ($8.4 million vs. $121,000). According to economist Joseph Stiglitz, the author of The Price of Inequality, this multiplied difference in net worth is because “the rich save—that is, invest—15% to 25% of their income…whereas those on the lower rungs consume most or all of their income and save little or nothing.” And thus, the rich get richer, to the point where some observers are worried that the U.S. middle class will disappear, and the population will bifurcate into two extremes: a small, wealthy ruling class, and a large, dependent underclass.

(To Be Continued…)

Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected]. See www.wagroupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents, or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.

By Elozor M. Preil