Wednesday, October 04, 2006

Net Worth Ranking: Traversing the "Data Desert" Between the Forbes 400 and the Fed Survey

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Real estate has been on a remarkable multi-year bull run, and the Dow reached an all-time high this week. Given this market strength, it's not surprising that the cut-off for making the Forbes 400 list of America's wealthiest this year, for the first time, is a billion dollars. With the U.S. population near the 300 million mark and the size of the average household being 2.6 people, there are approximately 115 million households, which means that the statistical likelihood of having your name on the rarified Forbes list is a mere one part in 300,000. Hmmm, what a longshot, right? Reading about billionaires makes us all feel a little poorer. . . .

But let's try from another perspective: The triennial Federal Reserve Survey of Consumer Finances reports on the net worth of U.S. households in the "mid-range" between the 25th and 90th percentiles. In the most recent survey (2004), the 90th percentile of household net worth was $832,000. By extrapolating results of the survey using a growth rate of 6.6% (which is the CAGR of 90th percentile net worth for the nine-year period between the 1995 and 2004 surveys), we can estimate 90th percentile net worth in 2006 to be $944,000, i.e., close to a million dollars. Since many (if not most) of you reading this already are (or I imagine will soon become) one of the "millionaires next-door," you probably sit in the top 10% of Americans as measured by net worth. In other words, you would be among those receiving an "A" grade if life were a hands-on class in net worth maximization.

Though you might be in the top decile (i.e., you're one among 11.5 million households!) by net worth, privately you may be still wondering just how wealthy you really are compared to the many millions of other "millionaire" households across America. Surely, in the "data desert" between the $1 million threshold of 90th percentile wealth in the Fed report and the $1 billion cut-off for stratospheric Forbes 400 status, there's a vast expanse--a factor of one thousand to be exact!

A quick and easy way to interpolate the wealth distribution in the zone between the Federal Reserve and Forbes studies is to use a simple "power law" model :

Net Worth/(Forbes 400 threshold net worth) = (Rank/400)-a,

where Rank runs from 400 to 103.5 million (90th percentile out of 115 million households) and "-a" is the exponent of the power law.

On a log-log plot, the above relationship becomes linear in a:

Log(Net Worth) = Log($1 billion) - a x [Log(Rank) - Log(400)]

Using the Federal Reserve 90th percentile point (Rank = 11.5 million, Net Worth = $944,000) to determine the coefficient a = 0.6785, we can solve for Rank and rewrite the equation as:

Rank = 400 x [$1 billion/Net Worth](1/0.6785)

For example, a household net worth of $10 million corresponds to a rank of about 350,000, meaning that approximately one in 320 households (99.7th percentile) is worth $10 million or more. At a net worth of $100 million, the rank becomes about 12,000, i.e., just one in 9,700 households (99.99th percentile) have $100 million.

If you are curious to find out where you sit, go ahead and plug your own net worth into the Rank equation to determine your ranking amongst all 115 million American households. Alternatively, you may find it easier to refer to the graph and table below to obtain a quick feel for your relative ranking.


Anonymous Anonymous said...

Good analysis for the high end, but one big flaw :

People with a net worth of zero are NOT at the bottom percentile of net worth. They are actually in the 30th percentile.

30% of US households have a net worth BELOW zero (credit card debt, student loan debt, criminal issues, legal fees, etc.).

A net worth of zero is still ahead of 30% of the US population.

6:49 PM, March 27, 2007  
Anonymous brochure printing said...

Very informative and useful. Will try plotting as discussed above. Thanks.

5:58 PM, April 18, 2010  
Anonymous said...

Wow, there is a lot of useful data above!

10:58 PM, October 16, 2011  
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