Tech employees are known for their high household income. Yet the cost of living in tech hubs like Seattle and the San Francisco Bay Area often makes it seem less glamorous.
To keep things in perspective, I eagerly await the Federal Reserve Board’s Survey of Consumer Finances (SCF) every three years. This report sheds light on typical household incomes in the United States.
But beyond just financial rubbernecking, this series of articles delves into how your finances stack up. How you compare to others and whether you’re accumulating assets at a rate that aligns with your peers.
In this first installment, we begin by exploring household income.
Breadwinning Basics: Household Income
In 2022, the median annual household income in the United States was $70,300 according to the SCF.
However, I know you will be shocked to hear, income distribution in the United States is far from normally distributed. It’s “skewed” with a long tail of high-income households. Resulting in an average (or mean) income of $141,900—over double the median income.
Comparing the mean vs. median incomes across percentile groups reveals this disparity. The chart below illustrates that the only cohort with a significant difference is the top decile.
Income distribution appears close to a normal curve (with mean and median values roughly equal) until you reach the top percentile band (>90%). This is where the income distribution is skewed by a long tail of high-earning households.
Sources: Federal Reserve, 2022 Survey of Consumer Finances.
For the full report on the Fed’s Survey of Consumer Finances, please visit their website.
Refresher: Mean vs. Median
Median and mean are two different ways to measure the “average” of a set of numbers.
Median:
The median is the middle number in a list of numbers when arranged in order from smallest to largest. If there are two middle numbers, you average them. It’s like finding the middle point in a line of numbers. For example, in the set {2, 4, 6, 8, 10}, the median is 6, which is the middle number.
Mean:
The mean, also known as the average, is calculated by adding up all the numbers in a set. And then dividing by the total number of values. It’s like spreading the total evenly among all the numbers. For example, in the set {2, 4, 6, 8, 10}, the mean is (2 + 4 + 6 + 8 + 10) / 5 = 6. So, the mean is 6, which is also the same as the median in this case.
In summary, the median is the middle number when the numbers are lined up, and the mean is found by adding up all the numbers and dividing by how many there are. While they can be the same, they might differ in situations where there are outliers or extreme values in the data, like household income.
Which is more relevant for household income? I believe median income is the more relevant benchmark. Half of all households have greater than $70K in income and half have less.
The Elusive Top 1% of Household Income:
In recent years, much attention has been directed toward the top 1% of earners.
Unfortunately, the Fed survey doesn’t delve into this level of detail. But the survey does provide insights into the cutoff or minimum required to be considered in the top 5% of family income.
The median or midpoint of the >90% bracket (the top 90-100% of family income) reflects what a family at the 95th percentile earns.
In simpler terms, 5% of all households in the United States earned more than $378,000 based on the 2022 SCF.
When searching for data on what it takes to be in the top 1%, you’ll come across various figures from different sources.
The variations arise from differences in methodology. Such as, using adjusted gross income (AGI) from tax returns versus total income, as well as variations in data sets that may include subsets of the total population (e.g., federal taxpayers vs. all households).
Therefore, these values may not be directly comparable to each other or to figures published by the Federal Reserve.
Nonetheless, here are some examples of what it takes to be in the Top 1% of Earners based on different sources:
SmartAsset (based on data from the IRS and Bureau of Labor Statistics) = $652,657
Economic Policy Institute (EPI) for 2021 income: $ 819,324
As you can see, the threshold for entering the top 1% can vary significantly depending on the source and methodology used.
Real vs Nominal Household Income
The figures from the Federal Reserve shared above are all in 2022 dollars. It is worth noting, that when comparing the 2022 SCF with earlier editions of the survey, you need to understand the inflation adjustments.
For example, asset values from the 2019 survey are increased by 15.9% to adjust for inflation in the three years between surveys.
For income, the survey captures household income for the year prior to the survey year. Meaning, the 2022 survey captures household income for 2021. This 2021 figure is then increased by 8.1% to account for inflation (reflecting the high inflation experienced post-Covid) to reflect 2022 dollars.
When showing 2019 household income in the 2022 survey, it is adjusted by 18.0% from the prior published numbers to adjust for inflation.
Hence, the median household income in 2022 is reported as $70,300 vs. $67,900 in 2019. These numbers are both in adjusted 2022 dollars.
But, if you compare nominal household incomes from the two surveys, it would be $65,000 vs. $57,500. [2022: $70,300 / 1.081 = ~$65K vs. 2019: $67,900 / 1.180 = ~$57.5K].
Or when comparing the adjusted values reported in the respective surveys, the 2019 survey value was $58,600 (vs. $70,300 for 2022). This would have been median household income for 2018 that was inflation-adjusted for the 2019 report. [2019 Survey of Consumer Finances post – click here]
Conclusion:
Income disparities are prevalent in the United States. There is a long tail of very high-income households. This is shown as a significant difference between the median and mean incomes at the very top. In future articles, we’ll explore household net worth in the United States (Part II) and Retirement Savings (Part III). Stay tuned for the next installment in our Financial Voyeurism series.
