The rich spend a lot. They don't spend enough.

The richest 10 percent of Americans do 49.7 percent of all spending. 

Those are households making $250,000 a year or more.

I don't do financial planning anymore, so this post isn't tax or planning advice meant for you specifically. People have different priorities, obligations, assets, and health, and those affect your best course of action. Consult your own advisors.

The wealthiest 10 percent drive consumer spending.

Thirty-five years ago the wealthiest 10 percent represented 36 percent of the overall spending, the same amount as did the next category of people, the three-times larger 30 percent of Americans in the next lowest income group. That has changed. The richest group spends more. Everyone else spends less.

Here is another way to look at that data:

The scale of spending by the wealthiest Americans re-affirms the notion that income distribution may be exacerbating political division in this country. Being in the bottom 90 percent of income pushes a person farther from the very visible people on top. How can there not be some frustration?

Premium seats are the ones selling out on airplanes. River cruises, which are preferred by upscale vacationers, are in growing demand. Meanwhile, Big Lots filed for bankruptcy and Dollar Stores is closing stores. My advice for a young person with flexibility to choose a career path is to find an arena of expertise and service that caters to the needs of wealthy people. That's where the money is.

The wealthiest 10 percent are spending because they have money and are getting wealthier. The price of homes and stocks have gone up faster than inflation. Our economy rewards assets, not earned income, and the wealthy have assets. They experience the "wealth effect." When asset prices go up they feel richer and more free to spend a part of their growing wealth. People with fewer assets aren't getting richer. They see inflation, and pull back on spending.

Spend more. Save the country. One way to address the social and political problem of income and wealth concentration is for the wealthy to spend more. Or donate more. Or otherwise to enjoy that wealth by exchanging it for goods and services provided by the 90 percent. It may seem "against type" for a financial advisor to urge people to spend down savings, since the cliche is the planner who urges early, regular savings and prudent accumulation, and is armed with growth calculators that compound wealth into infinity. There is a problem with that advice. At some point, money is there to be used, not compounded.

Except for public employees and a few union plans, the American retirement system has switched from a pension-based one to a do-it-yourself 401-k and IRA system. The risks of poor investment choices or outliving one's money got transferred to the individual. The result is that retirees consider that nest egg a precious safety net. They mentally divide it into two categories, income and principal. Income they can spend. Principal they cannot.

Lifetime wealth transitions from earnings into capital, but it doesn't get spent down.

Retirees are willing to spend approximately 2 percent per year of that principal, which is about its after-tax, after inflation income. That is substantially less than its total return in recent decades. The psychologically comfortable thing to do is to die rich, which is a satisfactory outcome if one has far more than enough money, a significant charitable bequest motive, or if one has heirs who need and expect it. But it is a far from optimal strategy, if one wants to maximize the use for the retiree. Money doesn't get spent for current needs. It accumulates "just in case." 

Annuitization via insurance or a charitable gift annuity transfers accumulated wealth into a lifetime income stream. That solution is uncomfortable to people who spent decades accumulating. Annuitization reduces the person's nominal wealth, which conflicts with the mindset of more-is-good and the reassurance of seeing a growing portfolio value on an account statement. In fact, there is more value, and in two forms. There is more safety because one has eliminated the risk of outliving one's money. There is also more spendable money, because with longevity risk transferred to the insurer, the retiree now feel free to enjoy spending income.

Something else good happens, and that is to the economy and politics of the country. The assets, having been turned into spendable money, which circulates from seniors who have money to the younger people who earn it, who then spend it so it circulates yet again. We need more of that.

Further reading: Working Paper: "Retirees spend lifetime income, not savings"

Tomorrow: A look at a proposal that preceded and informed the Social Security Act, the Townsend Plan. It is relevant to today's post.

Dr. Francis Townsend

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