Goolsbee on the Superrich
In today's NY Times, economist Austan Goolsbee asks what motivates the superrich.
Oddly, Austan's calculations assume a return on assets of 10 percent. Can one really achieve a 10 percent return after accounting for inflation and taxes? It seems high to me, if we are thinking about a balanced portfolio of stocks and bonds. At a more modest return, say 4 percent, providing for heirs is a somewhat more plausible motive than Austan gives it credit for being. Remember that the number of heirs is approximately doubling every generation--a rate of about 3 percent per year. So consumption smoothing among you and your heirs would allow you to annuitize your wealth at a rate of only 1 percent. And if you want your family's consumption to grow over time, the annuitization rate would be even lower.
Oddly, Austan's calculations assume a return on assets of 10 percent. Can one really achieve a 10 percent return after accounting for inflation and taxes? It seems high to me, if we are thinking about a balanced portfolio of stocks and bonds. At a more modest return, say 4 percent, providing for heirs is a somewhat more plausible motive than Austan gives it credit for being. Remember that the number of heirs is approximately doubling every generation--a rate of about 3 percent per year. So consumption smoothing among you and your heirs would allow you to annuitize your wealth at a rate of only 1 percent. And if you want your family's consumption to grow over time, the annuitization rate would be even lower.
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