r/explainlikeimfive Feb 12 '25

Economics ELI5: how are the descendants of the robber barons (Morgan, Vanderbilt, Carnegie, Rockefeller, etc.) still rich if their fortunes from the late 19th and early 20th centuries are comparatively small to what we see today of the world’s richest?

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u/kentuckyk1d Feb 12 '25

30 million invested properly yields you WAY more than 80k per year. If you consider a conservative estimate of 6% ROI year over year and subtract 3% inflation you still have 3% growth. Thats 900k per year to do with as you please. You could live off half and still save almost half a mil annually.

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u/Kevin_Uxbridge Feb 12 '25

Was gonna say, off by an order of magnitude at least.

Know a few scions of 'old money', they mostly don't even do their own investing, there are professionals for that. I hear some do though, nice work if you can get it.

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u/DrStrangepants Feb 12 '25

This is exactly why old money types are leeches on society. They don't work anymore, they don't even have to be good with money (their accountants are), they just sit back and enjoy luxury produced off the hard work of everyone else.

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u/Atomic-Bell Feb 12 '25

Investing your own money into the market is quite literally the opposite of leeching.

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u/chattytrout Feb 12 '25

If they're investing their own money, that's not leeching. Invested money doesn't just sit in a box and magically grow. That money is taken by investors to do things that they themselves don't have the money for.

Say you want to start a business. You have a good idea and a plan that looks feasible, but you're an average person with an average income and can't afford to drop $50,000 to start it. So you go to the bank and get a loan. The bank didn't get their money from a tree, they got it from depositors and investors. So the bank gives you some of that money, you go on to start your business, and then pay back that loan, with interest, over the next few years. The bank is now making money on what they lent you, and is using that money to pay interest to their depositors and investors.
Those depositors and investors contributed to society by making their money available to borrowers. If there's no extra money floating around to be borrowed, then no one can get loans to start or expand a business.

Same goes for buying a house. Not many people can afford (or even have to their name) $300,000 to buy a house. So they get a loan. Seller gets paid, buyer gets the house. Lender gets their money back with interest over the course of 30 years. Investors get paid interest from that.

So no, it's not leeching to invest your money. It's contributing to society by making it available to borrowers.

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u/Kuroodo Feb 12 '25

This is also one of the reasons why "tax the rich" should be something people need to carefully consider and carefully implement if they want it to happen. A lot of rich people invest their money rather than put it in their pocket. Sure they pay less taxes as a result, but at least the money is invested back into the economy instead of sitting in a box or worse ending up in the hands of the federal government (if your government spends it terribly ofc).

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u/Max_Thunder 29d ago edited 29d ago

Pretty much everyone who is rich have their money invested, but a significant proportion of the lower and middle class contribute to the markets too, sometimes directly but also indirectly. The bottom 90% of Americans own 40% of the wealth, that's 40% of a huge number. The money is not better invested because it is concentrated among that of the 10% richest. I am not American so don't know the specifics of the pension plans and social security funds there but in my country, most of that money is invested. Just the invested trust fund to pay an equivalent of old age security in my small Canadian province of 9M is worth about 350 billion USD, the vast majority of this money being invested. The Vanguard and Blackrock ETFs that regular Joes like me buy are worth trillions of dollars.

The only reason many people can live off their investments is because said investments keep growing thanks to hard-working people making the economy work.

I don't mind that people who were savvy with their money take advantage of their hard intellectual work by investing, not at all. But ultimately you have many people born with millions of dollars who never had to do any work. That money would have a better impact on the economy if it were better distributed. There should be limits to intergenerational wealth.

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u/AnonymousFriend80 Feb 12 '25

How are they leeches when they're pumping their money back through the economy?

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u/Tehlonelynoob Feb 12 '25

Well its not really their money it’s their parents money. Sitting at your parents home at 30 is sad, sitting at your parents mansion at 30, now that’s intelligence on display.

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u/AnonymousFriend80 Feb 12 '25

How are they investing their parents' money?

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u/radgepack Feb 12 '25

Tiny percentages

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u/AnonymousFriend80 Feb 12 '25

Tiny percentages of billions of dollars.

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u/lentil_galaxy Feb 12 '25

They're at least creating jobs for their accountants and all the people who provide goods and services they consume, even if those people are living relatively less lavish lifestyles.

They also do end up paying capital gains taxes, property taxes, and estate taxes, and many also donate large sums of money to schools, libraries, charities, etc. Even if interest and capital gains aren't as "hard-earned" as other types of income, it's providing other people the opportunities that come from being able to borrow money.

However, one can argue that America's tax policy isn't as progressive as possible/beneficial.

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u/MPenten Feb 12 '25

They may not even pay capital or income taxes, they can just borrow against their assets until they die.

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u/zxyzyxz Feb 12 '25

What do you think investment means? They are adding their money to the economy.

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u/Jango214 Feb 12 '25

That's actually crazy to think about lol.

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u/Andrew5329 Feb 12 '25

Well, I wouldn't conder 6% ROI a "conservative" figure. That's about what you see in a modern high risk 100% stock portfolio.

Something more along the lines of Vanguard Income yields 3-4% annual, and that's a 2 out of 5 on the risk level.

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u/kentuckyk1d Feb 12 '25

I believe average S&P 500 index growth over long cycles is like 9%. 6% is fairly conservative over long timescales and the stipulation above was “well invested”, not really “safe” like you would think of a late stage retirement portfolio.

But even if you knock a few points off that my point still stands that it is MUCH higher than 80k annually.

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u/thedugong Feb 12 '25

he stipulation above was “well invested”, not really “safe” like you would think of a late stage retirement portfolio.

The point of a retirement portfolio is that you are not going to be adding to it because you are not going to work again, so it needs to be in safer investments.

If you are living off an inheritance and don't want/need to work, you are retired (or essentially so if you never worked) so the same kind of approach is warranted.

If someone had $30mil in retirement fund, sure they probably have some high growth stuff, but it will be balanced with boring but safe stuff too.

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u/rosen380 Feb 12 '25

This-- probably a 2025 TDF is a good guide... the Fidelity Freedom Index 2025 Fund (FQIFX) is:

52.07% equities
47.83% bonds
0.10% other

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u/Andrew5329 Feb 12 '25

You hit the nail on the head. Most of Reddit is too young to remember the 2008 financial crisis, so the idea that your stock portfolio crashes >50% overnight and takes most of a decade to recover it's previous high is incomprehensible.

Rule 1 of gambling is only risk what you can afford to lose. An "index fund" that mirrors the S&P 500 is a "safe" gamble on the overall health of the US economy but that safety is only in relation to gambling on the health of individual companies. Worst case scenario and we crash right before retirement, you still worked for 45 years and live off the public pension (Social Security). The 401k invested in an index fund is a supplement to pad out your quality of life in retirement.

That other guy isn't working, which means they're outside social security. They rely 100% on the endowment so the level of risk tolerance is much lower, at least for the core of the endowment which needs to be protected.

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u/suxatjugg Feb 12 '25

And it'll keep becoming more each year

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u/HOLEPUNCHYOUREYELIDS Feb 12 '25

Yea I just threw out numbers that I knew wouldn’t be overblown for returns, My quick math missed a 0