Lester Burnham is a middle-aged magazine executive who despises his job and is unhappily married to Carolyn, a neurotic and ambitious real estate broker. Their 16-year-old daughter, Jane, abhors her parents and is a cheerleader despite low self esteem. The Burnhams' new neighbors are retired US Marine colonel Frank Fitts, his near-catatonic wife, Barbara, and their teenage son, Ricky, who obsessively films his surroundings with a camcorder, collecting hundreds of recordings on video tapes in his bedroom, while using his part-time job as a waiter to serve as a front for dealing cannabis. Frank is a strict disciplinarian who has previously forced Ricky into a military academy and a psychiatric hospital. Jim Olmeyer and Jim Berkley, a gay couple who live nearby, welcome the family to the neighborhood; Frank later reveals his homophobia when angrily discussing the encounter with Ricky.
During one of the school's basketball games, Lester has an out-of-body experience and becomes infatuated with Jane's conceited friend, Angela, seeing her perform a half-time routine. He starts having sexual fantasies about Angela, in which red rose petals are a recurring motif. Meanwhile, Carolyn begins an affair with a married business rival, Buddy Kane. When his boss informs Lester that he is to be laid off, Lester blackmails him and quits his job, taking employment at a local fast food restaurant. He buys his dream car and starts working out after he overhears Angela tell Jane that he would be much more attractive if he improved his physique. He begins smoking cannabis supplied by Ricky, and flirts with Angela whenever she visits Jane. The girls' friendship wanes after Jane starts a relationship with Ricky, which Angela scoffs at. They bond over what Ricky considers the most beautiful imagery he has ever filmed: a plastic bag blowing in the wind.
Lester discovers Carolyn's infidelity, but reacts indifferently. Buddy ends the affair, fearing an expensive divorce. The embarrassment combined with her lack of professional success drives Carolyn into a spiral. Frank becomes suspicious of Lester and Ricky's friendship and later finds his son's footage of a nude Lester lifting weights, which Ricky captured by chance. Later when Frank sees Ricky selling Lester more marijuana Frank gets the wrong idea and is convinced they're sleeping together. He viciously confronts Ricky for their supposed affair, accusing him of being gay. Ricky falsely admits the charge and goads his father into expelling him from their home, giving him his freedom. A distraught Carolyn is shown sitting in her car where she removes a handgun from the glove box. At home, Jane argues with Angela about her flirtation with Lester, which is interrupted when Ricky asks Jane to run away with him. He persuades her to come with him to New York City, and scolds Angela as ugly, boring and ordinary.
Frank seemingly goes to confront Lester, but then breaks down crying, hugs him and attempts to kiss him. Lester gently rebuffs the colonel, who flees in humiliation. Lester finds a distraught Angela sitting alone in the dark. She asks him to tell her she is beautiful; he does, and they kiss. As they are about to have sex, Angela admits she is a virgin. Having a breakthrough of conscience, Lester's unable to fulfill his fantasy and do what he now considers to be unbecoming. Instead, they bond over their shared frustrations in life. Angela goes to the bathroom and Lester smiles at a family photograph in his kitchen, seeming to have come full circle with his mid-life crisis. In this moment, an unseen figure shoots Lester in the back of the head. Ricky and Jane find Lester's body, while Carolyn is seen in her closet, discarding her gun, and crying hysterically. A bloodied Frank returns home where a gun is missing from his collection.
Lester's closing narration describes meaningful experiences during his life; he says that, despite his death, he is happy because there is so much beauty in the world.
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