Do you feel wealthy? Almost certainly the booming stock market has people feeling richer than ever, but according to a recent survey by Ameriprise Financial, the vast majority of American millionaires with between $1 and $5 million dollars don’t consider themselves wealthy. Most of the surveyed millionaires consider themselves as having a “middle-class” lifestyle. Only 13% of these millionaires consider themselves “wealthy” or “upper-class”.
Perhaps it’s because a million dollars doesn’t buy nearly as much as it use to — With $1 million and using the 4% rule, that’s only a safe withdrawal rate of $40k per year. That’s not a lot of money, especially if you’re cautious about the 4% rule and prefer to use a more conservative “3% rule” or less.
That withdrawal rate is also lower than the average spending of a U.S. family, which spends around $60k annually (according to the U.S Census Bureau).
If you’re spending less than average, it makes sense that you’re not going to be feeling terribly wealthy. You won’t be able to afford some of the stuff that an average American household purchases in an average year.
At the lower end of the scale, I totally agree with the survey’s findings — One million dollars isn’t going to have you feeling wealthy. A million dollars is not going to afford you an extravagant lifestyle or even an average lifestyle.
But what about $2 million dollars or more? Would you feel wealthy then?
Two million dollars is definitely more money to work with than $1 million. It also means considerably more spending cash, even under conservative withdraw scenarios. It’s a level of assets that should be able to afford an above-average lifestyle ($80k using the 4% rule).
Larger numbers of assets should also be able to afford equally large lifestyles:
Simply put, most multi-million dollar households should feel fairly secure. It totally depends upon the local cost of living of course, but on average those households should be feeling fairly comfortable.
So why aren’t these multi-millionaires feeling a lot wealthier than your average middle-class American? Maybe it has something to do with their spending…
The Habit Of Under-Spending
Every time I see wealth surveys like this Ameriprise survey, I tend to get pretty skeptical. After-all Amerprise is in the business of selling retirement planning to hard-working stiffs (like you and I). This is Ameriprise’s bread and butter, and they definitely publicized this survey data for a reason.
Of course they’re trying to convince us we need their services. In this case, the survey pushes the idea that multi-millionaires don’t feel wealthy because they lack a solid retirement plan.
But what if there’s more to all of this “feeling wealthy” stuff than just selling some overpriced financial plan?
For one, if you’re able to save a couple of million dollars (or more), the odds are good that you’re spending a less than average to reach that level of wealth. It is possible to do this just by aggressively saving an average salary.
As individuals like myself and others in the financial independence community have show the world, if you save roughly half your salary for 15 years (or so) you can fairly easily reach $1 million dollars.
As you can guess, doing anything for 15 years is bound to form a habit. That habit of under spending your income is how most folks reach multi-millionaire status. It should come as no surprise that these millionaires are not going to feel wealthy when everyone around them is spending everything they earn.
Being wealthy is a perception as much as it is a number put on your bank account. This perception of wealth frequently revolves around how much you spend. While America’s multi-millionaires are prudently saving, their spend-thrift peers are living far more luxurious lifestyles — with nicer cars and newer clothes, the latest tech gadgets, and plenty of eating-out at restaurants. Not to mention bigger houses and more luxurious vacations.
I have a few friends that live like this, and I definitely don’t feel very wealthy next to their level of spending. I feel like I’m middle-class even though my assets are approaching $4 million dollars these days.
It stands to reason that many of America’s “single digit” millionaires fall into a similar situation — They’re frugal and saving, yet they don’t feel wealthy due to the frequent association of wealth being about excessive spending.
One other factor that might contribute to millionaires feeling a little less than flush, is the fact the most retirement assets are inexplicably linked to market prices, and thus highly volatile.
That $3 million portfolio today might be $2 million tomorrow if the market takes a big swing downward. Everyone who invests in stocks should know that market volatility is a very real thing. Market-based wealth is ethereal — it can come and go at a moment’s notice, completely out of our control.
Back in the day, the boomer generation didn’t have this issue. They grew up in a world with Social Security and pension funds for the workforce. That was considered a stable path to a decent retirement. Workers could trust that their pension plan would deliver a secure retirement. In return, workers were loyal and they tended to stay at one company for their entire career.
That was then, and this is now.
Today’s generation has a lot more to worry about when it comes to saving for retirement. Most people now have to live with saving in tax deferred retirement accounts (401k’s and IRA’s) and hope for the best in the markets. They choose what percentage of their salary to save, where to invest it, and then cross their fingers that those decisions will actually work out.
If they decide to hire a financial adviser, they also risk losing much of their wealth to the financial vampires.
Right or wrong, we’re on our own when it comes to making good retirement saving decisions. This is one of the reasons why I believe the FIRE movement was inevitable. The responsibility of retirement planning sits squarely on our shoulders. Even multi-millionaires might not have complete confidence in their plan due to the extreme volatility of financial markets.
How much is enough? What’s a realistic withdrawal rate for the future? And what about social security? Who knows how much of that money we’ll actually see once we finally become eligible for payouts in 25+ years!
It’s a situation that has everyone drawing a big question-mark about retirement.
Assets Locked Away
Another reason I believe people are feeling less than secure these days is because nobody has any money. OK, that statement sounds a little crazy, so let me explain it a little further: Even though single-digit millionaires might have a decent-sized net worth, very few people have liquid access to more than a million dollars at a moment’s notice. Why? They either spend it, or have it all locked away in real estate equity, 401k’s, IRA’s or other tax deferred retirement accounts. Money that’s technically theirs, but they can’t touch it (easily) for decades.
Real estate in particular is a popular place to put money because people frequently believe it to be safer than the stock market. So they buy a large house, and maybe some rental properties to “diversify”. That’s great, and perhaps those rental properties even cash flow a little money… but accessing that equity quickly isn’t easy.
Investors forget that it can take considerable time to sell a building. At least in my local area, the real estate market has slowed down a lot. I have a neighbor that’s been trying to sell his house for 6 months now. Yes, for six months his house has been sitting vacant! There have been plenty of people looking at it, but no buyers. I think he’s about ready to give up on selling it, and my guess is that he has $500,000 (or more) tied-up in equity in this house. That sucks.
My neighbor’s little conundrum just emphasizes the point — without access to considerable liquid assets, a job loss or other financial setback can be a major blow to most families. The lack of access to our full financial resources probably keeps most people on-edge.
Sleeping Well At Night
Want my advice on how to feel wealthy and sleep well at night? You need to start by discarding all the usual measurements of wealth. Wealth isn’t the kind of car you drive, or how big your house is. Neither does it have anything to do with how fancy you live. Those are liabilities. (Yes, your lifestyle is a liability!)
In my opinion, the easiest way to be wealthy is to have plenty of regular income from your financial assets (in the form of dividends, interest, or other regular payments) AND a significantly sized taxable portfolio — Assets that aren’t locked up and are freely accessible at a moment’s notice.
This is one of the reasons why I’ve always recommended that folks on the Road to Financial Independence start building a taxable portfolio once they’ve fully contributed to their tax deferred accounts. You really want to have both kinds of assets — Assets behind the tax wall that will grow tax-free AND a taxable account to handle the here and now.
Both kinds of assets will help your growth your net worth, but only one will let you sleep well at night after losing a job.
For example, I sleep pretty well knowing I could easily pay my bills for 8 years without a single dividend payment. Or, I could simply decided to pay off my mortgage, should the desire arise.
I might live a middle class lifestyle, but I still feel pretty wealthy. To me, that’s what real wealth is: The freedom to not worry about money. I have money I can access right now (should I need it), and assets that provide me with a decent income even if the markets decide to tank … for a decade.
You see, real wealth isn’t about what lifestyle money can buy. Real wealth is the freedom and security your assets can provide. Knowing the difference between the two is key to building a truly wealthy lifestyle.
So sleep well my friends… and dream the dreams that only real wealth can provide.
[Image Credit: Flickr]