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I recently heard a fascinating discussion about millionaires. A financial advisor was speaking to an audience and made the comment that billionaires have jets and millionaires have two used Toyota Camrys in the garage. His point was that millionaires become millionaires by living below their means and that most millionaires whom he has met live modestly.
He went on to say that there are an estimated 24 million people in the United States who are millionaires. (Wikipedia says there are around 5 million millionaires in the U.S.) His definition of a millionaire was a person’s net worth, including their home and their retirement accounts.
I agree with his definition on technical terms. However, picture this. A married couple in their early 50’s paid $225,000 for their house 20 years ago. They make modest salaries — say one is an elementary school teacher and the other is an accountant. They each have been saving in a 401-K retirement account through their jobs. They have no consumer debt and have paid off their mortgage. They drive older model cars. Today, the value of their house has almost tripled, with Zillow assessing it at $600,000. They each have saved $200,000 in their retirement accounts. Since they have no debt, their net worth is $1,000,000 ($600,000 + $200,000 + $200,000). They technically are millionaires. Yet they can’t touch that retirement money until they retire. They don’t want to sell their home and move, and even if they did, they’d have use the proceeds from the sale of their house to purchase a new home. On paper this couple may be millionaires, but they don’t feel like “millionaires.”
I am curious … how do you define a millionaire?
I’ll add another wrinkle; the future value of pensions. We do poorly on standard retirement calculators which always say we don’t have enough money saved. But we do because we both have pensions with survivor benefits to count on. So we’ll be fine in retirement. But I don’t know how to include that in “net worth.”
Dana, I include the present value (PV) of our annuities and expected SS benefits. Adam wrote a good piece on PV. I think Jonathan has written about it in the money guide on the math of investing page.
Adam’s: https://humbledollar.com/2019/09/need-to-know/
Guide:
https://humbledollar.com/money-guide/future-value-vs-present-value/
I wrote an article about how you might do the calculation back in 2017:
https://humbledollar.com/2017/09/a-price-on-your-head/
I have two definitions:
Mathematically, a millionaire is someone for whom the liquidation value of wealth exceeds a million.
Psychologically, a millionaire is someone whose sense of financial security won’t change even if they end up spending a million dollars from their assets for some reason or the other.
I’ve followed the Spectrem Group’s study on millionaires for years, but I’ve never paid to read the details. They exclude the primary residence in their definition. However, I don’t know how they compare a million now to a million even 3 years ago. Here are the 2021 stats.
“The number of U.S. households with a net worth between $1 million and $5 million, not including the value of the primary residence (NIPR), increased 8.1 percent from 11.6 million at year-end 2020 to 12.55 million by year-end 2021, an increase of 950,000 Millionaire households.
The Very High Net Worth market, in which household net worth is between $5 million to $25 million NIPR, increased from 1,630,000 to 1,800,000, an increase of 10.4 percent from Dec. 31, 2020 to December 31, 2021.
The number of $25 million-plus American households, Ultra High Net Worth market, increased from 214,000 at the end of 2020 to 252,000 as of year-end 2021. That reflects a 17.8 percent increase in the wealthiest Americans.
Net worth is only thing that matters. My DW and FIL were found of excluding home value and there’s an argument there, so we have total net worth and exl home.
Liquid Net Worth.
I track liquid net worth and total net worth. My definition of millionaire is simply total net worth over $1M.
The key to staying a millionaire is keeping a gap between your ego and your income, ie manage your spending, automate savings, and keep investing while mindful of new risks as you age (see the HD Money Guide).
The important thing, to me, is reaching the “more than enough” point. Does one have more than enough to support one’s self in old age? To not burden others? To give to worthy causes and help others in ways that one wishes? Having reached that point long ago, the thought of being a millionaire would never have changed the way I live.
The difference between a net worth millionaire and a nest egg millionaire is critical. You can’t eat bricks and mortar or other illiquid capital. The healthiest millionaires have less than 20% of their NW tied up in their primary residence. I rely on a nest egg definition of millionaire which is liquid.
I think I agree with you. My liquid net worth is about a million but I don’t feel at all like a millionaire. My paid off home is worth about 400k, so id need to have about 2 million to meet your 20% criteria. With 2 million I’d probably feel like a million.
Being a millionaire is not what it used to be. Now, I’m not saying this from experience, but rather from posted calculations of US population net worth. Granted, it is still better than most.
A calculator at DQYDJ lists a millionaire in their early 50’s as being in the top 77% of the population, when counting home equity. That same value increases another 6% if no home equity included. Rarified territory? Perhaps…. But as Dick points out below, much of it may not be readily accessible.
https://dqydj.com/net-worth-by-age-calculator/
I would go in between. I would exclude illiquid assets like real estate, vehicles, etc. But I’d include liquid assets like retirement accounts, especially for those who have reached age 59.5.
What about pensions and social security. If you have started to draw on those, do you include the present value of those income streams in the calculation? I’m not sure about that one.
Well, you defined it, but it just isn’t the way people imagine it to be. You could also define it and exclude retirement funds and home value and you may be closer to the impression of millionaire. I favor the second definition.
Many multi- millionaires are not what they seem either. Take a CEO with a $15 million pay package. Most of that is not cash, much may be in stock options which can’t be used for several years and some may never have any value. .