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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?
The CPAs have been discussing these kinds of issues with regard to the creation of balance sheets for big businesses for a long time. On the personal side we all allow ourselves a kind of self-talk flexibility when we look at these numbers. And, when some entity tries to give us a broad view of how rich we are they too are mostly not playing hard ball.
I will give you a few examples. First, when you put your IRA or other tax deferred account on the list, do you deduct the tax you will owe to actually get your hands on it? Or, do you just list the gross account value? Likewise, when you list your taxable account do you list the total value, or do you deduct the tax you would currently owe on your huge capital gains?
Real estate has its own set of issues. Our county assessor shows the present assessed value of our house at around $1M. That is what we pay property tax for. What it would actually sell for would be just a guess. And then, you would have selling expenses, transactional taxes for the state, and also potential capital gains tax.
So, on balance I am suspicious when reading about how many people are really worth a million, or any number. And, when you do your statement, do you captialize the word NET? Because that word really means a statement of what you could actually net?
Good points. I’ve usually not considered those. And when being considered for a loan or something like that, I don’t think banks consider them either. But good points nevertheless.
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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.”