MarketWatch discusses why the notion that millionaires are among the ultra-wealthy is outdated and why most high-net-worth individuals in the U.S. say they need at least $5 million to consider themselves rich. Here is a direct link.
Its simple math: even when interest rates for the safest deposits were in the 5% range, each million in savings could provide just $50,000 a year of pre-tax income. Now in the 2-3% range, the income generated is about half that. Few westerners living on 25K a year before tax today consider themselves millionaires or wealthy.
Another way to look at this is to consider how much capital one would need in savings in order to replace their employment income. To provide the equivalent of $100,000 of employment income today requires savings of about 3.3 million. And this means 3.3 in excess capital. Not equity in our home or effects, but savings that is set aside to generate income for the rest of our life time. Less than 10 million people in the world today (out of 7 billion) have 1 million in excess savings in addition to the equity in their home. And of those who do have at least a million in excess savings, few have figured out a way to live comfortably on just the income it can produce. The math works the same for everyone no matter how many zeros we may have in our bank account. The choices are these:
- figure out a way to lower or control our spending in line with what our savings can safely produce.
- continue to work or generate income from active pursuits well into our 60′s and 70′s in order to supply or supplement needed or desired income.
Faced with the reality of these choices, many people opt for a third approach: they decide to undertake aggressive investment activities in the hopes of producing extra capital and higher income yields. Sometimes this works– at least for a period of months or even years. But then usually, over a full market cycle, this approach fails and capital and years of income are lost. This puts the person even further behind as now they still have to downsize spending habits, and have even less capital to live on and less time to make it up.
In the end, the level of income each of us needs in order to feel financially secure has everything to do with the spending habits we have developed or aspire to have. In my experience, mostly everyone–even the few who have several million dollars in savings–eventually come to a point sooner or later where they seek to downsize capital outlays and spending in order to make themselves more financially self-sustainable. The truth remains that no matter how much money one has, if we spend more than we earn we will deplete capital and accumulate debt. The sooner we accept and understand this basic truth, the better off we will be.
Source: Juggling Dynamite
