Poor Millionaires?

    Nobody knows what rich and poor mean anymore. Of course the majority of us are neither, just part of the vast unheard majority in between. 

    The only way you can measure the value of an amount of money it to relate it to something else. You can’t say whether $500 is a lot of money without some reference point. It is a lot of money to pay for a hamburger but not much to pay for a new car. 

    So how can we decide if the millionaires are rich or poor? One way is to look at what sort of income they might earn on this and relate that to average income. Remember, having a million dollars is a lot different from spending a million dollars. When people describe what they would do if they had a million dollars, they often describe how they would spend it. Usually they would spend it immediately and several times over. This should be a clue as to why they will never be in that position. 

    Let’s describe someone who could be a typical millionaire. I’m using total net worth to define “millionaire.” Some like to use a definition that only includes investable assets so excludes the value of their home. This is important to investment advisors looking for clients because they are looking for what they could earn a commission on. For the rest of us, the total is fine. 

    Let’s assume a case of someone who accumulated a net worth of a million dollars over 30 or 40 years of running a small business, say a couple of dry cleaning stores or maybe a couple of drugstores. Let’s say our millionaire is 70 years old and no longer working. So how are things going in this situation? 

    Many investment advisors say that it is safe to spend 4% annually of your savings in retirement. Of course with the low investment incomes now, you might have to cut back. And say our millionaire has $200,000 of his net worth invested in a home. You can’t spend that as you go along and you aren’t going to be getting any income from it unless you are renting out a room so we should take that amount out of consideration. If you spent 4% of the remaining $800,000 it would only amount to $32,000. 

    Then let’s assume a Social security payment of $20,000, fairly typical. You would have a total income of $52,000 a year, very close to the actual median income. Our millionaire is not poor but is a long way from rich. Depending on the cost of living in your location, he could be on the lower end of middle class. You could just plunge in and spend more of your capital but those who think like that aren’t likely to accumulate much anyway. So it’s good to remember this example when you hear the media discussing millionaires.

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[senior living long island]

In life, you can never afford to splurge at all. Everyone splurges but to the limit of their financial capacity.