Sept. 18, 2017
A report from Boston Consulting Group focused on the growing global wealth gap. Worldwide roughly 18 million households control $1 million or more in wealth, representing the top 1% of the global population and holding 45% of the world’s $166.5 trillion in wealth.
If you are a current or aspiring member of the One Percent Club, what might this mean for you? Assume that your $1 million in wealth (now or future) consists of financial assets (stocks, bonds, cash, other investments), investment real estate, a business.
Regulators define an “accredited investor” as one having $1 million in investable assets, excluding personal residence, or had income of at least $200,000 each year for the last two years ($300,000 combined income if married) with expectations of similar amounts going forward.
Let’s put $1 million in perspective. If you are about to retire, or are retired, and want to harvest the fruits of your labors, if you pull 5% of your $1 million stash annually for cash flow, you have $50,000 per year, or $4,167 per month pre-tax.
If the funds come from a qualified retirement plan – a traditional IRA, 401(k), etc. — you must pull $62,500 from your nest egg (6.25%) to have $4,167 net to spend monthly at an average 20% federal and state tax bracket.
With interest rates still low on a historical basis, how much risk do you need to take in your portfolio to sustain your lifestyle and the financial independence of you and a spouse over a potentially 20 to 30 year lifespan? If we define risk as volatility in a diversified portfolio, how much risk is required to meet goals? How do you build a portfolio so as not to run out of money and be dependent on your kids or Medicaid?
Then there’s inflation. If you had retired 30 years ago, it takes $2,184,905 to buy today what $1 million bought in 1987. If your bank balance goes to zero before your heart rate, will you be living in your daughter’s spare room? Usually it’s a daughter who is the go-to person as a caregiver. Sons, sometimes, but most often, a daughter. Have you had a conversation with your children about that?
Are responsible adult children named in powers of attorney for health care and assets if you and a spouse or partner cannot act in your behalf? Does the adult child or other named person know where key documents are? Wills, trusts, insurance policies, military documents, how to pay bills, care for pets, minor children? Loose ends in living and testamentary estate planning are legion. Similar questions abound for closely held business owners. Say you are comatose, terminal or dead. Now what?
If you retired 20 years ago, it takes $1,522,270 in today’s buying power to equal $1 million back then. For someone age 25 with dreams of being a millionaire, what might it take in 40 years at age 65 to have the buying power of today’s $1 million? It takes $4,148,316 today to equal what $1 million bought in 1977.
In the last 40 years, inflation averaged 3.62% annually. Now, inflation is running a little below 2% annually, but going forward, who knows? You must have an inflation strategy and a tax-minimization strategy to become a millionaire in today’s spendable dollars, plus prudent and well-informed risk in portfolio building strategies.
Since 1980 we’ve experienced four bear markets: November 1980-August 1982 with the S&P 500 index down 27.8%; August 1987-December 1987, S&P 500 down 33.5%; March 2000-March 2002, S&P 500, 49.1%; October 2007-March 2009, S&P 500 down a heart-thumping 56.4%.
If you were retired over any of those times, how did you handle downturns? Did you have sufficient safe-money firepower to let your stock portfolio ride out the slump and recover? You may have raked off dividends, but did you have to sell stocks cheap to run your life, values no longer there to recover?
The lessons? Those in the work force, including new entrants, require sound money and career development strategies to become a tax-and-inflation-adjusted millionaire. You need to know your human capital and financial capital strengths and build on those. Coaching can be a sound investment.
Retirees need a bucket strategy based on specific needs and their risk-reward profile central to a life transitions and personal financial plan. A million dollars ain’t what it used to be, and won’t be in the future. Dealing with longevity, interest rate, inflation, market and insurable risks is integral to sound financial planning.
As Woody Allen observed, “Money is better than poverty, if only for financial reasons”