Millionaires

[REWahoo]

I saw this graphic in an article entitled "$1 million is just not what it used to be" on MSNBC.com...



...and thought the absence of real estate was unusual. Then I saw this definition of net worth:

"According to research from Merrill Lynch & Co. and the consulting firm Capgemini, some 2.9 million people in the United States and Canada have net worths of $1 million. The New York-based companies count all of an individual’s financial assets except a primary residence."

Debate, anyone?

[wabmester]

The article includes a poll asking whether $1M is enough to retire on. So far, 52% say no.

[Sam]

No debate from me. I just wonder how many additional millionaires would there be on top of the 2.9 million if the primary residence equity is included in the networth? Twice as many? Three times?

[Sam]

Quote:

Originally Posted by wab The article includes a poll asking whether $1M is enough to retire on. So far, 52% say no.

Which means that 48% says yes. I said yes too, but that did not change the percentage


Anyway, I like the following paragraph for its perspective:

But David Bach, author of “The Automatic Millionaire” and other financial advice books, points out that “99 percent of Americans don’t have a million dollars — and to them, a million dollars is a fortune.” To the hundreds of millions of people around the world who live on $1 a day or less, “it’s unfathomable.”

[kcowan]

In previous discussions on the subject, I have concluded that residence equity should only be included if it represents significantly more that what would be needed in retirement. So if the family home is worth $750k and the place that would be needed is only $400k (because it is in a lower cost area and/or is smaller) then the $350k should be counted because it can be harvested to generate additional retirement income.

Similarly, if a person is renting their home, then it is acounted for in expense projections, increasing the equity needed to cover the added SWR. In our case, the $40k we spend each year requires another $1 million in savings at 4% SWR. Does that makes us richer than someone who owns their home outright?

But I also have a quibble on the other items:
1. Restricted stock/stock options - this is just another form of business ownership.
2. Inheritance - when do you count the % and what if you use it to pay off the mortgage.
3. Investment performance - I assume this is any such performance that happens up to the point of retirement (or the point of the survey). But it really gets messy if the sale of the business or the exercise of options has happened in the past.
4. Pension - If I earn a COLA'd pension of $50k/year, I am significantly better off than most of the population. At an SWR of 4%, it is worth another $1.2 million! So am I an extra rich person? Most people here would say yes.

Alas, it all goes to reinforce that there is no simple way to characterize wealth. :

[wabmester]

Quote:

Originally Posted by Sam But David Bach, author of “The Automatic Millionaire” and other financial advice books, points out that “99 percent of Americans don’t have a million dollars — and to them, a million dollars is a fortune.” To the hundreds of millions of people around the world who live on $1 a day or less, “it’s unfathomable.”

Hmm, I wonder if he stopped pimping his books after he hit $1M....

[macdaddy]

$1 million + SS + medicare = enough
$1 million by itself = not enough

[free4now]

For the purposes of determining whether you have enough to retire on, I think it's useful to take account of your home value and equity. Otherwise you end up with absurd contradictions, like the guy with 10k equity in his sprawling $1 million mcmansion looking more retirable than the person living in a $300k condo with $200k equity (assuming they both have the same cash nest egg).

[LOL!]

Merrill Lynch is only interested in getting their hands on your investable assets. They don't care about your house and they don't sell real estate. Thus, no surprise on absence of real estate ... it was by design.

[SteveR]

Relative to the question of your primary residence being in or out of your net worth..

Here we go again!

Net Worth discussions are always a great way to get the blood of some folks pumping as evidenced by previous threads that spanned many many pages of replies.

I don't use the value of my home in my SWR calculations for my cashflow planning. It is only a number since I have to live somewhere and I can't eat it, be clothed by it, buy things with it or otherwise get an income stream from it (without losing equity or taking on more debt.) so I don't count on it for expense funds as as an investment.

I do, however, count it in my overall net worth since I see net worth as the simple calculation of assets minus expenses(including outstanding debt). But for SWR I don't use net worth, I use investment assets only since they are there to fund my ER and pay the bills. The number are different and used for different things.

As for the question of is $1M enough? It all depends. As was said before, a COLA pension is worth a lot especially over time since it will, by definition, keep up with inflation while your investment nest egg may not. In that respect, it is worth far more than a similar pile of assets used to create a SWR of the same annual amount over time. I suppose one could argue the relative payout of a COLA pension taxed as income vs an investement that could be taxed as divideds or capital gains less expenses but that would give me a headache.

Regardless, $1M is not what it used to be but depending on what other incomes streams you have and your expense level it could provide a very nice standard of living.

[jdw_fire]

Quote:

Originally Posted by SteveR As was said before, a COLA pension is worth a lot especially over time since it will, by definition, keep up with inflation while your investment nest egg may not. In that respect, it is worth far more than a similar pile of assets used to create a SWR of the same annual amount over time.

Do you feel the same way about an inflation adjusted immediate annuity that has starting payments of 4% of the amount paid for the annuity?

[saluki9]

Quote:

Originally Posted by LOL! Merrill Lynch is only interested in getting their hands on your investable assets. They don't care about your house and they don't sell real estate. Thus, no surprise on absence of real estate ... it was by design.

That's not true. Merrill loves to have clients with big mortgages, because they are in the mortgage lending business. What they like even more is when their clients don't want the trouble of going through a mortgage loan and instead they urge them to use margin loans for personal use.

[SteveR]

Quote:

Originally Posted by jdw_fire Do you feel the same way about an inflation adjusted immediate annuity that has starting payments of 4% of the amount paid for the annuity?

What expenses are you paying for that annuity?

I would take the COLA pension over the annuity. Wish I had one.

[jdw_fire]

Quote:

Originally Posted by SteveR What expenses are you paying for that annuity? I would take the COLA pension over the annuity. Wish I had one.

If you pay $100K (including expenses) for the annuity and get an immediate annuity that pays you $4K/yr adjusted annually for CPI does it matter what the expenses are? You are getting the same return as the pension you mentioned

Quote:

Originally Posted by SteveR As was said before, a COLA pension is worth a lot especially over time since it will, by definition, keep up with inflation while your investment nest egg may not. In that respect, it is worth far more than a similar pile of assets used to create a SWR of the same annual amount over time.

assuming that by "a similar pile of assets used to create a SWR of the same annual amount over time" you are using a SWR of 4%. In fact the way your post is worded, the pension would be worth more that $100k to get a $4k/yr adjusted annually for CPI for life payment stream, thus making the SWR of the pension <4%.

[unclemick]

1993 age 49 retired 300k in financial assets(his and hers) plus a duplex.

Reread the three B's - Ben(Graham), Bogle, and Bernstein.
Sold the duplex and ate it, jobshopper one year. Bogle and balanced index.

2007 - Yesterday's market 1.1 mil - all praise to Bogle. Excluding real estate and junk.

Wiped out by Katrina and the SO passed away suddenly. That - wasn't on my spreadsheet.

Check your numbers, pencil up your expenses and when your belly button says go - rock up and go!

Remember Bear Bryants linebackers - agile, mobile and hostile.

The clock is ticking.

heh heh heh heh - , 8).

[HFWR]

Quote:

Originally Posted by jdw_fire If you pay $100K (including expenses) for the annuity and get an immediate annuity that pays you $4K/yr adjusted annually for CPI does it matter what the expenses are? You are getting the same return as the pension you mentioned assuming that by "a similar pile of assets used to create a SWR of the same annual amount over time" you are using a SWR of 4%. In fact the way your post is worded, the pension would be worth more that $100k to get a $4k/yr adjusted annually for CPI for life payment stream, thus making the SWR of the pension <4%.

Not sure I follow...

A pension does not cost you anything out-of-pocket (discounting what you might have gotten in increased salary); you buy an annuity out of your portfolio, thus reducing it's value. How are these comparable, cost wise?

[jdw_fire]

Quote:

Originally Posted by HFWR Not sure I follow... A pension does not cost you anything out-of-pocket (discounting what you might have gotten in increased salary); you buy an annuity out of your portfolio, thus reducing it's value. How are these comparable, cost wise?

If you read the post I was responding to, SteveR said "it is worth far more than a similar pile of assets used to create a SWR of the same annual amount over time" refering to a pension. By making this statement he put a value on the pension and I was just trying to pin that value down and compare that value to the cost of an annuity. He may not have stated it explicitly but he implied that he would trade "a similar pile of assets used to create a SWR of the same annual amount over time" for the pension he described and I was interested in knowing if he felt the same way about an immediate annuity that made the same payments.

[Texas Proud]

Remember.. the survey was done for an investment company... they can't make a fee off investing your house...

They want the people with $1 mill investable assets... so for them, primary residence is not needed...

[SteveR]

Sorry about the confusion...these darn employees keep distracting me

What I was trying to say (and less clearly than intended) was that due to the cost of an annuity and the annual fees associated with keeping it; a COLA pension was worth more over time because of the built in inflation factor and the fact that the pension has no on-going direct costs like the annuity. (I recognize that in fact, a pension is an annuity, but the costs to maintain it are buried in the payout and appear to be off-set by the COLA element.

Likewise, if one were to create a pension (cash stream) from only assets then it would take fewer $$$ to create the same cashflow as the annuity because the relative costs of creating the cashflow from the assets would be less than the fees associated with the annuity. I have never run the numbers but on the surface I believe it to be true.

On the whole, I would rather have a COLA pension than a non-COLA pension.

I would rather have a non-COLA pension than have to accumulate enough assets to fund an equivalent cashflow(SWR).

I would rather accumulate and dispose of sufficient assets to fund a SWR than buy an annuity.

To really know if all this holds water one would need to run the numbers including taxes, loss of future earnings of cash tied up in investments, fees, commissions, etc. I don't have the energy to do all that so I am just stating what I believe to me true. If you want to prove otherwise, knock yourself out.

[jdw_fire]

Quote:

Originally Posted by SteveR What I was trying to say (and less clearly than intended) was that due to the cost of an annuity and the annual fees associated with keeping it; a COLA pension was worth more over time because of the built in inflation factor and the fact that the pension has no on-going direct costs like the annuity. (I recognize that in fact, a pension is an annuity, but the costs to maintain it are buried in the payout and appear to be off-set by the COLA element.

I don't know where you get your information re fees but per Vanguard "Expenses for the fixed income option are incorporated into the initial quote." Which means when they say that for a price of $100k now they will pay you 428.79/mo (5145.48/yr) adjusted annually for CPI for the rest of your life provided you are currently 60yo the fees have already been removed i.e. you get the whole 428.79/mo. (note that is >5.1% SWR)

Quote:

Originally Posted by SteveR Likewise, if one were to create a pension (cash stream) from only assets then it would take fewer $$$ to create the same cashflow as the annuity because the relative costs of creating the cashflow from the assets would be less than the fees associated with the annuity. I have never run the numbers but on the surface I believe it to be true.

As Vanguard said "Expenses for the fixed income option are incorporated into the initial quote." so you can compare cash flow to cash flow. This is why I asked earlier what difference it makes what the fees are since the number you are using to compare is an after fee number. Maybe you should run the numbers without making assumptions like the insurance co is going to screw you.

Quote:

Originally Posted by SteveR On the whole, I would rather have a COLA pension than a non-COLA pension. I would rather have a non-COLA pension than have to accumulate enough assets to fund an equivalent cashflow(SWR). I would rather accumulate and dispose of sufficient assets to fund a SWR than buy an annuity.

And yet you say "I recognize that in fact, a pension is an annuity". Your logic is circular and has broken down.