November 25, 2013

Most wealthy Americans no longer think that $1 million is enough to makes you rich. In a survey of affluent investors released this week by UBS, only 28% of “millionaires” said they considered themselves wealthy. And even among “multi-millionaires” – those with $5 million or more in assets, only 60% of that group identified themselves as wealthy.

These “I’m not wealthy” responses – from people who are better off than 98% of the world, seem a little spoiled and self-pitying to many.  But it’s worth noting that the UBS survey framed its questions in a way that may have influenced the answers. For example, the options it offered as answers to the question, “What does it take to be considered ‘wealthy’?”  included:

a. No financial constraints on activities

b. Surpassing a certain asset threshold

c. Never having to work again

d. Ensuring a comfortable lifestyle for next family generations

Perhaps they should have included a more down-to-earth choice for that question. Something like “Feeling confident in my financial security.” But the option that the largest number of survey respondents chose was “No financial constraints on activities.” That raises the wealth standard considerably. No constraints? I can do whatever I want, wherever I want, and whenever I want, no matter the cost? Then, yes, $1 million or even $5 million would probably not be enough.

Let’s take the survey’s benchmark numbers and apply them to a simplified retirement scenario. Let’s say you and your spouse retire with a nest egg of $1 million. If you’re very responsible, you’re putting aside, say, $220,000 for out-of-pocket medical costs, so now you have $780,000 to live on. If you follow the classic 4% rule for withdrawals, you’ll be paying yourself an income of $31,200 a year, plus whatever you’re getting annually from Social Security. Let’s say it all comes to $56,000 before taxes. Are you comfortable? Yes. Financially secure? Probably. Living with “no financial constraints”? Definitely not.

Retire with a $5 million portfolio, on the other hand, and your 4%-plus-Social-Security income is around $200,000 a year. That’s still not enough for a private jet, but it’s enough to feel as though your range of options, for everything from leisure time to estate planning, is far wider.

Here are the items that UBS considers the “Top Insights” from the survey:

1. Wealth equals no financial constraints on activities
2. Cash is still “king”
3. Investors control risk by bucketing their money
4. Four out of five investors provide financial support for adult children or aging parents
5. Comprehensive financial planning must include long-term care and financial support across generations

The survey goes on to say that “Financial planning has a positive impact on investors’ confidence in achieving their goals. However, not all financial plans are created equal, and most plans do not increase investors’ confidence as much as one might expect—because they contain major gaps.”  Specifically, the survey asked:

“Do you have a financial plan that you created with your primary financial advisor?”

57% of wealthy UBS clients said that they have a financial plan in place, and 43% said they do not.  The clients who took the time to prepare a formal plan with their adviser were much more likely to answer “yes” to the question of “are you prepared for retirement?”  These prepared investors also had more success in building wealth, with an average of 50% more accumulated wealth at retirement than clients who did no formal planning.

 

 

About the author 

Erik Conley

Former head of equity trading, Northern Trust Bank, Chicago. Teacher, trainer, mentor, market historian, and perpetual student of all things related to the stock market and excellence in investing.

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