We’re in the holiday season and I thought it would be fun to talk about dreams of great wealth. The word “millionaire” is mainly used loosely to mean a person with so much money that he or she can spend far more than the average person with no fear of ever going broke. Increasingly, this loose definition does not match up with the more precise definition of a person with a net worth of at least $1 million.
Consider the hypothetical couple, Sam and Christie, both 56 years old. They met working for the same employer and have 3 children, two of whom are still attending university. Their employer is having tough times and they both got forced into early retirement. Unfortunately for them, their skills are mostly useless now that the entire industry they worked in has collapsed. Fortunately, though, they are collecting a defined-benefit pension of $5500 per month.
Using a rule of thumb that an indexed pension is worth about 15 years’ worth of payments, their pensions have an actuarial value of $990,000. Sam and Christie live in a house worth $450,000, but their mortgage is $300,000, they owe $80,000 on a line of credit, $40,000 in car loans, and $20,000 on their credit cards. This gives a net worth of exactly $1 million. Sam and Christie are millionaires.
Let’s look at Sam and Christie’s cash flow. Their monthly debt payments add up to $4700 per month. This leaves $800 per month to pay income taxes, help with their children’s tuition, heat their home, and buy food. Sam and Christie are in serious financial trouble, but they are still millionaires. Obviously, this is an extreme case. But it illustrates how being a millionaire by the precise definition can be very different from the looser definition.
Some readers might object saying that we shouldn’t count pensions. To these people I offer to buy their pensions for one-tenth of its actuarial value (if this is legal). If pensions don’t count as an asset, then these people should be happy to turn their worthless pensions into cold hard cash.
I think inflation has reached the point where we should be saying “decamillionaire” (a net worth of $10 million or more) to mean a person with enough money to be able to spend without worry. Even if $1 million is tied up in a house and $2 million in a pension, and we draw only a 2% income on the remaining $7 million, this is still $140,000 per year.
Of course, it is possible to burn through just about any amount of money as many professional athletes have demonstrated. But, I think the decamillionaire level gives about the right balance between the loose and precise definitions. Now we just have to figure out how to get the $10 million.