The Number of Millionaire Households is at a Record. Should This Surprise Anyone?

May 1, 2007

From CNNMoney.com:

Another year, another record for the rich. The ranks of households with a net worth of at least $1 million grew 5 percent to an all-time high of 9.3 million, according to a report released Monday.

Isn’t this a good thing? These numbers DO NOT include primary residences. The median age of these millionaire households was 59. Hmmm… This makes sense. The oldest Baby Boomers turned 60 last year. The number of millionaire households should be increasing each year.

These reports are misleading because they report millionaire households but don’t adjust the millionaire status to reflect inflation. Had this particular report been published each year for the last 20 years and inflation ran at 3% per year, it would now take over $1,800,000 to equal what a millionaire in today’s dollars:

$1,000,000 × 1.0320 = $1,806,111

In other words, people may be millionaires now but they have no where near the purchasing power they would have had 20 years ago.

14 responses to The Number of Millionaire Households is at a Record. Should This Surprise Anyone?

  1. A bigger problem is that it doesn’t include home equity. Seems odd that if you went from a large home to a small home you could all of a sudden become a millionaire.

  2. Kurt,

    Good point. I never really looked at it like that.

    I’m guessing that they don’t include the primary residence to keep the number fairly conservative.

  3. My guess is they didn’t include them because housing prices have gone up so much recently, inflating the numbers. Of course, that’s more of an argument towards using a different number for “rich” than anything else.

  4. @ JLP – Well you knew I was going to have to weigh in on this one didn’t you.

    Some thoughts on the subject:

    1) The reason they don’t include home equity is that the folks who generally commission these studies are largely of the kind that sell investment/banking products – and home equity just doesn’t do much for their bottomline. They want to know who’s liquid, where to find them, and how to get some of their action.

    2) Not so fast there on the thing about being a millionaire ain’t what it used to be. I think for a large majority of these folks, they have owned property for a very long time and benefited immensely from it. Sure, inflation eats away purchasing power, but when you own long-term, hard assets, inflation can be your friend too – assets worth more, old debt repayable with inflated income, etc. A lot of these folks have made out like bandits in r.e. (even if r.e. is not part of the liquid measure). And r.e. can be converted to liquid assets (which I bet some of them have done when they hit retirement).

    3) I always find the average age (59) to be a telling statistic. Wealth usually takes a bit of time to accumulate – this is why older people seem to often have more of it. Whenever I am feeling impatient with my financial progress, I remind myself of this. In the same way recent college grads shouldn’t expect to be able to have their parents lifestyle right of the bat, I shouldn’t expect to be able to live too high off the hog in my 40’s.

    4) I have to admit that the bar does seem to keep moving up. Whenever I reach a financial goal, it seems like the things I thought it would bring (fancy cars, vacation homes, fin’l independence, etc.) seem still off in the distance. Part of it is hedonic adjustment, part of it is inflation, and part of it is just misguided expectations. The more wealth I accumulate, the more I realize it costs a lot more than I thought to live the TV life of a millionaire.

  5. Does John Edwards know this? The two America’s are changing in size. The one that he belongs to – but denigrates – is expanding in numbers. He needs to get elected to stop the trend right now. /End sarcasm/

    Seriously, this is great news. And Miguel is right in his comments, it takes a while to accumulate a lot of money. And when you do, you are at an age when the conspicuous consumption that you lusted after when you were younger just doesn’t mean as much anymore.

  6. Miguel,

    As always, you made some great observations.

    My point about inflation is that as a society, we keep using a static number like $1 million as the basis for what “wealthy” is. If that’s the case, folks who had $1 million 20 years ago are a lot wealthier than folks who have $1 million today.

    Sam,

    It is great news but I didn’t really get that from the article. The article seemed to have a sort of “rich-get-richer” feel to it.

  7. @JLP – Sorry about the Kiyosaki-ish rabbling. I did get your point and mostly agree. However, real wealth aside, I think it is much easier to live the life of a millionaire these days due to easy credit and also the proliferation of fractional ownership and rental access to so many luxury goods and services that were previously out reach of the masses. And in a way, now that just about anyone with a decent income can essentially rent the lifesyles of the rich and famous, it makes being an actuall bonafide millionaire much less special (at least on the surface).

    I mean, if you can have the material rewards of wealth so much sooner these days than if you actually had to have the money in the bank, then why not skip a couple moves ahead? I think this is very much driving the whole luxury spending trend – there aren’t simply more wealthy people, there are more people that feel entitled to live like the wealthy (and that in turn is fueling the credit abuse trend).

    Have I completely gone overboard with the rambling? I scratch my head on these topics a lot.

    @Sam – You are so right. To my surprise, many of the things I lusted after when I had no money, have little meaning to me now that I have a little something stashed in the bank. Is it a result of age? wisdom? experience? I don’t know. I like nice homes, cars, jewelry, vacations, etc. as much as anybody. But, once you come to feel the value of creating real wealth it is a more lasting emotion.

  8. There’s a good reason for not including home equity in the calculation.

    If you bought a house thirty years ago at $50 thousand it might be worth $330 thousand now. But unless you decide to go live under a bridge (or move to a much lower cost of living location or downsize) you can’t cash out.

    Equity in your house is not cash in the bank. It’s security and it reduces your housing expense, but it’s not a liquid asset. You gotta live somewhere.

    Investment properties, however, that’s a different story. When retirement comes around you can cash out of an investment property and put that money into some sort low-risk liquid interest-bearing instrument; so it would be appropriate to include equity in an investment property in your net worth calculation.

  9. @Christopher – I am going to have to somewhat disagree with you (knowing full well that we could spend hours debating this and get nowhere).

    When you look at the balance sheet of a business, you don’t say, gee let’s not count the office building because they have to work somewhere or let’s not count the value of the factory because, hey, they have to make widgets somewhere… you get the picture.

    For that matter, why not say that you shouldn’t include ownership in a small private business – it’s often not liquid and hey, you (usually) gotta work somewhere.

    IMO, an asset is an asset is an asset. Sure they have different characteristics, but if they have long-term stable or appreciating value, then they should be part of your NW calculation.

    A home can be converted to cash via margining (i.e. mortgaging), renting it out (in part or whole), or outright sale. You can argue that those don’t seem like good alternatives to raise cash, but in reality that really depends on the situation. Many people have financed big life expenses thru mortgaging their home – it is usually the one significant source of liquidity for most middle-income people.

    And I know too many people who have taken advantage of relocating or decided to downsize in retirement and were able to take out substantial cash sums in the sale of their home. Again, just because it’s relatively illiquid does not make it unworthy of your balance sheet.

    Maybe as a compromise to the debate on this (which I have seen debated vigorously in the past), I would suggest that people look at their financial situation in two ways (I actually look at mine this way too):

    1) In terms of liquid assets (the kind that financial “planners” salivate over getting their hands on).

    and

    2) In terms of long-term assets, including illiquid things like home, tax-def’d retirement funds, equity in private businesses, partnership interests, insurance and annuity cash values, etc.

    I’d also point out that all these illiquid assets have very real implications in both insurance and estate planning, it pays to keep them in mind for planning purposes.

  10. This is only good for everyone if these are self-made millionaires, ideally ones that jumped from lower to upper class.

    It would also be interesting to read how quickly the number of millionaires are expanding as compared to the growth rate in the US. Are there more or less millionaires are a percentage of the total population?

    Otherwise, at best we don’t have a good foundation for a discussion, or at worst we’re celebrating a permanent aristocracy.

  11. “If you bought a house thirty years ago at $50 thousand it might be worth $330 thousand now. But unless you decide to go live under a bridge (or move to a much lower cost of living location or downsize) you can’t cash out.

    Equity in your house is not cash in the bank. It’s security and it reduces your housing expense, but it’s not a liquid asset. You gotta live somewhere. ”

    That couldn’t be more wrong. All you have to do is move across the street into a house that’s out for lease (or sell your house and lease it back). If you are excluding the value of the equity in the house, you have to capitalize the lease payment on a comparable dwelling and call it debt. As I said above, the idea that you can move from a house to an apartment doesn’t make you rich.

  12. “If you are excluding the value of the equity in the house, you have to capitalize the lease payment on a comparable dwelling and call it debt.”
    Of course this applies only to renters.

Trackbacks and Pingbacks:

  1. THE SKILLED INVESTOR Blog - May 2, 2007

    […] **JPL presented The Number of Millionaire Households is at a Record. Should This Surprise Anyone? posted at AllFinancialMatters (With a bit of exponential math, JPL demonstrates that being a millionaire ain’t what it used to be. Simple inflation anoints many more middle-class millionaires every year. Many of these people don’t really feel like the millionaires whom they heard about when they were much younger. Inflationary dollars are illusionary dollars. Again, constant purchasing power dollars are the only way to plan.) […]

  2. The InterNet Millionaire Guide For Blogger » Blog Archive » The Number of Millionaire Households is at a Record. Should This Surprise Anyone? - May 5, 2007

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