Time was, a million bucks put you on easy street. But things have changed. Lewis Walker, a financial planning and investment strategist at Capital Insight Group in Peachtree Corners, Ga., explores the new meaning of being a millionaire:
The nation is minting more millionaires. But that isn’t much of a distinction anymore.
Sure, the raw numbers are noteworthy. As the Washington Post reported recently: “The number of households with a net worth of $1 million (measured in constant 1995 dollars, or about $1.6 million today) grew from 2.4 million households in 1983 to 9.1 million households in 2016, a growth rate of 279%.”
For those saving for financial independence, there are messages behind the headline. Note the comment about “constant dollars.” It took $1.60 in 2017 to buy what $1 did in 1995. If you plan to live at least 22 years in retirement, solo or with a loved one, you must consider inflation. We have been living in a period of relatively low inflation and some pundits predict higher inflation in the not too distant future.
The article noted “net worth” and cited a growth in real estate prices as a factor. If you deduct the value of a home from the $1.6 million figure, the value of an investment portfolio, a key component of financial freedom, is likely to be less than the $1.6 million gross number dancing in the reader’s head. Your home does not generate retirement cash flow. Of course, having it paid for is a bonus.
“Investment net worth” statistics normally don’t include an allowance for taxes. The article credits the growth of stock accounts as a factor in the wealth surge. Sell stocks that have grown in value and capital gains taxes kick in.
If you take money from a qualified retirement account like a 401(k) or IRA, the distribution is fully taxable as ordinary income (Roth IRAs excluded). Dividends and interest earned outside of qualified retirement accounts are taxed in the year earned. Tax strategies matter.