Saturday, December 25, 2010

Are you a Millionaire or a millionaire?

Are you a Millionaire or a millionaire?  To some folks, there is a distinction.

As I noted in an earlier post, becoming a millionaire in America isn't hard to do, for the average middle-class person.  Buy a modest house, pay off the mortgage, fund your 401(k), and by the time you retire, your net worth could be over a million dollars.  In fact, it may have to be - if you want to retire.

But some folks dispute the definition of what exactly is a millionaire.

To some folks, the equity you have in your primary residence is not counted toward your overall wealth - only investments are counted toward the total - not personal assets, cars, or personal residences.

Others take a more inclusive view - that assets are assets, and to calculate your "net worth" you total all those up, subtract your debts, and then take the balance.  If is over a million dollars, you are a millionaire.

To distinguish between the two, I would call the first definition "Millionaire" with a capital M, and the second as "millionaire" with a lower-case m.  By the former definition, there are as many as three million Millionaires in this country, or about 1% of the population.  By the latter, we have 16 million millionaires in this country, or about 5% of the population.

Frankly, this distinction between Millionaire and millionaire to me is a bit disingenuous.  For example, if you own your home free and clear and it is worth $500,000, plus you have $500,000 in investments, by my reckoning, you are a millionaire.  But the Millionaires, with a capital "M" won't let you into their club, as you don't have $1,000,000 in investments alone.  But, ironically, if you sold your home and moved into an apartment, you'd be a member of the club, as you would then have $1,000,000 in investments.

Or, for example, if you mortgaged your home to the hilt, and then invested the proceeds, that would put you in the Millionaires club, but you would be heavily in debt, and your net worth would be unaffected.

It is, to say the least, an artificial distinction.  But the numbers tell a story, I think.  If you compare the number of Millionaires to the number of millionaires, it shows us that there are a lot of people out there, even today, with sizable equity in their homes.  The jump between 1% and 5% is significant, and as a result it means that a lot of people either own their homes "free and clear" or have significant equity in their houses.

Of course, you can't eat a house.  So if you want to retire on your investment income, you will need to have more than just equity in your home, or to own your home free-and-clear.  You will need significant investments from which you can live on the income produced by them.  This either means you have to have a lot of high-yield investments, or have a lot invested.

And perhaps if you are a lower-case millionaire, that might not be enough to really retire on, comfortably.