Who Is A Millionaire?

I hear people use the word millionaire, but I’m not sure what exactly it means. For example, President Obama said in his latest State of the Union address,

“Before we take money away from our schools or scholarships away from our students, we should ask millionaires to give up their tax break.”

Who exactly are millionaires who should be asked to pay more taxes to help fund schools and scholarships?

By Income Or By Net Worth?

Is a millionaire someone who earns $1 million a year or is a millionaire someone who has $1 million or more in net worth? Wikipedia uses the net worth definition:

“A millionaire (originally and sometimes still millionnaire) is an individual whose net worth or wealth is equal to or exceeds one million units of currency.”

The popular TV show Who Wants To Be A Millionaire also implies the net worth definition. Winning the grand prize once sure won’t make someone earn $1 million a year every year.

If we go by the net worth definition, we have millions of millionaires in this country.

Include Home Equity Or Not?

Should home equity be included when we calculate net worth? Absolutely.

Home equity is an asset. A home can be sold, refinanced, or inherited. It makes no sense if someone with a large mortgage and a large investment portfolio is counted as a millionaire but another person who has a smaller investment portfolio but owns the home free-and-clear isn’t counted as a millionaire. They just choose to hold their assets differently.

Many seniors living in homes without a mortgage in the coastal states are millionaires. Although they may not have as much income as a younger person still working, they have a much higher net worth.

Include Pension Or Not?

Some retirees have a pension. Most public sector workers and some private sector workers still have a pension. A pension gives someone an income stream now or in the future. A 401k or IRA balance also gives someone an income stream. If person A has a large IRA balance but no pension and person B has a smaller IRA balance but has a pension, who is a millionaire? A $2,000 a month pension with cost-of-living adjustments is easily worth half a million dollars.

The value of a pension should be included in the net worth.

Include Health Insurance Or Not?

Some people have health insurance as a part of their retirement package. Some must buy health insurance themselves. Since the value of a pension should be included in the net worth, the value of paid-for health insurance should be included too.

Health insurance isn’t cheap. It can easily cost over $1,000 a month. If person A has a large investment portfolio but must buy health insurance and person B has a smaller investment portfolio but has health insurance paid for life, who is a millionaire?

One Person Or Two?

When it comes to a two-earner household, if their combined net worth is over $1 million, are they both millionaires? Or should we divide their net worth by two? I say we should divide by two. Two millionaires must have two million dollars.

Adjust for Cost of Living Or Not?

The cost of living in this country can be vastly different. A millionaire in New York City or San Francisco doesn’t live nearly as well as a sub-millionaire in Nebraska. By New York City standard, many people with net worth under $1 million are also millionaires.

Inflation

Inflation will eventually make everyone a millionaire. When I was in Chile, a can of Coke costs 1,000 Pesos. If we have high inflation, one day a can of Coke will cost $10. If you aren’t a millionaire yet, inflation will help you.

I bet many readers of this blog are millionaires. If you are not yet a millionaire, you will be.

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Comments

  1. Money Beagle says

    My guess is that it comes down to net worth. That’s the measure I use anyways. I also know that I’m a LONG ways away, but we have to keep plugging away, right?

  2. tmgbooks.com says

    I agree with you that, technically-speaking, a net worth in excess of a million makes you a millionaire. However, it is entirely possible to not feel particularly “rich” even with a $1M net worth.

    This is especially the case if a large part of that figure is tied up as equity in your primary residence.

    And as you allude to, a million bucks ain’t what it used to be! Even so, I think $1M or even one-half that amount in liquid assets would make one feel pretty rich. And a large positive cash flow would also help you achieve that “rich” feeling, as well.

    I also think that the annuity value of a pension should definitely be counted as it is about as secure an “investment” as there is with a predictable revenue stream. And it is passive income.

    So, all million-dollar net worths are not the same and some are preferable to others. For example, I would much rather have a pension with a $500,000 NPV than $500,000 of equity sitting in my primary residence.

  3. Harry Sit says

    @Robert – I would say yes if one already earned the benefits. You don’t count something you still have to work for (e.g. salary next year). You do count it if it will just come to you as long as you live.

  4. phr3dly says

    If your assets are $1M in a pre-tax account, does that make you a millionaire? Even though the post-tax value is less than $1M?

    This topic infuriates me. When Obama talks about millionaires, he is engaging in class warfare, even though many of his constituents are millionaires thanks to their pensions, they just don’t have the cash in the bank to indicate it.

    Meanwhile us working stiffs who actually do our own saving get in trouble for having saved too much. My wife and I are “millionaires”, thanks to hard work, intelligence, and living /well/ below our means for 12 years. Meanwhile our colleagues who have also worked hard but have lived beyond their means, buying new BMWs and Porsches, are not millionaires. We should now be published for our frugality?

  5. nickel says

    I mostly look at it in terms of net investable assets. Sort of a modified net worth. I ignore things like personal belongings, our cars, etc. I have also historically ignored our house, though my view is changing a bit on that now that we have paid off our mortgage… I used to view it like “we’re not going to sell it, so I shouldn’t count it.” But now, it seems overly conservative to ignore such a significant asset, especially since it provides us with a “free” place to stay.

  6. tmgbooks.com says

    Nickel: IMO it is correct to consider your primary residence as an asset, particularly when it is paid off. In that situation, to value the asset in your net worth calculation, you assign a value to the imputed income you receive.

    For example, if your house would rent for $1,000 and property taxes, insurance and maintenance (operating costs) are 30% (pretty standard assignment in the industry, your actual mileage may vary), then the net value to you is $700 a month.

    How much would you need to have in the bank to earn that amount as interest? Well, that depends on the ROI assumed. I just got a notice from my bank that my Roth IRA deposit has renewed for the coming year at 0.005% (one half of one percent!).

    At that rate, to earn that same $8,400 a year, it would take about $1,700,000! The value of the imputed income received by a homeowner is greatly undervalued in by most people.

  7. Tom @ FindCashBackCards.com says

    When I hear the term, “millionaire”, I think net worth. I think you’re going to have varying responses on this. I just assume that the person has a total net worth that is great than a million.

  8. PaddyMac says

    If your net worth is a million, then you could call yourself a millionaire, although I would exclude equity in the home. A million is not a lot of money these days, particularly if you are near retirement age.

    However, in the context of Obama saying he wants to tax “millionaires”, if you pay attention you’ll realize he’s referring to people whose total taxable income (from their 1040) is in excess of a million dollars PER YEAR. And I believe only the income above a million is being charged the extra 5% tax, not their entire income (could be wrong on that, but I thought I’d read that somewhere). So if your taxable income is $999,999 you won’t pay anymore.

    So he’s really referring to the top end of the 1%. Hopefully he’ll catch the hedge fund managers who get a huge annual income that is currently taxed mostly at the 15% long-term capital gains rate, or the CEOs who get huge salaries in the millions each year – while laying off middleclass workers. I don’t know who can complain about that. 99.9% of people are never going to be hit with this tax.

  9. Harry Sit says

    @PaddyMac – Usually people don’t object to taxes levied on others. I haven’t heard much complaint about the 5% surtax on income above $1 million. Sure, let’s do it. However, I doubt the surtax by itself is going to make much difference to the budget deficit or national debt. It’s a start. I hope we don’t just end there. We need much more than that.

  10. P. Alexander says

    Hello. We’re just wondering how you would compute a public employee MULTIPLE(90/10 split) joint&survivor pension with annual 3% COLA to determine your net worth? Just asking considering one of the beneficiaries is still a teenager right now, so she will collect (10% of pension w/COLA) for about 40 yrs., after we’re gone! BTW, been retired for 18 mths. How do you figure net worth with such a long pay-out? Thanks!

  11. si says

    A person who is a millionaire if the value of a persons assets after removing liabilities is at least a million. Also including a pension as part of someones net worth is just plain stupid. It is an income not part of your book value. This is just the thinking financial advisers want you to accept so that theu can get your income into a pension: it is the easiest way for them to get paid.

  12. JoeTaxpayer says

    I have no issue with counting pensions or SS as an asset. A $40K pension would qualify as $1M, no? It’s not so much that “we’re all millionaires’ now as that a million isn’t what it used to be. A $400K house and $600K in retirement accounts might be it, but the $600K is just $24K/yr you can withdraw. Not quite rich, but millionaire non the less.

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