In a recent survey by Northwestern Mutual, it was found that just over one-third (32%) of high-net-worth individuals (HNWIs), those with $1 million or more in investable assets, in the US regard themselves as wealthy. Advisors working with HNWIs suggest that the phenomenon of 'lifestyle creep', when discretionary spending increases alongside earnings, may be the reason behind this.
Eric Roberge, CFP and founder of Beyond Your Hammock, who often works with clients who have a net worth between $3 and $5 million, explains that as clients increase their income, expenses often rise in sync. Regardless of whether families are making $50,000 at the beginning or more than $500,000 later on, the financial pressure remains. The situation is further complicated by factors like the cost of living based on location.
Silicon Valley workers, for instance, may have relatively higher net worth because their income includes equity compensation. However, they might face greater housing costs compared to workers in other parts of the country, affecting their perception of wealth. Additionally, HNWIs who have just surpassed the million-dollar net worth mark, might not recognize or discuss it openly.
An individual's net worth, inclusive of retirement accounts, brokerage accounts, and real estate assets, may accumulate to reach the $1 million mark, but it might only be "on paper". According to the survey, wealthier respondents were observed to exhibit a heightened sense of retirement readiness and financial literacy, with 87% feeling financially prepared for retirement compared to 54% of others.
Roberge pointed out that taxes on retirement savings are a significant concern for HNWIs, especially those receiving bonuses and equity as part of their compensation. Millionaires surveyed by Northwestern Mutual expressed tax minimization during retirement as their primary concern. However, over six out of ten millionaires had a tax minimizing strategy in place, which could involve strategic withdrawals from IRAs, charitable donations for tax deductions, and utilizing health savings accounts (HSA).