July 5, 2007 — Most older baby boomers remember John Beresford Tipton, the “Millionaire” who discreetly awarded a million dollar check to some worthy individual every week on TV during the late 1950’s. While people old enough to remember the show (over 55) would still be thrilled at such a gift, being a millionaire just ain’t what it used to be.
One problem is that Inflation has deflated the significance of a million dollars, which has only 54% of the purchasing power it had in 1987 (source: Wall Street Journal). There are a whole lot more millionaires today thanks to inflation and prosperity. Another issue is that real estate prices have soared and become a significant source of illiquid wealth – for boomers fortunate enough to have significant home equity in hot real estate markets.
For example, an existing single family home in San Francisco goes for $748,000 and $521,000 in New York. Just owning a home in one of these markets alone gets you close to millionaire status. Problem: You can sell your home, but you still have to live somewhere.
How rich are you?
Let’s say that your millionaire status includes about $300,000 in home equity (the median price of a home is about $220,000 nationally) and $700,000 in retirement savings. You definitely are one of the richest American baby boomers, who typically have about $50,000 in household retirement savings included in a total net worth of about $250,000. You are in the top 2% of Americans – not bad!
What kind of income can you expect?
Presumably if you have this kind of net worth you had some high paying jobs to get to this position, so you are probably used to having more than $100,000 in annual income. Let’s say you invest your $700,000 in 10 year Treasury notes that yield about 5%, before inflation. That will give you about $35,000 per year for the rest of your life, assuming rates stay about the same. Every year inflation will make that $35,000 worth a little less, but that is OK because you won’t live forever (you could draw down the principal), and as you age your expenses will presumably decline. If you tack on a much better than average social security benefit of $24000 for you and your spouse (the average payout is $9360 annually for a single person), that gives you $59,000 in yearly income. A nice living and well above average, but a far cry from being a luxurious income.
The value of a defined benefit pension
Other than government and some non-profit workers, baby boomers are probably the last group who have a chance at getting significant defined benefit pensions (a defined benefit means you are promised a specific annual retirement payment as a pension, rather than guaranteed payments into your future retirement fund). If you are fortunate to have such a pension you can see what a difference these pensions can make, even at some minimum payment like $10,000 a year. Your pension could propel you into the ranks of the comfortably retired.
Strategy for frugal millionaires: Trade in Your home equity
One effective strategy that many active adults over 50 are taking is to trade in their home equity. If you could trade in your $300,000 home in a hot market for an equal or better home worth $200,000 in a less expensive state like South Carolina, you could maintain your current lifestyle while adding $5000 per year in income. As a bonus, this extra income would come in a market where the overall cost of living is less than where you live now. Certainly a strategy worth considering, now that you might have to become the “frugal millionaire”.