By: Kirk Licata, CFP®

LongView Wealth Management. There’s that “Wealth” word again. What comes to mind when you hear the word “wealth”? Do you picture mansions, yachts, luxury cars, and designer wardrobes? How about the term “wealthy”? Certainly, all millionaires and most professional athletes and famous celebrities are considered wealthy, right?

At LongView, the term “wealth” goes hand in hand with the term “financial independence.” We define “financial independence” as the ability to enjoy one’s current lifestyle without the need to earn an income. In our minds, our wealthiest clients are the households that have the most multiples of their annual living expenses socked away in investments. For example, Jane Doe spends $50,000 per year and has $1,000,000 of investment assets. Jane can theoretically live off of her nest egg for at least 20 years without having to earn an income. Her brother John also has the same $1,000,000 of investment assets but still has a mortgage on his lavish home, a note on his luxury car, and a designer wardrobe that he keeps adding to. Because of these expenses, he requires $100,000 per year to enjoy his current lifestyle. John may look wealthier than Jane, and he does have the same account balance, but he is clearly not as financially secure as his sister.

John and Jane are both in their early 60’s, and while Jane is on a great path to being financially independent by her desired retirement age of 65, John is losing sleep over his lack of preparedness. Wouldn’t you agree that Jane is significantly wealthier than John? Do wealthy people lose sleep over their finances?

I’ve recently been reading a classic publication on personal finance called “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko. The authors spent nearly 20 years conducting research on America’s millionaire population and revealed the surprising secrets of America’s wealthy. Here are some of their most note-worthy revelations:

• More than 80% of the millionaires in America did not inherit their wealth (a statistic that still holds true today). Through practices of modesty and prudence, they’ve been able to live below their means and methodically accumulate their wealth in a single lifetime.
• Income does not equal wealth. What really matters is how much of the income is saved and invested. On average, millionaires invest nearly 20% of their income.
• Financial independence is more important to the wealthy than displaying high social status.
• Money does not buy happiness. Research shows that those who drive a BMW and wear a Rolex are not happier than those that drive a Ford and wear a Timex. Research also shows that those who are financially secure are significantly happier with less worries than those in their same income/ age range that are not financially secure.

According to the novel, there are three categories of people: prodigious accumulators of wealth (PAWs), average accumulators of wealth (AAWs), and under-accumulators of wealth (UAWs). Households can be categorized based off their age and annual income to determine whether they’ve built up an appropriate amount of wealth. The reality is that most households fall into the UAW category due to their tendencies to live above their means and overconsume relative to their household incomes.

There is even a simple calculation offered to readers to quickly determine whether they are UAW’s, AAW’s, or PAW’s:

Multiply your age times your realized pretax annual household income. Divide by ten. This, less any inherited wealth, is what your net worth should be.

For some, this figure can be a decent starting point to assess if they are accumulating sufficient amounts of wealth to support their lifestyle indefinitely, but for most, there is no simple calculation or online retirement calculator that can be relied upon for something as important as their family’s financial security.

At LongView, we strive to help you define what wealth means to you and your family. Working with thousands of households over the past 40 years has shown us that there is no substitution for a customized plan. Professional assurance that you are on the path to financial independence along with the increased happiness that comes from achieving that goal is the number one reason our clients tend to stay clients for life.

Source: Stanley, Thomas, and William Danko. The Millionaire Next Door. New York: Pocket Books, 1996.