Can This Family Really Afford This Lifestyle?
In comfortable middle class neighborhoods across America there are families that are just getting by and those that are more than financially secure. The view of their lives from the street probably can’t tell you much. The attractiveness of their homes and the cachet of the autos in their driveway may not be an accurate representation of their wealth. In fact, middle class neighborhoods very often consist of families that are multi-millionaires, while others are carrying a lot of debt and have little equity. Surprisingly, you may not be able to tell which is which from the outside.
Unexpectedly, middle class millionaires are often not super high earners. They can be public employees, Main Street business owners and technicians. Outward appearances are misleading. Financial decisions often determine financial success more than huge earnings. Saving and investment are critical to middle class wealth accumulation.
John and Joan Anderson are in their mid 50’s and have a modest income of $125,000 a year. She is a teacher and he is a contractor. They are careful with their money and despite appearances, they are self-made millionaires.
The Andersons drive late model but paid for vehicles. Their home is nicely kept and typical for their neighborhood. John is a contractor so the upkeep and upgrades on their home were done without loans or great expense. They don’t hire lawn services or pet sitters. They avoid extra expenses like storage units, security services and house cleaners. They live well but without frills.
The couple saves money in many ways large and small. Her health benefits from the school help their budget a lot because John is self-employed and health care costs are very high for small businesses. John and Joan are masters at do-it-yourself and save a lot on home maintenance. Monthly bills add up so they have cut out the extras in their monthly outlays for cable and cell phones down to what they need. Their utility bills are reasonable; they have insulated their house well and use a programmable thermostat.
Consistent and sensible investors, the Andersons have three apartments from which they plow the rent back in to pay off the properties. With the kids done with school, they now invest about $25,000 a year in their retirement plans. The value of his SEP and her 401k is already over $430,000 and the equity in their investment properties is $300,000. The equity in their home is $250,000. They have almost $1 million of equity in just these three categories. They are modest people but they are already worth a $million.
10 years from now they will be able to retire with multiple sources of income. Her pension and their social security benefits should payout about $85,000 a year. Income from their properties will net them about $25,000 a year. Finally, income from their IRA’s should comfortably provide them with $40,000 a year. Yes, that is more income than they have now. But they are happy living on much less than all that.
Conspicuous consumption has the appearance of success. Ironically, in the middle class it very often undermines success. The luxury SUV in one driveway may announce success, but if it is leased, this status symbol is an expensive monthly liability. Buying new cars and holding on to them for 10 years or more, easily saves a family with two cars $6,000 a year over leasing. The choice is starker still when you take into account how they need to earn about $10,000 before taxes to carry that extra leasing expense. Most of that could have been deposited into a retirement plan.
The question is; does the family with high status cars really have the huge income required to spend many thousands a year leasing luxury vehicles and still build equity in their investments and home? It’s too bad but the irony is so often the people, who live most like millionaires, are less likely to become one than others in the same neighborhood who spend carefully and invest steadily.
Can you think who might be the middle class millionaires in your neighborhood?