Wealth Building Secrets of Middle Class Millionaires: A Financial Analysis

Can This Family Really Afford This Lifestyle?

Luxury in Driveway

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?

Social Security: Waiting Until Later is Like Getting a Second Pension

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Susan Kasik is an office manager and will be 62 soon. She is considering retiring. Susan is healthy and ok with her job, but she just wonders if she can move on now to a life of days doing whatever she likes and nice vacations.

But Susan will probably live a really long time. Her statistical life expectancy is 85 years. Half of women her age will live longer. Being healthy and relatively affluent, Susan is particularly likely to exceed the average. Does she have the financial resources to live 30 more years in retirement?

At 62 Susan can begin to take Social Security but should she wait? She has an IRA that is over $500,000 and no mortgage, but Social Security will be an important part of her income and financial security. Lets look at how much more Susan gets if she waits to retire at age 70 when she can get the maximum benefit.

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Waiting to 70 Pays an Additional Benefit: It is like Having an Extra Pension

The extra $1,132 a month Susan will get amounts to $13,584 a year. She would need another IRA account with $250,000 in it to get that kind of income if she doesn’t wait. The Best part; this is a real diversification from stocks and bonds that she doesn’t have to manage or do anything sbout.

*Illistration is Hypothetical. After age 80, Susan will have received more in total benefits by waiting until 70. By the age of 95, she will have received $196,222 more than if she had begun to draw at age 62.

Ultra Low Interest Rates Have Hurt Retired Investors

Investors are increasingly focused on the task of finding retirement income. Sadly since 2009, one and two year CD’s have earned much less than 1% a year. On the other hand, inflation has been over 2% a year. The result has been a significant loss of principle as many retirees have had to cash in their CD’s to make up for the income shortfall. Since 2009, most CD’s have lost 6-10% of their purchasing value to inflation.

In this graphic, CD rates have been under the black line (inflation) most of the time since 2002.

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Many income investors have responded to the failure of CD’s in this ultra low interest rate world by investing in diversified income portfolios. Diversification smooths price fluctuations and puts money to work in places that provide income and sometimes appreciation as well. These portfolios are generating income above the rate of inflation and preserving purchasing power but they don’t have the fixed price guarantee of a CD. That is the tradeoff. Fluctuating account value with sufficient income or fixed account value with insufficient income.
It is believed by many respected analysts that in the next few years inflation is very likely to make a return. Income investors should be positioned for that. Diversified income investing can offer solutions should interest rates and inflation begin rising and can even look to profit from it. On the other hand, CD investors will have to keep investing short term in ultra-low interest rates until rates get higher. That means more of the same slow loss of purchasing power and draws on principle.