The U.S. added more than 1,000 new millionaires a day last year, report says
Wealth increased disproportionately fast in the United States last year, with more than 379,000 people becoming new US dollar billionaires, or more than 1,000 people a day, a recent report showed.
If you have a seven-figure net worth but don’t really consider yourself wealthy, you may be part of a growing number of “hidden billionaires.”
Vanguard applies the term to Americans who have quietly surpassed the $1 million mark in recent years, primarily by saving for retirement and building home equity.
“More than 127,000 individual investors became millionaires last year,” said Andy Reid, director of investment behavior research at Vanguard. “Hundreds of users cross the millionaire threshold every day on our platform.”
The burgeoning population of hidden billionaires is cause for celebration. Thanks to a soaring stock market and rising retirement savings rates, more Americans have seven-figure balances in their 401(k) accounts. Housing wealth is also near record highs.
But Vanguard researchers have found worrying signs in the way hidden billionaires manage their money. Vanguard reports that new millionaires are making costly mistakes when handling investments, debt, and financial planning.
reason? Many of the hidden millionaires seem to live in denial of their wealth. They don’t consider themselves wealthy. They didn’t care about financial advisors. They have no estate plan.
“Roughly one in five millionaire investors don’t even think of themselves as investors,” Reid said, “let alone being wealthy.”
Here are six common financial mistakes hidden millionaires make.
cash drag
Vanguard reports that one of the most costly mistakes secret millionaires make is storing their retirement savings in cash.
Reed said “cash drag” often occurs when retirement savers roll over their workplace 401(k) accounts to IRAs. After a rollover, funds often remain in a cash or cash equivalent account until the saver reinvests them.
If you keep your retirement funds in cash, you typically miss out on stock investment returns that average about 10% a year.
Why do investors hold their savings in cash?Many say they either didn’t realize their savings weren’t invested yet, or thought the funds would be invested automatically.
“For many investors, it will remain in cash for months, maybe years,” Mr. Reed said.
Inventory concentration
Another costly mistake made by hidden millionaires is stock concentration. Putting too much of your investment money into individual stocks.
A typical example is employer stock. Your company will offer you its stock as a 401(k) match. After 20 years, a huge percentage of your retirement savings is in one stock.
“There’s a sense of security because they’re familiar with the company and they trust the company,” Reed said. “But in reality, it’s very dangerous.”
Retirement savers sometimes overinvest in their favorite stocks that have made big profits over the years.
Michelle Crum, a certified financial planner in Ann Arbor, Michigan, recalls a client who inherited $4 million in Microsoft stock from her parents.
“I’m saying, ‘We need to sell all of this stock,'” Crum said. However, the customer refused, saying, “My father bought it in the 1970s.”
“I have a very emotional attachment to this stock,” Crum said. She eventually persuaded her client to sell her half.
With stock concentration, there is a risk of betting too much on a single company’s performance. Experts usually recommend not putting more than 10% of your investment in any one stock.
Bad debt management
In theory, if you have a seven-figure net worth, there’s no need to take on high-interest credit card debt.
However, a Vanguard study found that many high-net-worth investors have credit card loans that they can easily repay.
Let’s say you have $20,000 in cash in a brokerage account earning 3% interest. You also have $20,000 in credit card debt with an interest rate of 20%.
Debt costs you far more than the income your brokerage account generates. Therefore, it makes sense to use some or all of the cash to pay down debt.
Other wealthy people have other problems. They are paying too aggressively on low-interest mortgages, wasting money that could have been invested in stocks.
The same principles apply. The cost of borrowing a 4% mortgage is lower than the potential interest you could earn by investing that money.
poor estate planning
Many hidden millionaires don’t consider themselves wealthy, so they don’t bother writing an inheritance plan.
“A lot of people say, ‘Estate planning is for rich people. I’m not that rich,'” Reed says.
Estate planning includes medical and financial instructions during your lifetime, as well as what happens to your assets after your death. According to research from Trust & Will, less than half of Americans have any sort of estate plan in place.
“Everyone needs an estate plan, even if it’s just a basic will,” says Spencer List, a certified financial planner in Dallas.
poor financial planning
Similarly, a hidden millionaire may not see the point in consulting a financial advisor.
However, there is a reason why wealthy people hire financial planners. A professional can help you solve all the above problems. This will help you invest your assets and prepare for retirement.
Don’t want to spend money on an advisor?
“Try to find someone who will do a one-time look at your finances and do it for a fixed fee,” says Dan Caplinger, contributing analyst and financial planning expert at The Motelly Fool.
This encounter may lead to a long-term relationship.
unnecessary frugality
And then there’s the economic blunder that Michigan CFP’s Crum calls “bag lady syndrome.”
Some of our clients have saved millions of dollars, enough to retire. But they continue to work and are reluctant to spend.
“They’re spending $50,000 a year,” she says. They can easily spend $100,000 a year. ”
Liz Windisch, a certified financial planner in Denver, says of related concerns:
When a household has hundreds of thousands of dollars in home equity, the family must decide whether to use that equity for retirement. This decision could reduce reliance on retirement savings.
“If you’re looking to sell, you may not need to put that much money into your retirement account,” she says.
