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Cut it out ... millionaires are not wealthy

The practice of referring to very wealthy folk as 'millionaires' began back in the 1700s. It remains a shorthand way of saying that someone is really loaded. Even recently, the headlines about Peter Freedman’s generous $5 million donation to the Sydney Festival often referred to him as a 'millionaire'.

The term turns up during talk about retirement incomes, pensions, taxation, franking credits and the like. For instance, one frequently reads an argument that says, 'future taxpayers cannot fund pensions for millionaires'. Or words to that effect.

This has to stop

The premise of statements like these is false. It presumes that if you’re a millionaire you are very wealthy. The implication, therefore, is that you are greedy if you have $1 million in assets and think you should receive any tax concessions.

Of course, there is a degree of wealth that, in any fair society that values equitable outcomes, will mean that reduced tax rates are not appropriate and shouldn’t be given. My point in this article is that this point on the spectrum is NOT as low as $1 million. It’s somewhat higher than that, but we need to stop thinking of someone who, at the time of their retirement, has accumulated $1 million in investment assets, as being very wealthy.

Don’t get me wrong, they’re not poor, but they’re not rich either. To think that they are is simply outdated.

Let me tell you a story of a man named Jed. He was a poor mountaineer who barely kept his family fed. Most of you know what I’m talking about, I’m sure. In the 1960s there was a popular comedy called The Beverly Hillbillies, in which the 'poor mountaineer', Jed Clampett discovered oil on his property. The next thing you know old Jed’s – you guessed it - a millionaire. The family left the remote country to live in Beverly Hills. The Clampetts didn't change their lifestyle even though they lived in a mansion and were one of the best customers of the local bank. The humour of the culture clash between the hillbillies and their neighbours (including banker Drysdale) highlighted the gulf that existed between ordinary folk and millionaires.

We have well and truly moved on

But we are no longer in the 1960s, let alone the 1700s. By the 1970s, financially literate people started to realise that those who used to be called 'millionaires' were now actually worth tens of millions. The term ‘multi-millionaire’ came into vogue, and is a more appropriate short-hand for 'very wealthy'. (And it should be used for the generous Mr Freedman who has a net worth in the hundreds of millions of dollars.)

This is largely because of inflation. $1 million today simply can’t buy the lifestyle that it could when old Jed struck it rich. In fact, it couldn’t even then – the fictional Jed Clampett actually became a multi-millionaire, with a net worth of something north of US$25 million in 1962 dollars. He couldn’t have bought the house he lived in if he had much less than that!

Let’s put this into perspective:

  • Inflation means that to purchase the basket of goods and services that you could with the equivalent of A$1 million in the early 1960s you now need $15 million.
  • Back then, $1 million was 385 times average annual earnings, but now it's only 17 times average annual earnings.
  • In 1960, you could invest your $1 million in bank deposits paying 3% and earn as much interest in one year as it would take the average worker 12 years to be paid. Now, investing $1 million at 3% earns you half a year's worth of average earnings. (And that says nothing about investing at 2020’s interest rates!)

Quite simply, the wide gulf between ordinary folk and millionaires no longer exists because being a millionaire does not make you wealthy! If invested wisely so that you earn better than bank deposits, it can make you comfortable, giving you in retirement an income that keeps you in the ballpark of the average working Australian.

Fortunately, the government understands this. That’s why the cap that the Government introduced a couple of years ago for the tax-free earnings base for super in pension phase was at $1.6 million. That amount invested conservatively makes someone's retirement income about the same as average earnings. (Or it did at the time – now the investment strategy needs to be somewhat higher risk, with interest rates falling to current extremely low levels since then.)


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It's time to cut out the millionaire references

So can we please stop bleating about tax levels for self-funded retirees who invest the cap or less as if being a 'millionaire' in 2021 means you could dine from a 'fancy eatin' table' in the pool room of your 10-bedroom mansion!

Yes, accumulating $1 million to invest for retirement is a stretch, if not impossible, for a lot of people. But policy needs to be based upon reality, not upon an emotive notion recalling when the concept of 'the millionaire' referred to only a handful of privileged people.

By the way, the mansion that was used as the Clampett's home in the TV series sold a year or two back for $350 million. Can I rest my case now?

 

Warren Bird is Executive Director of Uniting Financial Services, a division of the Uniting Church (NSW & ACT). He has 30 years’ experience in fixed income investing. He also serves as an Independent Member of the GESB Investment Committee. These are Warren’s personal views and don’t necessarily reflect those of any organisation for which he works.

 

17 Comments
james
February 22, 2021

million dollars USD in america is ALOT of money compared to $1 millon AUD here.

Steve
January 24, 2021

Warren, thank you for the historical perspective. This trite expression is redundant but people still keep churning it out to my eternal frustration. Well said!

Ruth
January 27, 2021

If they continue attacking self-funded retirees, people will not bother to save here at all, especially into superannuation, as who knows with the constant tinkering when or if they will ever see it. Compare that with the age pension where the taxpayer puts money aside for you with no effort on your part. You don't have the hassle of having to manage investments in your declining years.

Shiraz Nathwani
January 24, 2021

To make any meaningful of "RICH" or "POOR"
One need to Ask a question to Mr Poor or Mr Rich ?
Shiraz

Leigh
January 24, 2021

Well, i know of a person who stopped, for a range of reasons, earning the average income from the age of 44. Their income practically reduced to near zero. By the age of 60 they had reached, excluding any bequests etc.., the lofty heights of being a millionaire. From 44 to 60 are supposed to be when most income is earned or saved in one's life. Based on that example those who complain aren't really trying.

Kerri Moore
January 23, 2021

If you have $400,000 in assets $300,000 in shares returning 7% is $21,000 you can receive a full aged pension of $37,000 This is for a couple so $37,000 plus $21,000 =$58,000. Not bad at all

Mike
January 22, 2021

An eligible age pensioner couple who own their own home get approx $36,000 p.a.plus lots of other benefits such as health card, cheap vehicle registration etc. To get this income they would need to have more than $2.0 million invested in a term deposit.This couple are therefore both “millionaires”.

Greg
January 22, 2021

Or...have money invested in variety of dividend paying shares (or a few LIC's)..you can make $36k a year with a lot less than a $1m in capital. Admittedly dividends have generally been slashed in the last year, however there are still LIC's with yields of 5%+.....meaning you would "only" need $720k.

Any person retiring in the next 7-10 years and DON'T have 60 to 70% of their superannuation in shares is an imbecile (and I mean a Donald Trump level imbecile!)

Chris
January 24, 2021

And that's regardless of the value of their own home, because that's not counted (yet) in the means test. But watch, it will be, because Gen X will be the REAL self-funded retirees, not these people right now who pretend to be, whilst claiming a bit from the Government. You can't be "half pregnant".

There won't BE any benefits when we get there because not only will the government have no money to look after us (hence, superannuation), this cachet around the word "millionaire" won't go away in a hurry, and Centrelink (or whatever they're called then) will be saying "oh, but you live in a million dollar house (that'll be the average price too), why can't you just sell it and live somewhere cheaper ?...computer says 'no' to giving you any pension"

Phil Kneale
January 21, 2021

And if you converted the value of the age pension to an estimated equivalent asset value, you would find that a large proportion of government-funded pensioners are effectively "millionaires".

Stan
January 21, 2021

Likewise for public servants and politicians !

Alan
January 22, 2021

That's if you are on CSS ... If it's PSSAP forget it bro!

Chris
January 24, 2021

Agreed Alan; only those who were pre-1983 public servants, and today it's only the top brass, judges and politicians who get the very generous Defined Benefit scheme that was 3/4 of your final salary, indexed to CPI for the rest of your life. Everyone else is on 9.5% in their nowhere near as good, defined contribution / accumulation scheme. Rank and file Commonwealth APS may get 17% if they are lucky, like the universities do.

Ruth
January 27, 2021

With CSS, pension only lasts for life. 2/3 pension to your spouse until their death (if you have one). Your estate gets nothing. Tough luck if you die young. Most are on modest pensions.
It is politicians and especially judges who are well placed.

Geoff
January 21, 2021

Amen, brother!

There are so many millionaires around these days that the term has no valid use as a marker of wealth - especially if you add the value of the home you live in into the equation. I'm shortly to retire, and I'm a millionaire, but rich, no way...

Michael
January 21, 2021

When I read Richie Rich or Scrooge comics as a kid - a millionaire was 'filthy rich'. Mansions, private jets, unlimited staff, the ability to afford anything that can be purchased in the material world - that was what being a millionaire meant. Due to inflation I think we really have to update this to 'billionaire' - for those with that degree of 'next level' wealth.

BTW - Hoping to win Powerball tonight too...

Scott
January 25, 2021

With Bezos and Musk now north of $100 billion, even 'billionaire' is sounding a bit so-so :)

 

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