If I had a net worth of $5M right now I'd consider myself rich--I could tell my boss to GFY and even if I never worked again, could live a VERY nice life off of passive income on that $5M.
I'm not disagreeing with you per-se, but I wanted to chime in here particularly because of the massive gap between your definition at $5M and:
I think you need close to a hundred million to meet my definition,
I think you are both right, but it is worth exploring (to me anyway).
When I think of "really rich" I think of people who might see Robin Leach knocking on their door (for those too young for this reference he did a show called "Lifestyles of the Rich and Famous" for many years). By that definition,
@bwarbiany 's $5M isn't even in the ballpark and even
@Cincydawg 's $100M probably doesn't get you there.
$5M sounds like a LOT of money and it is but it depends on lifestyle and location. If you are happy/comfortable living an upper-middle-class life in Midwestern suburbia you can do that for a lifetime on $5M. If you want to cavort with movie stars and live in a hillside mansion overlooking Hollywood . . . $5M will not pay the annual taxes and maintenance on the house let alone buy the house or pay for the lifestyle.
The current yield on 20 US Treasuries is 1.46%. Thus, if you invested your $5M in 20 year US Treasuries, you'd have an income of $73K. One could certainly live on $73K/yr but Robin Leach will NOT be knocking on your door. There are a few other things to consider,
@bwarbiany mentioned "never worked again" and that is probably part of most people's definition (or at least not HAVING to work). That $73K is BEFORE taxes and if you aren't working you have some other issues to contend with such as:
- Healthcare: You could easily spend $23K/yr on healthcare.
- What to do? If you aren't working you might want to travel or take up some hobby. Travel is expensive and hobbies can be depending on what your tastes are.
By the time you pay taxes and buy health insurance that $73K is going to be down to probably $40K or less but lets call it $48K "take home". That is $4,000 per month. Like I said, you can live on it, but you aren't living a life of luxury. If you want to (lets say) go to Paris, you can afford it but you'll probably need to fly coach, plan your trip in advance to hunt for deals, etc. When I think of the "Wealthy" I think of some guy who can call his travel agent on Thursday morning and say "Hey, I want to take the wife (or g/f but not both) to Paris for the weekend, set it up." THAT Paris trip is going to cost a fortune. Somebody with $5M in the bank obviously could afford it, but certainly not very often because it would chew up a not insignificant portion of the principle.
The long-term average on 20 year treasuries is roughly 3x the current yield so instead of $73K/yr you would be looking are $219K/yr. Now we are getting into a higher-end lifestyle but Robin Leach still isn't knocking on your door and you still are not living in a mansion overlooking Hollywood.
Then there is another issue, inflation. Inflation has been so low for so long that most people don't really think about it anymore but it exists and every year it degrades your purchasing power. If you are retiring at age 80 and inflation remains under control then it will not be an issue for you and your $5M nest egg. OTOH, if you are in your 20's or 30's and/or if we get back to double-digit annual inflation like we experienced in the late 70's and early 80's then inflation is a major issue for you. Annual inflation from 1973-1982:
- 6.2% 1973
- 11.0% 1974
- 9.1% 1975
- 5.8% 1976
- 6.5% 1977
- 7.6% 1978
- 11.3% 1979
- 13.5% 1980
- 10.3% 1981
- 6.2% 1982
Suppose you started out with $73K or $219K per year in today's dollars in 2020 then we experienced exactly that level of inflation over 10 years from 2021-2030. By 2030 your $73k or $219k would only be worth $29K or $87K. So if you started with $73K by year 10 you probably wouldn't even be able to afford healthcare and if you started with $219K by year 10 you'd be down to just a little more than the $73K we just talked about. Even at more typical rates inflation can take a big bite out of your purchasing power:
- at 2% inflation your purchasing power is cut in half every ~34 years
- at 2.5% inflation your purchasing power is cut in half every ~27 years
- at 3% inflation your purchasing power is cut in half every ~22 years
- at 3.5% inflation your purchasing power is cut in half every ~19 years
None of those are too awfully alarming if you are 80 in year one but if you are 35 in year one . . .
In order to hedge against inflation I would say that you probably need to put about 20% of your gross earnings back into principle (ie, increase your $5M by 20% of your gross earnings each year). NOTE, I said gross so it comes BEFORE taxes. Now even the $219K starts to not look like all that much:
- $219K in annual earnings on your $5M at long-term average 20 year US Treasury Yield of a little under 4.5%
- $43,800 back into principle (20% of gross)
- $54,750 Taxes (this is probably a low estimate for Federal, State, and Local Taxes, 25%)
- $20,000 healthcare (this is probably a low estimate unless you are old enough for Medicare)
- $100,450 "take home"
That $100,450 works out to a little under $8,400/month. That is a good life in Midwestern suburbia. It will, as you said, keep you in late model Honda Accords. You will not be driving Ferraris, cavorting with movie stars, or living in the hills over Hollywood and Robin Leach will not be knocking on your door.
So, what about stocks? Well stocks typically return a lot more than treasuries but they are also a lot more volatile. Returns:
- The Dow Jones Industrial Average started on May 26, 1896. From then through May 25, 2018 (123 years) it averaged a return of 5.42%.
- The S&P 500 began as the "Composite Index" in 1926 and the average return on that from 1926 through 2018 was about 8%.
The problem is the volatility. If you have $5M at the depth of a major long-term trough in the market then you are loaded. If you have $5M at the crest of a major long-term peak in the market, not so much. If you had put the equivalent of $5M in a roughly average group of stocks in 1929 and just left it there you wouldn't have seen a balance of $5M again until the 1950's. It took roughly 25 years for a 1929 investor to get back to even. Now if you had put the same $5M in at the depth of the depression in the 1930's you'd have been VERY wealthy by the time
the Germans bombed Pearl Harbor and you'd have been able to live a life of luxury by the time WWII ended. Either way you'd probably be dead by now.
Some more recent examples (using DJIA and -for simplicity- assuming that you buy on NYE):
- If you put your $5M in at the end of 1999 you were still under water on 12/31/2009 and only BARELY above that on 12/31/2010. That is a decade of basically zero return.
- If you put your $5M in at the end of 2002 it roughly doubled by 12/31/2013.
- If you put your $5M in at the end of 2008 it more than doubled by 12/31/2014.
- If you put your $5M in not long after Kennedy was assassinated (12/31/1965) you were STILL underwater at the end of Reagan's first year in office (12/31/1981) and you wouldn't have doubled your money until 12/31/1987 (22 years).