The Investment Coach

The 2020 “election wars” are in full swing and we hear much about the struggles of the middle class. The odds are that virtually everyone reading this column regards themselves as middle class. Fortune magazine, January, 2019, ran a piece by Clifton Leaf entitled “The Shrinking Middle Class,” acknowledging the challenge in even defining who qualifies as “middle class.”

Leaf noted myriad definitions, concluding, “The range of who might be considered middle class is extraordinarily expansive—including anyone from a single, part-time bartender scratching by on $13,000 a year to a suburban power couple pulling in $230,000, or 90 percent of American households in all.”

Many formulas focus on what people earn, while in contemporary political discussions about benefits, tax policy, and tax relief, net worth gets thrown into the mix.

In 1996 the late Thomas Stanley and William Danko published “The Millionaire Next Door: The Surprising Secrets of America's Wealthy.” The authors defined a millionaire as anyone with a net worth of $1 million. What was described in the book was accurate given that many clients I had as a financial advisor fit the Stanley-Danko profile.

The “millionaire neighbor” was likely to be modest, just a regular guy or gal, not flaunting wealth. Millionaire clients were just as likely to wear blue jeans and drive a pickup truck as a Lincoln. Many did not want others to know how much money they had. Middle class status was as much a case of modesty as it was a measure of wealth.

Much of the Fortune piece touched on the middle class battle with the shrinking purchasing power of earnings adjusted for inflation. For example, non-supervisory wages hit $23 an hour in November 2018, midst a powerful recovery and relatively low inflation. Suppose you were making $23 an hour in 2007, just before the big market decline and recession? It requires $29.26 in 2018 dollars to buy the same basket of goods compared to 2007. Have your earnings increase by 27.2 percent to keep up with inflation?

How are millionaires doing? It now takes $1.6 million in 2018 inflation adjusted dollars to equal $1 million in buying power in 1996 dollars, 23 short years ago. Do you think you, and/or your spouse, could live that long or longer in retirement, depending on your portfolio for your “paycheck” or “play check”? Keep in mind that net worth numbers may include your residence or other non-earning assets. How big must your financial “interest, dividend, and capital gains generating asset base” be to sustain the life you desire and are working toward?

Fortune delineated a number of items that have risen in price faster than median earnings from 1990 to 2018. Using median earnings as a benchmark, up 117 percent, the list includes in order of severity, unleaded premium gasoline (+118%), physician services, rent of primary residence, alcoholic beverages away from home (there goes “date night”), heating fuel, funeral expenses, childcare and nursery school, prescription drugs, medical care, elementary and high school tuition, college tuition (+374 percent). No wonder college planning is such a big deal!

How cost strains impact you and your family depends on where you are in your life cycle, but you get the point. It isn’t about the dollar you have. It’s about how much that dollar will buy in the future.

The All Items consumer price index is up 1.9 percent over December 2017, just shy of the Fed’s target of 2 percent annual inflation, which is why pundits proclaim “inflation is under control.” Yes, but your dollar buys a bit less than it did a little over a year ago. Let’s say you’re retired and have a $1 million portfolio. To live the life you want, you aim to take out 5 percent, $50,000 a year, $4,167 per month after tax, to supplement Social Security. For a 5 percent return net of inflation and taxation with the CPI at 1.9 percent and a 20 percent average personal or joint federal and state tax bracket, your portfolio must earn 8.625 percent annually. You can’t do that without risk.

Stanley and Danko noted that the millionaires in their study considered riskier investments “if they were worth the reward,” including stocks, private businesses, and venture capital.” For closely-held business owners, will the value you desire be there when you decide to “cash out” as you transition your enterprise?

You can handle more risk and market volatility when you are working and not dependent on investments to fund living expenses. In full retirement, we must balance risk and reward with a myriad of factors. That’s part of the retirement planning and cash flow sustainability conversation which must take place well before you retire.

Which part of the middle class will you be in? The upper middle or lower middle? Go for the “tippy top!” Plan carefully!

Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which otherwise is unaffiliated with Capital Insight Group. He is a Gallup Certified Clifton Strengths Coach and a Certified Exit Planning Advisor (CEPA®).

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