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Why $5 million is the new $1 million

There was a time not long ago when a net worth of $1 million was considered a benchmark for being rich. No longer. Nowadays you need to have at least $5 million to really be secure, many financial planners say. And the ranks of these penta-millionaires are growing rapidly.
/ Source: contributor

Who wants to be a millionaire? A lot of people. After all, that’s synonymous with being rich.

But these days, many wealth seekers say $1 million is no longer enough to be considered wealthy. With the rising cost of living, and the lengthy retirements many people must plan for, financial experts say the new benchmark for the rich is $5 million.

“It can be said that the new $1 million is $5 million,” said Ajay Gupta, vice president, wealth management adviser at Merrill Lynch in San Diego. “We’ve seen a lot more $5 million net worth families than before.”

While the number of millionaires has nearly doubled in the past decade, the number of "penta-millionaires" has quadrupled.  The number of U.S. households with $5 million or more in net worth has grown to 1.14 million as of last year from 250,000 in 1996, according to Spectrem Group, a Chicago-based research firm that focuses on the "affluent" market. There are about 9 million households with $1 million or more, up from 5 million a decade ago.

Financial advisers at firms like Merrill Lynch and Schwab Institutional say they are seeing growing numbers of multimillionaire clients. “It’s the fastest-growing segment (of our business),” said David Welling, a vice president at Schwab Institutional investment advisors in San Francisco.

For many affluent individuals, a $1 million nest egg is just not enough these days. “Everything costs more — gas, housing, education, health care, food — everything,” said Welling. “A million dollars used to be the magic number, and while it still is a lot of money, it may not be enough to retire or support the kind lifestyle people think it could.”

Longer lifespans are one reason why $1 million may not be enough to provide a lifetime of financial security, he said. “What do you do if your mom ends up living to 100 but her retirement plan only lasts till 80?”

“Robert,” 40, a penta-millionaire in San Diego, made his fortune through stock options at a technology company where he worked. His net worth hit the $1 million mark in 1995. But he felt it was not enough.

“When I had a million dollars, certainly the thought came to mind, ‘Gee, I wonder if I’m gonna need to keep working?’” said Robert, who did not want his real name used. “But that thought lasted about 10 seconds, because $1 million just isn’t as much as it used to be.”

For Robert, the turning point came in 1999, when his assets hit $5 million. He quit his job, set up a charitable foundation and became a full-time philanthropist. “When you have a lot of extra money, you start thinking about the causes that you’ve always cared about,” he said.

Of course, $1 million in Boise, Idaho, will go a lot farther than it will in New York or San Francisco, where a typical home can easily cost more than $1 million. But for many wealthy individuals, the point at which they begin to think about retiring is when their assets move into the $2 million to $10 million range, financial experts said.

Somewhat surprisingly, the Securities and Exchange Commission still uses $1 million — a figure that was established in 1982 — as an important benchmark for wealthy households, although there is a pending proposal to raise the minimum to $2.5 million.

Under the agency's Regulation D, an individual or couple with a net worth of $1 million can be considered an "accredited investor" qualified to buy complicated securities such as shares in lightly regulated hedge funds.  The theory is that such individuals are more sophisticated and able to protect themselves from scams and hoaxes than less-wealthy investors.

A proposed amendment would create a new definition for "large accredited investor" that would include individuals with at least $2.5 million in investments, a definition that would exclude the equity in one's personal residence.

Most multimillionaires today made their wealth in one of three ways: real estate investments, business buyouts or the technology boom, said financial experts.

The real estate market has created enormous wealth. Many couples who bought houses for, say, $50,000 in the 1960s now find themselves with homes worth millions, said Merrill Lynch’s Gupta.

A wave of mergers and acquisitions also has fueled the growth in multimillionaires. Gupta tells of one client who made $100,000 to $200,000 in annual income for many years until selling the company for $3.2 million.

The technology boom of the 1990s and beyond also has left tens of thousands of multimillionaires in its wake. Schwab’s Welling pointed to companies like Google and Yahoo that have created many 20- and 30-something millionaires.

One trend among these newly minted multimillionaires is that many are using their wealth to try to effect global change, by putting money into socially responsible investment funds, for example. Such funds are among the fastest-growing investment categories, according to the World Wealth Report 2007, released by Merrill Lynch and Capgemini. Clients with $1 million or more in assets hold 8 percent of their portfolios in such funds, according to the report.

“As (high net-worth) investors are becoming increasingly conscious of social and environmental concerns, they are looking to invest in companies and financial products that share their concerns,” the report stated.

Multimillionaires are also giving their money directly to social causes, but they want a "social return on investment,” the report stated.

That may be why one reason several penta-millionaires who were contacted declined to be interviewed for this article.

“A lot of us would rather remain anonymous, because we are not being philanthropic for our egos,” said Robert. “We want the spotlight on what’s needed to make the world a better place.”