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Over the past few years, increasing attention has been paid to differences between “rich” and “wealthy.” Arguably, the trend is positive for advisors and clients alike because there’s a growing sense among clients that they can be wealthy without being rich in the traditional sense.
While wealth has grown to encompass esoteric concepts, there’s no denying that there is a financial component to it and that’s never going to change. What is changing, however, is the amount of financial resources people think they need to qualify as wealthy/rich. According to Schwab’s 2024 Modern Wealth Survey, respondents believe it takes an average of $2.5 million. That’s a notable increase from the answer of $2.2 million given to the same question in the 2022 and 2023 editions of the survey.
For advisors, it’s helpful to know where clients’ heads are at and there’s nothing wrong with ambitious goals. Advisors also know that in order for someone to amass $2.5 million in financial wealth, a lot needs to go right. Those moving parts include but are not limited to earnings by way of the client’s job or business, investment performance, home value appreciation and avoidance of debt.
There are other considerations, including demographic, that advisors should be aware of.
Splitting the Difference Between Comfort and Wealth
Getting to $2.5 million is a challenge under even the best of circumstances and it’s not an advisor’s job to be negative and tell a client something is impossible. However, advisors are authors of the possible for clients and what is possible for a great many clients is financial comfort.
Financial comfort doesn’t always equate to “rich,” but there’s considerable value in the former and that comfort can implications for wealth in terms of alleviating of burdens and stress.
“By generation, Boomers have the highest threshold of what it takes to be considered wealthy, at $2.8 million, while the younger generations, Millennials and Gen Z, have lower thresholds of what is considered wealthy,” adds Schwab. “At the same time, Americans say that the average net worth required to be financially comfortable is $778,000. The average net worth required for financial comfort reached a peak last year at $1 million, but this year, Americans’ estimations are more in line with 2022 ($775,000) and show an upward trend when compared with 2021 ($624,000).”
Along with the demographic considerations outlined above, there are also regional issues to take into account when it comes to rich/wealthy. Put simply, perceptions about wealth vary from place-to-place. For example, respondents to the Schwab survey from San Francisco think they need $4.4 million to feel wealthy, or double what their counterparts in Dallas said. New Yorkers view $2.9 million as wealthy -- $600,000 more than what folks in Phoenix said.
“When it comes to geographic region, Californians have the highest threshold of what it takes to be wealthy, with San Franciscans saying it takes $4.4 million and Southern Californians indicating it takes an average net worth of $3.4 million. Survey respondents who live in Atlanta, Chicago, Houston, Phoenix, and Dallas express a lower threshold of what it takes to be wealthy when compared with the national average,” notes Schwab.
Youth Has Its Advantages
Advisors already know that strategies that are applicable to say baby boomers probably aren’t relevant to millennials and Gen Z. It’s just simple math. Younger people have time on their side and take risks when it comes to building wealth.
“When asked if they think they will be wealthy within their lifetimes, 21% of Americans say they are on track to be wealthy. Younger Americans, including Millennials and Gen Z, are the most optimistic about being wealthy in their lifetimes (29%),” observes Schwab.
When it comes to Gen X and baby boomer clients that are far from the aforementioned $2.5 million figure, the emphasis should shift to more attainable comfort and capitalizing on nonfinancial sources of wealth.