Wealthy people inspire lots of reactions-envy, admiration, emulation and even legends. A veritable mythology has built up about who they are and how they got to be so rich. I am pleased to share with advisors insights we've gleaned from nearly a decade of studying this market segment through the Phoenix Wealth Survey and, in the process, debunk a few of these myths.
We'll focus on the so-called pentamillionaires-those having a net worth of $5 million or more, excluding their primary residence. These people are at the top of the wealth pyramid and represent less than 1% of all U.S. households, according to TNS's 2007 Affluent Market Research Program. To be successful with this coveted market requires a complete understanding of their wants and needs, and changes in their financial behavior.
Myth #1: Rich People Are Old People
When
I ask advisors to estimate the average age of this market, the typical
answer is 65 and older. That's not surprising given the traditional
thinking that significant wealth is primarily accumulated over a
lifetime, most likely from building and selling a business. But the
facts point to a different demographic-one that is younger and more
diverse.
Since we launched our survey in 1998, the average age of the high-net-worth market has fallen to 53 from the upper fifties. The number of older pentamillionaires is growing, but younger pentamillionaires are growing at a faster rate. Figure #1 shows that pentamillionaires under 40 and those 65 and older are almost the same size and the largest segments of this market (unless otherwise noted, all cited data are from the 2008 Phoenix Wealth Survey).
Pentamillionaires come from a variety of ethnic backgrounds: 74% are white, 8% Asian, 6% Hispanic, 5% black/African American and 2% are of mixed or other race. They are diverse in more than just race. Three percent, for example, indicate they are lesbian, gay, bisexual or transgender. All of this correlates with a wealthy population that continues to get younger.
Myth #2: Young Wealth Is Inherited Wealth
Inheritance
of wealth is not the primary reason many pentamillionaires are younger
today. Only 26% in last year's survey said an inheritance played any
role in their wealth status. Many other factors were cited: 37% said
work-related stock played a role, 32% cited work-related bonuses, 20%
pointed to liquidating a business and 17% cited taking a company
public. These findings make perfect sense because the majority of
wealth today is first generation.
Myth #3: Pentamillionaires Don't Worry About Retirement
The
misconception that pentamillionaires are older contributes to a
mistaken belief that this client group considers retirement planning a
low priority. On the contrary, 94% of pentamillionaires view retirement
issues as among their top concerns. Furthermore, when asked to name
their single most important financial goal, 26% say it is ensuring a
comfortable standard of living in retirement and 14% say it is to avoid
outliving their assets.
The growing number of younger pentamillionaires may be behind some of this concern. In focus groups with younger wealthy people, we find significant concerns about retirement security even though they start from a wealthy base and have many years to acquire assets.
The irony is that they see time working against them. In their mind, more time means more exposure to economic events that could threaten their financial security. Focus group findings indicate pentamillionaires worry about the future of Social Security, the potential for multiple economic downturns, the disappearance of traditional pension plans and the impact greater longevity for themselves and their parents will have on their finances. Compounding the worries are their expectations for a high standard of living in retirement and their desire to retire early.
Myth #4: Pentamillionaires Own Lots Of Life Insurance
Another
mistaken belief among advisors is that individuals worth $5 million or
more own plenty of life insurance. Nothing could be farther from the
truth. Less than two-thirds-63%-of pentamillionaires own individual
life insurance. Only 37% own permanent coverage, while 28% own term
insurance. Only 9% plan to buy permanent insurance and 8% plan to buy
term life. Clearly, the penta-millionaire market is not saturated when
it comes to life insurance ownership.