Episode 516 – What Does it Take to Feel Financially Secure?

The content shared on Your Life, Your Wealth Network reflects the views of the host and guests of the program only, and are not necessarily the views of Cordasco Financial Network or its advisors. This media production is educational in nature and should not be construed as financial, legal, or tax advice or a solicitation or presentation of sale of any financial products or solutions. Please consult a professional prior to making any financial, tax, or legal decisions.

Welcome to the Your Life Your Wealth Network, helping you find clarity and comfort for your life and wealth.

John Walker
Hey, welcome to the Your Life Your Wealth podcast. I’m John Walker, Regional Vice President at Mercer Advisors. Always a pleasure to be with you. And today we’re going to talk about something that we, you know, get the privilege of talking to families with all the time, and that is getting them comfortable with being financially secure.

Finding where they have confidence in that they will have enough money, and it’s predicated by some really interesting new data that came out. There’s been some really interesting studies recently. Northwestern Mutual just released one, a survey around how people feel about their finances. And so we’re going to talk about why most millionaires don’t feel wealthy.

And to help me have that conversation, my good friend and colleague here, market leader and CERTIFIED FINANCIAL PLANNER®, Mr. Jason O’Meara. Jay, thanks for joining me.

Jason O’Meara
Of course, John, thanks for having me back.

John Walker
Yeah, absolutely. I mean, I think growing up, you and I are of a similar age. I may or may not be slightly older. Who knows? Yeah, same birthday, different year, pal. And so growing up, right, to think of someone being a millionaire, reaching millionaire status, right?

Jason O’Meara
That seemed like a stretch, right? Like I think you can hit that — that seemed like we’ll never get there, but we’ll be OK.

John Walker
And it used to be just sort of like a benchmark, right? If you hit that seven-figure mark, yeah, you were successful, right? You had reached a level of comfort and security that—

Jason O’Meara
Yeah, well, you said they had a title for it. You’re a millionaire. No one ever bragged about being the 100,000-aire.

John Walker
Correct.

Jason O’Meara
You know what I mean? There’s that line in the sand.

John Walker
But there’s a growing body of research that shows that many, many millionaires still worry significantly about retirement, about healthcare costs, about whether their money will last, and there is a big disconnect between a family’s net worth and their confidence in their money sometimes. And so I think it’d be really helpful to talk about some of the factors that are driving that sentiment, and then we can talk a little bit about, you know, how we can address it. But, you know, the definition of what is wealthy has changed, and there’s a lot of factors that are driving that. That Northwestern Mutual survey I referenced basically talks about how only a minority of US millionaires actually even consider themselves wealthy, right?

That’s very true. Many, many report on an ongoing anxiety about what the future holds, and one of the key drivers of that — inflation has really — especially — I know there’s definitely some recency bias in this, right, with how people have felt about inflation in the last year or so or a couple of years, but it has eroded people’s purchasing power, right?

Jason O’Meara
Let’s go back, right? Let’s be honest — there’s recency bias, but let’s go further. If you go further back, it’s compounding. Inflation is compounding, so if you have averaged 3% per year inflation, that’s 3% every year the cost of something goes up, right? So over long periods of time, like you and I were talking about growing up — we both grew up in the nineties — and a million dollars then was amazing. But think about it. If you made $100,000 in 1994, you were considered rich, right? Factor that in today’s dollars — $100,000 a year isn’t what it used to be.

If you make $100,000 a year — again, I’m not saying that you can’t make ends meet. I’m just saying that you don’t feel like you’re wealthy or rich, you know.

John Walker
And so yeah, great point, Jason. A $100,000 salary in the mid-90s is probably equivalent to making several hundred thousand dollars a year today, right? And so there is certainly a difference in that inflation has eroded people’s purchasing power, right? A million dollars simply doesn’t go as far as it once did.

Jason O’Meara
Exactly. You cannot — yeah, that’s probably the hardest part, right? Because a lot of times inflation is unseen. You don’t notice it. Not everybody goes to the grocery store and shops by unit value. That’s where you notice it, right? If you look at the package of cereal, it’s the same size on the front, but it’s not nearly as thick, you know what I mean?

John Walker
Yeah, and listen — not to be cynical, but companies are good at kind of hiding it, disguising it, right? We always joke the ice cream carton has definitely gotten smaller, right? But to keep prices the same, you lose an ounce here, you lose an ounce there, right? And one of the other places we see it really reflected lately — housing costs have surged in a lot of parts of this country, right? And a lot of families’ net worth is tied up in the equity they now have in their homes, but that doesn’t necessarily provide spendable cash, right? That’s not leverageable equity for many, many families, and so they have maybe a significant net worth that doesn’t provide them the opportunity for the cash flow that they need.

Jason O’Meara
Right, because that’s true. That’s one thing we should really distinguish between. It’s net worth versus liquid assets. Liquid assets can be spent. Your net worth can be astronomical, but you’re completely illiquid and it’s unusable, right.

John Walker
Right. You own a real estate portfolio — things that if they’re not generating income that are significant assets may not be leverageable, right? And we see that. We’ve seen a significant increase in many families’ total net worth on some of these other illiquid assets.

Jason, maybe even more significant than inflation and housing costs is the requirement of savings now that lifespans have become so elongated, right? People are living significantly longer. I mean, we have some families we work with that may spend more time in retirement than they did working. We’re modeling financial plans out to 95, 100, 105. When retirees might need 25, 30, 40 years of living expenses supported by their assets, that really has eroded people’s confidence that their resources will last.

Jason O’Meara
That’s the scary part. And that’s where we get into those difficult conversations around retirement where, you know, if you’re not somebody who has a glass-half-full kind of personality, that will spook you out of retiring every day. Because, you know, how am I going to continue to bring in money when I’m no longer working is one of the biggest questions we try to answer for families.

And if they don’t have faith in markets, they don’t have faith in various things, it’s gonna be really difficult for them to pull the trigger on that retirement. Because, like you said, it’s not like they’re going to retire at 65 and they’ll be dead by 72. They’re gonna retire probably at 60, and, you know, live another 30, 35 years. So how do they feel comfortable with a million dollars? The answer is they probably don’t.

John Walker
They probably don’t, yeah. In fact, there was a recent Charles Schwab survey that said the results bore out that the average net worth required for someone in America to feel wealthy — to report that they feel wealthy — has grown to about 2.3 million. And folks don’t even report feeling comfortable, not just wealthy — just even comfortable — until they have a net worth in excess of $839,000, right? So that’s a gap that has widened. $839,000 is really approaching that millionaire status that used to be considered a bar of wealth just a few decades ago. Now people are reporting that’s just where they start to maybe feel a little bit comfortable. So there’s a significant gap between comfort and perceived wealth.

And, you know, believe me, we can caveat this — it varies significantly generation to generation, and there’s a lot of personal family circumstances that impact this, and this certainly doesn’t account for everyone — but these surveys are really revealing as to sentiment, right? If you can take a broad brush and apply this to what we can learn from it, it does really highlight that there’s a significant gap between what people perceive as wealth and how they feel they can have some stability in their retirement. And so as these expectations rise, it becomes even more incumbent on teams like ours to start to reassure families — to help use planning and tools and resources to provide that confidence and clarity that maybe they are not able to have on their own.

And so, you know, there are some things that help people feel more secure in their finances. People often feel more secure, Jason, when they have confidence that they’ll have reliable income streams.

Jason O’Meara
I mean, think about it, John — how many times do we meet with families and they don’t have the biggest savings, but when you dig a little deeper, we realize they have a massive pension. And we’re like, oh, this is why you didn’t save anything — because you have this massive pension that’s gonna take care of you. So obviously net worth is one thing, but an income stream and liquid assets are better than having a big net worth that’s tied up in illiquid assets.

John Walker
Yeah, that’s a good point. I know it’s becoming a bit of an anomaly for folks to have pensions these days, but we can show them ways — with good portfolio management — that you can have confidence that the resources you have saved, if you don’t have a pension, can be converted into some sort of reliable income stream. If you’ve worked for quite a bit of time, you might have significant amounts of Social Security benefits coming your way. There are other ways to provide some clarity around income that makes people have a little more confidence.

The other thing we find, Jason, is having liquidity. You just mentioned it, right? Not having — being sure that you have adequate emergency savings, being sure that you can access capital without penalties — whether it’s through not having to go to high-tax retirement accounts or not having to sell a business or real estate that isn’t tax-favorable, right? Having adequate resources to support you in an emergency can be really, really reassuring. This is a bit of balance sheet management. If you can take the time to have low or manageable debt, the data more than bears out that makes people feel more confident. Not having a mortgage, not having credit card debts — just knowing that your expenses might be a little more controllable. These surveys all point to that as a good way to help you feel more confident about your future.

Jason O’Meara
Yeah, because having that low, guaranteed expense, lower manageable debt — right, so—

John Walker
Yeah, if your fixed expenses are lower and controllable—

Jason O’Meara
For those who are listening who are still working — my own mindset is, how many days do I have to work where I’m working for somebody else? Where the money I’m earning is going to the bank, or going to something else — guaranteed payments. At what point in a month can I get to working for myself, where the money’s going to my savings, where I need something I want, you know, living my life? When I get into the first week, that’s bank money, and then after that I’m working for me. That’s great. That’s how you should be. Because that’s kind of my own mindset — I’m trading my time for money, and at what point is my money being used for me versus at what point is my money used to service a debt or service something else? And if you ask me as a kid what would it mean to be wealthy, I would say not having to worry about spending.

Right, right. And one of the best ways to do that is to, one, make sure your spending is appropriate, right? I’m not out buying Lamborghinis, John, as much as you know I want to.

John Walker
You definitely would.

Jason O’Meara
But I’m not, right? But having that low and manageable cost of living — you’ll be surprised. It’s not what you make, it’s what you keep. And the more you can control this side of the balance sheet — or this side of the budget — you know, I hate that word, but you know what I mean.

John Walker
Well, I mean, I think you’re really underscoring a really important point, which is that one of the things that often happens is this lifestyle creep that we help families understand. As many families’ earnings grow, things start to get more expensive. You might upgrade the home you live in. You might be taking more vacations or traveling. You might be spending more on entertainment or getting out to dinner. Your lifestyle inevitably starts to expand. And so one of the other reasons that a lot of families don’t feel as wealthy or secure despite their resources is that psychological factor of sort of keeping up with the Joneses — because if your peers appear to have higher incomes or higher net worth, you start to feel less satisfied, even though objectively you might be in a fantastic place from a wealth and income perspective. So there is that lifestyle creep. There is a behavioral component to this.

Jason O’Meara
Let’s dig into the psychology a little bit. I have this conversation with people, and they’ll say, “Oh, well, my neighbor has this — how could they afford that?” And I constantly remind people: maybe they can’t, right? People all over the world are making terrible financial decisions as we speak. So maybe that was a bad decision on their part and they’re living with it. You can’t say, “Because they could afford to do it, I should be able to afford to do it.” Maybe they can’t afford it. You see things all the time online — people who are like—

You know, I make $30 a day and I have a $9,000 car payment. It’s like — what are we doing? So you can’t look at the Instagram lifestyle—

John Walker
Social media is not really real, right? That reminder that that is not necessarily the real world, and no one’s posting themselves — exactly.

Jason O’Meara
Posting them falling on their face, yeah, right — or worrying about how they’re going to pay their credit card bill that they just racked up this month because they wanted to look like a hotshot, right? So live within your means and you’ll be surprised how quickly you start to feel wealthy.

John Walker
Yeah, and stop looking at these benchmarks that are arbitrarily put out there, like “you should have this much by this age,” right? Those things, from my experience, Jason, I think they just add layers of stress. If we could give folks some takeaways today, I think there are a couple of things that I would want to make sure we highlight. The way you build that confidence is to focus on things that are controllable for you. Make sure that you understand what income is going to look like both while you’re working and in retirement. Understand what your potential Social Security benefit is going to be. Make sure you understand if there will be pensions or other things you can rely on.

Have confidence that you have enough emergency reserves — whatever that number is; there are all kinds of rules of thumb, but make sure you have enough available savings — that you have a little bit of a buffer and you feel like you have a bit of a buffer. Make sure that you have adequate insurance to cover for life’s unexpected events — health, disability, home, life insurance, whatever it is. And at the end of the day, Jason, I think the most — maybe the most critical thing is — create a long-term plan that you have confidence in. Because when we have market volatility, when we have all kinds of things, when we have, unfortunately, world events like wars and other things that really do spook people understandably, being able to go back to a plan that says, “Hey, remember, Jason, when we looked over this, we anticipate these types of things, and here are the types of returns you need long-term to be successful. Has anything materially changed in your life?” — when we can center people back to:

Don’t focus on what is happening that you can’t control. And certainly don’t compare yourself to your neighbors. What brings joy and meaning and purpose to your life? Let’s build a plan for that. And then you should hopefully have confidence and clarity that you guys are gonna be OK. Jason O’Meara, CERTIFIED FINANCIAL PLANNER® and market leader here at Mercer Advisors — thank you so much for joining me today and having this really important conversation.

Jason O’Meara
Of course, John. This is a good one.

John Walker
And if you’re listening, and if you have these concerns — if the world has you anxious, if you’re not sure if you’re on the right trajectory — we’re always here to help. Give us a call anytime at 215-558-3500. That’s 215-558-3500, or email me at jwalker@merceradvisors.com. That’s jwalker@merceradvisors.com. I’m John Walker, Regional Vice President of Mercer Advisors. Thanks so much for listening to the Your Life Your Wealth podcast. See you next time.

If you’re interested in learning more about applying the principles we discussed to your personal financial circumstances, please visit Cordasco Financial Network at CFNplan.com.