by Harry Sit on January 31, 2011 13 Comments

I hear people use the word millionaire. but Im not sure what exactly it means. For example, President Obama said in his latest State of the Union address,

Before we take money away from our schools or scholarships away from our students, we should ask millionaires to give up their tax break.

Who exactly are millionaires who should be asked to pay more taxes to help fund schools and scholarships?

By Income Or By Net Worth?

Is a millionaire someone who earns $1 million a year or is a millionaire someone who has $1 million or more in net worth? Wikipedia uses the net worth definition:

A millionaire (originally and sometimes still millionnaire) is an individual whose net worth or wealth is equal to or exceeds one million units of currency.

The popular TV show Who Wants To Be A Millionaire also implies the net worth definition. Winning the grand prize once sure wont make someone earn $1 million a year every year.

If we go by the net worth definition, we have millions of millionaires in this country.

Include Home Equity Or Not?

Should home equity be included when we calculate net worth? Absolutely.

Home equity is an asset. A home can be sold, refinanced, or inherited. It makes no sense if someone with a large mortgage and a large investment portfolio is counted as a millionaire but another person who has a smaller investment portfolio but owns the home free-and-clear isnt counted as a millionaire. They just choose to hold their assets differently.

Many seniors living in homes without a mortgage in the coastal states are millionaires. Although they may not have as much income as a younger person still working, they have a much higher net worth.

Include Pension Or Not?

Some retirees have a pension. Most public sector workers and some private sector workers still have a pension. A pension gives someone an income stream now or in the future. A 401k or IRA balance also gives someone an income stream. If person A has a large IRA balance but no pension and person B has a smaller IRA balance but has a pension, who is a millionaire? A $2,000 a month pension with cost-of-living adjustments is easily worth half a million dollars.

The value of a pension should be included in the net worth.

Include Health Insurance Or Not?

Some people have health insurance as a part of their retirement package. Some must buy health insurance themselves. Since the value of a pension should be included in the net worth, the value of paid-for health insurance should be included too.

Health insurance isnt cheap. It can easily cost over $1,000 a month. If person A has a large investment portfolio but must buy health insurance and person B has a smaller investment portfolio but has health insurance paid for life, who is a millionaire?

One Person Or Two?

When it comes to a two-earner household, if their combined net worth is over $1 million, are they both millionaires? Or should we divide their net worth by two? I say we should divide by two. Two millionaires must have two million dollars.

Adjust for Cost of Living Or Not?

The cost of living in this country can be vastly different. A millionaire in New York City or San Francisco doesnt live nearly as well as a sub-millionaire in Nebraska. By New York City standard, many people with net worth under $1 million are also millionaires.

Inflation

Inflation will eventually make everyone a millionaire. When I was in Chile, a can of Coke costs 1,000 Pesos. If we have high inflation, one day a can of Coke will cost $10. If you arent a millionaire yet, inflation will help you.

I bet many readers of this blog are millionaires. If you are not yet a millionaire, you will be.