How to Become A HNWI: High-Net Worth Individual

[jacob]

You changed your lifestyle to get there but achieving the number does not change the changed lifestyle.

In terms of [potential] lifestyle changes, each +1 million liquid is essentially like adding +1 median household income in capital income. However, one factor here is that five-figure earners might have much of their liquidity tied up in retirement accounts where the capital income remains less visible than having the income appear on the checking account. This dampens the wealth effect/

For example, keeping the OP table in mind, if you max out a 401k, an IRA, and a HSA, you're already putting away $2750/month before even getting started with taxable accounts.

[7Wannabe5]

@fiby41:

Yeah, and I believe he went from 10 million to 100 million in the last decade of his life. I would note that he often made a point of telling me that the game changes at the higher levels (simultaneous to basically patting me on the head while advising me to just invest in an index fund.) Of course, the more of your life energy you devote to any given pursuit, the more you will desire access to the higher level games available. No different than wanting access to some shiny, expensive laboratory stuff if you devote yourself to hard science or wanting access to acreage and archaic seed banks if you devote yourself to permaculture.

I shared the hobby of gardening with my uber-wealthy friend, but he was fairly terrible at that activity, in part due to a combination of extreme frugality and lack of biology background. He saved his tomato seeds every year, and ended up back-breeding them into almost inedible tiny balls of acidity, and he based the soil amendments for his relatively small suburban garden on the pre-tractor crop rotation scheme his father had used on large farm combined with what he could get for free. It was highly amusing to me to help man with his net worth "steal" leaf compost bags from his neighbors.

When fixated on a magic number, it's hard to appreciate the closing paths.

This is true, but my point was more along the line that it is "better" (likely to be more efficient) to admit that you do wish to achieve a certain level of wealth than to try to sneak up on it through the back-door of security needs. This is not my idea. There are articles written on this topic by financial economists linked to the Wikipedia article on the Trinity Study. One of the math exercises I have assigned to myself is figuring out variations on "splitting the difference" between constant withdrawals and percentage withdrawals combined with considering work-life as a stock subject to flexible withdrawal. One trivial result of this analysis is that if desired maximum net-worth is minimized, the model devolves to something very much like the cash flow problems often faced by a very small business or the "typical" consumer attempting to get by with only $400 in bank and no credit. IOW, the smaller your nut, the tighter you have to make your time periods/feedback cycle, and the longer you wish to be able to "set and forget", the larger the nut you need. So, how likely you are to actually "set and forget" is also highly relevant. For instance, if the market drops your net worth by 40% this year, how likely is it that you will seek some form of paid employment/reduce expenses further rather than making your "set" withdrawal?

[Scott 2]

Got it.

The challenge I have, is while I know the big number is a false idol, the desire for a high score never goes away. 5MM sounds great. My impulse on seeing that number, is to imagine how I'd put the money to work and live better.

I've contented myself with the fact, there will always be a voice in my head, saying "you could have more..."

My rational self disagrees, but that doesn't erase a lifetime of financial insecurity. Which is different from having unstated wealth goals.

[jacob]

I've contented myself with the fact, there will always be a voice in my head, saying "you could have more..."

Whereas the voice in my head keeps saying "but what am I gonna spend this on, when I could more easily [not spend it] [by showing others how not to waste it]". Likely, given my trajectory as a research scientist turned academic apostate in order to solve more worldly issues, I never transitioned into the the "solve problems by throwing money at it"-stage. This is an interesting difference. How did this ever come about?

[Scott 2]

My internalized financial insecurity is generational. A set of grandparents divorced at just the right time, and now I think $30 is excessive for a bedsheet. At 5MM, I might overcome that.

[PhoneticNachos]

When I was younger I dreamed of being rich, now at 36 I just want to have low drawdown of what I can save for retirement, and have more than enough to cover my COL. I don't want kids, and doubt I will ever get married, I plan to leave anything left over to my brother and sister.

I love my job in finance industry, and while I took a pay cut and have to start at the bottom, I plan to work up until I retire, unless I happen to get some windfalls that speed it up enough. But with how much I like this type of work, and having something to do each week, I could happily do it until my 50s-60s.

I want my Social Security to cover most of my monthly food/survival costs, and then a tiered system of various asset classes to cover different needs/wants.
Hopefully I have some real estate helping speed the accumulation up within a few years.

Saving around 40-65% of my take home pay each month (because I have cheap rent), and plan to get a duplex to lower my rent once I move.

[conwy]

In my mind, income is more important than net worth. High net worth might be illiquid (e.g. tied up in affluent housing) or volatile (e.g. tied up in idiosyncratically risky assets).

I prefer to measure myself by the perpetual safe income that my portfolio is likely to generate. This number appears at first very modest (around the $28k p/year AUD mark by my conservative estimate). Some would call me poor. What they're not considering is that: A) this is a very, very safe income stream due to the assets I hold and the way I calculate it, B) this is an almost totally passive income stream, requiring practically zero ongoing maintenance effort

IMO, once you've reached FIRE with more or less safe assets, status / progress will be more important and evident in other areas of life such as education and general "life skills" (e.g. renaissance man), friendships/relationships, physical health and fitness.

[Veronica]

I used to think this way, but realized that for me, valuing cash flow > net worth was intellectual laziness (at least, when it comes to stock market or financial assets. Housing or privately traded investments are a totally different beast).

ETFs, index funds and the like are so liquid that you can get a quote every minute of everyday. And it usually takes a maximum of 3 days to get your money in the worst case scenarios. My brokerage has an integrated debit card, so if I sell at noon, it becomes spendable cash in about 2-3 hours.

So if I have cash needs, I can just sell an amount of stock that would be equal to the cash flow a different fund might have produced.
"Manufactured dividends" if you will.

The real metric should be total return, CAGR, or similar. I'd much rather invest in a strategy that returns 15% annually, and have to login from time to time to sell some for cash, than a totally hands off strategy that only returns 5%.

[7Wannabe5]

I'm currently reading "Portfolios of the Poor: How the World's Poor Live on $2 a Day" and it's fascinating how research reveals that the financial tactics and strategies of the world's VLNWI are really not all that different from those of the most affluent. For instance, the research revealed that VLNWI or household made use of an average of 7 financial devices to manage their money. For example, large lump sum short-term loan from neighbohood money-lender to cover rickshaw repair, having employer hold back some pay as savings account, small emergency fund stashed under mattress, holding money for neighbor with spendthrift husband (acting as micro-banker), long-term loan to brother, micro-loan from commercial/philanthropic entity towards purchase of sewing machine, and another stashed savings earmarked for schooling or wedding expenses. IOW, contrary to popular belief, even the poorest modern humans do not tend towards living literally hand-to-mouth.

Another interesting result of this research was that the main concern being addressed by all this financial manipulation undertaken by the VLNWI was irregularity of income vs expenses. IOW, their primary goal was to maintain cash flow at a level that would allow them to have enough to eat into the foreseeable future, and meet their other personal and financial obligations. In mathematical terms, this cash-flow problem is the same challenge often faced by small businesses and the retired affluent hoping to live off stream from volatile asset class*. What occurred to me as I considered this similarity, was that although the Renaissance Man and the Salary Man are in opposing quadrant in the ERE diagram, what they have in common to the extent that the Renaissance Man is relying on SWR from index fund (or similar) is that they are both "paying" to have the volatility dampened on their cash flow vs. The (not too big to fail) Business Man or The Working Man.

Anyways, the important takeaway relevant to this discussion would be that it is pretty obvious that the field you are operating in makes a huge difference in terms of income/net-worth. If it was possible, saving up enough money to immigrate would constitute largest advantage possible for VLNWI. So, similar rule-of-thumb might very well apply when considering how best to move from moderate net worth to very-high or ultra-high net worth in objective, as opposed to relative, terms. Of course, a great deal of other research also indicates that being one of the bigger fish in a small pond is more likely to correlate with happiness. So, to the extent that your net-worth/income/assorted-capitals-asset-basket is portable, that might be the superior strategy for humans not in actual danger of starving to death.

*Just substitute in "go out of business because temporarily broke and can't make payroll" and "have to go back to work, un-retire because can't meet basic "needful" expenses" for "starve to death."

[chenda]

I'm currently reading "Portfolios of the Poor: How the World's Poor Live on $2 a Day"

Sounds interesting. I've heard it said entrepreneurship is much more common in the third world as it's a necessity.

Vaguely related you might enjoy Castles in the Air by Judy Corbett, about a young couple who buy a remote Welsh castle in the 1990s and attempt to restore it whilst living in squalid, freezing conditions. It touches on a lot of ERE topics, housing, entrepreneurship, self sufficiency etc.

@Henry you might enjoy it as well as there are plenty of bats involved.

[Henry]

@Henry you might enjoy it as well as there are plenty of bats involved.

Sounds good. Once I've finished "Enemas in The Medieval Period: A Pictorial History" and watching every episode The View, I'll be sure to pick it up.

[Sclass]

What occurred to me as I considered this similarity, was that although the Renaissance Man and the Salary Man are in opposing quadrant in the ERE diagram, what they have in common to the extent that the Renaissance Man is relying on SWR from index fund (or similar) is that they are both "paying" to have the volatility dampened on their cash flow vs. The (not too big to fail) Business Man or The Working Man.

Interesting observation. This effect is everywhere. Insurance and extended warranties are an example where you can leverage up your position (a big car loan for example) without a lot of capital as long as you have a system to deal with short term volatility.

VLNW is going to be up against these constraints all the time.

[conwy]

I used to think this way, but realized that for me, valuing cash flow > net worth was intellectual laziness (at least, when it comes to stock market or financial assets. Housing or privately traded investments are a totally different beast).

ETFs, index funds and the like are so liquid that you can get a quote every minute of everyday. And it usually takes a maximum of 3 days to get your money in the worst case scenarios. My brokerage has an integrated debit card, so if I sell at noon, it becomes spendable cash in about 2-3 hours.

So if I have cash needs, I can just sell an amount of stock that would be equal to the cash flow a different fund might have produced.
"Manufactured dividends" if you will.

The real metric should be total return, CAGR, or similar. I'd much rather invest in a strategy that returns 15% annually, and have to login from time to time to sell some for cash, than a totally hands off strategy that only returns 5%.

Sorry I should have clarified – when I write "income", I mean income in the general sense of "money available over various time periods", not necessarily limited to dividends, bond coupons, etc. I think of my index funds and other assets in terms of chunks of money over periods of time, not as one lump sum to aim for.

I think this is more aligned with how humans actually live. Humans have regular recurring costs. E.g. we don't do all our eating in the first half of life, followed by expending energy in the second half. (Probably certain animals or insects have this kind of life.) Rather, food is a regular ongoing cost, spread evenly over the days, weeks and years.

My portfolio isn't 0-risk, none is, but I've got enough accumulated in index funds that I could afford to live off them until the age of 100 even if there was 0 real growth for the whole period. Combined with other duration-matched assets, I regard that as a very low-risk calculation from a point of view of income over the next 65-year period. But it doesn't look as glamorous when measured in terms of liquid capital at any given point in time.

[fiby41]

@Veronica have you factored in the risk of return being -15% when you most need the cash and must sell?

@7Wannabe5 I often read read than myCountry is a 'low trust society' and then have to deal with the cognitive dissonance caused by the prevelance of chit funds/bhishi/kitty. People meet up monthly and pool together a fixed amount per person. Then a person's name is drawn at random from a chit of folded paper having their names written inside kept in a bowl, hence the name. This person gets all of that month's money and his chit removed from the lot but has to keep making the fixed contributions into the kitty during the upcoming months.

@PhoneticNachos from which industry did you break into finance such that you had to take a pay cut?

[icefish]

E.g. we don't do all our eating in the first half of life, followed by expending energy in the second half. (Probably certain animals or insects have this kind of life.)

Moths! Some do all their eating as caterpillars, then lose their mouths as adults. Makes it a little funny to see people be worried about being bitten...

(/end bug interjection, carry on)

[PhoneticNachos]

@PhoneticNachos from which industry did you break into finance such that you had to take a pay cut?

I took a pay cut to work at Fidelity. I have a non-traditional background and no degree, so I am working my way up. I used to work at a tax company in a specialized support role.

[Dave]

I don't mean to be flippant, but it seems fairly trivial to close the gap between FIRE'd and that threshold for HNWI as long as the individual doesn't have a combination of many of the following: extremely low income, moderate-to-high expenses, desire to quit all income producing activities upon achieving desired level of $, short duration of life left.

Let's say you hit FI @ $350,000 at age 40 and leave your job to do something you like more. You generate 5% investment returns, and are able to scrape together an extra $10K of savings into the portfolio per year. You hit $1M at age 55.

While not everyone of the ERE ilk will follow this path, I think this isn't particularly aggressive. Someone starting early would have a much longer runway, the assumed rate of return is not aggressive, and the assumed savings could be achieved by someone with a fairly low level of expenses with even a fairly low salary.

Obviously lots of variation for everyone here, but I don't think this is so difficult. The relevant variables for most people are the duration of time it takes, the rate of return, and the long-term gap in income and expenses.

Getting to that ultra high net worth individual level is a different game altogether. Outside of causes like winning the lottery or getting a huge inheritance, this almost has to be done through entrepreneurship of an exceptionally valuable company, exceptionally successful investing, or an exceptionally highly-paid job (CEO, elite surgeon, etc.) sustained for a long time. I'd argue all 3 of those outcomes are unachievable for most people, which highlights the beauty of ERE and how replicable it is for (most) everyone.

Still, achieving just $1M or $5M opens a lot of doors even for standard consumers, with severely declining utility as you approach the ultra high net worth status.

The main thing that would appeal to me at that level is you could do sizable philanthropy in a way a $1M portfolio couldn't support. Imagine earning 7% on $30M, $2.1M per year. Round to $1.75M after-tax and assume $0.05M costs. You could donate $1.7M per year to causes, which is eye-popping to me. At a local level, this could go incredibly far.

[chenda]

It's probably the case that most HNWI today are in relative terms much poorer than the robber barons of the 19th century or the mediaeval fiefdoms, some of whom controlled double digits of national GDP.

[7Wannabe5]

VLNW is going to be up against these constraints all the time.

Yes, and at the opposite end of the spectrum, research that equates innovation with patents granted (and similar), high IQ and large family wealth were the two factors most likely to correlate with becoming a highly innovative individual. IOW, large family wealth provides the buffer that allows the individual to fail at a "risky" enterprise(s) multiple times before succeeding.

I think this is more aligned with how humans actually live. Humans have regular recurring costs. E.g. we don't do all our eating in the first half of life, followed by expending energy in the second half. (Probably certain animals or insects have this kind of life.) Rather, food is a regular ongoing cost, spread evenly over the days, weeks and years.

Yes, but the level and/or frequency at which individual humans, households, and larger groups/organizations will have to make these considerations will vary. For instance, my primary concern might be enough money to buy food tomorrow for everyone in my household, or it might be focused on covering payroll on a bi-monthly basis, or paying property tax on a yearly basis, etc. Anybody who has simultaneously kept the books for two different entities, such as household and small business, knows that different entities have different metabolisms, and different perspectives on the field.

I often read read than myCountry is a 'low trust society' and then have to deal with the cognitive dissonance caused by the prevelance of chit funds/bhishi/kitty.

Smells like neo-liberal-colonialist bullshit to me Really, it's a complex stew of who/where/why/when/how you are likely/able to trust in a given society/field/set of circumstances. The VLNWI in the study were more likely to repay their micro-loans to large entity on a regular basis (over other less formalized debts), because they valued the reliable availability of these loans. Your also VLNWI brother-in-law might be just as unlikely to offer you further credit if you don't pay him back on a regular basis, but he is also less likely to have the money to lend you in the future. Consider how humans on this forum on average hold much more irrationally low trust in the U.S. Social Security system than is invested in neighborhood bhishi.

[7Wannabe5]

It's probably the case that most HNWI today are in relative terms much poorer than the robber barons of the 19th century or the mediaeval fiefdoms, some of whom controlled double digits of national GDP.

Actually, we're currently living in a pretty solidly gilded age once more. The GDP of Amazon is greater than that of South Korea and Netflix has larger GDP than Bangladesh. Warren Buffett's wealth is approximately the same as the entire nation of Bolivia.