Just focusing on being 'rich' doesn't guarantee personal success

No matter how rich you are, you always feel like you need more, writes Thane Stenner

By Thane Stenner

Thane Stenner is founder of Stenner Investment Partners within GMP Private Client L.P., as well as Managing Director, Private Client. www.stennerinvestmentpartners.com He is also author of ´True Wealth: an expert guide for high-net-worth individuals (and their advisors). He can be reached at thane.stenner@gmppc.com

Globe Investor Magazine online, April 13, 2009

How rich do you need to be to feel rich? $1-million? $10-million? $100-million? More?

Clearly, the net worth of most wealthy people has dropped dramatically as a result of the current market downturn. There has been such a rapid erosion of wealth, people are feeling they need "more" to maintain their lifestyles and achieve their financial goals.

Fair enough - but only to a point.

The graph comes courtesy of William Danko, emeritus professor and co-author of the The Millionaire Next Door. I call this the "wealth curve" - a visual representation of the amount of money it takes to feel rich.

As part of his continuing research on America's affluent, Mr. Danko asked survey participants two questions. The first: How wealthy are you? Answers ranged from $100,000 to more than $20-million. The second: How much more wealth would you need to feel rich? People with a more modest net worth needed a lot more wealth before they considered themselves "rich." So, if your current net worth is $500,000, you would need 500 per cent more wealth - $2.5-million - to feel rich.

But here's the surprising thing: The rich feel the same way. Yes, the multiplier diminishes, so a couple with a net worth of $5-million, needs only 60 per cent more wealth ($8-million) to feel rich. But the sentiment never goes away entirely. No matter how rich they are, nearly everyone feels they need more. Keep in mind that Mr. Danko's research was done in 2004; I expect these multipliers would be much higher today.

"Feeling rich is a state of mind," Mr. Danko says. "Most households don't even come close to attaining their hoped-for net worth - suggesting they always 'need' more."

Your answer to this question - how much do you need to feel rich - has important implications on how you manage and invest your money. Allow me to explain by telling you about a conversation I had last month with a new client.

"Roger" is a retiree who met with me for the first time in February. He's a former entrepreneur who sold his manufacturing business last August before the stock markets collapsed for about $20-million (after tax, he netted about $16-million).

Wisely, Roger took some time to think about what he wanted to accomplish after selling his business. He placed his wealth in short-term investments while he "decompressed" and adjusted to his new life as a multimillionaire. This is a good approach after a significant liquidity event, and a fortunate decision for Roger given the market turmoil that was to come.

Roger told me that while he had enjoyed building his business, he was happy to turn a new page. In fact, in the months since he had sold, he found himself asking the same simple question: "Why didn't I do this before?"

Roger made the right decision with his business. He determined that $16-million was "enough" for him.

Our recommended portfolio withdrawal rate of 3 to 4 per cent a year would satisfy his lifestyle and philanthropic goals. In essence, Roger's focus had shifted. He was no longer concerned with feeling "rich." Rather, he wanted to achieve his life goals. Sure, if he had waited a few years for the current economic turmoil to pass, Roger may have been able to secure a higher price for his business.

But this constant striving for "more" would have only distracted him from what he wanted to accomplish with his wealth. More people need to go through this process. Today, after the most severe recession in half a century, we need to re-evaluate what wealth really means to us, and align our financial decisions with that meaning.

Wealth is not an end in itself, and the idea that "more" will make you happier or more secure is an illusion. As the graph shows, it doesn't really matter how much money you have - if your only goal is to feel rich, you're always going to need more.

On the other hand, if you look for your riches in different places - a happy, healthy family; a thriving business; a significant impact on a cause you care about - well, these are things worth striving for.

Special to The Globe and Mail