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Why Millionaires are Running Scared

Investopedia logoInvestopedia 17-06-2015 Justin Kuepper
Most millionaires don't identify as rich and worry about maintaining their wealth. Here's why. © Thinkstock Most millionaires don't identify as rich and worry about maintaining their wealth. Here's why.

The term millionaire has always been associated with those possessing copious amounts of wealth, but only 10% of millionaires self-identify as upper class, according to UBS Group Inc. (UBS) study. The same survey found that majority of millionaires with families — earning $1 million to $5 million per year — are also concerned that a single wrong move would have a major impact on their lifestyle.

Changing Goal Posts

Many people have lavish dreams when imagining a million dollars, but in reality happiness appears to plateau with a lot less. Using 450,000 responses from a 2009 Gallup weekly survey, researchers found that day-to-day happiness increases along with wealth until $75,000 per year. These figures must be adjusted based on cost of living and the Consumer Price Index, but the result is still around $100,000 per year — a far cry from millions of dollars.

The UBS survey found that three-quarters of millionaires feel like they’ve “made it,” but more than half feel that they’re stuck on a treadmill and unable to slow down in order to maintain their wealth. In effect, many millionaires seem to suffer from shifting goal posts associated with their improving lifestyles, which makes it difficult to be happy with lesser amounts of money and cut back on work and investment expectations.

According to psychologists, these dynamics are due to psychological factors rather than financial discipline. Humans subconsciously look at those around them for confirmation of their social and economic status, which means that wealthier individuals spending time amidst wealthier individuals tend to spend more to fit into the crowd. Scaling back the lifestyle may not seem like an option to many who are stuck inside of that loop. 

Ironically Growing Gap

These dynamics are particularly ironic given that millionaires are increasingly distancing themselves from the middle class. According to Pew Research, the wealth gap between America’s high income group and everyone else has reached record high levels. Currently, upper-income families earn approximately 6.6 times that of middle-income families, which is up from 6.2 times after the Great Recession in 2010 and under 4.0 times throughout most of the 1990s.

The study found that the Great Recession resulted in a 17% drop in upper-income family incomes compared to a nearly 40% drop in middle-income incomes. At the same time, the economic recovery greatly improved the finances of upper-income compared to lower-income families, primarily due to the greater allocation of wealth to equities and investments. Lower interest rates also made it easier for the rich to borrow to increase their buying power.

In an international context, the United States remains an outlier when it comes to wealth distribution around the world. The bottom 90% of earners take a greater than 50% share of total wealth across Europe, New Zealand and Australia, with the United Kingdom and Canada being the few developed nations below the mid-line. However, Canada – the next closest to the U.S. in uneven distribution – has a bottom 90% with twice the share of the U.S.

The Bottom Line

Millionaires have always been associated with having copious amounts of wealth, but those that have amassed such fortunes often don’t consider themselves very rich and are fearful of losing their wealth, which is ironic given the growing U.S. income gap. In some cases, these feelings are caused by underlying psychological factors. French economist Thomas Piketty has warned that unfettered capitalism will continue to lead to even greater inequality over time, since returns on investments outpace economic growth and wages earned by lower-income households.

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