Macro Economics and Personal Finance

[panda]

Below are the Networth and Household income % in the United States. Over the last 4 years, I have interviewed several top wealth managers, commercial brokers, and investors of what their personal retirement portfolio looks like. The problem I have seen with the top financial advisors is that they do not own income properties as the foundation of their retirement portfolio. Financial advisors have most of their networth in stocks and most of the top commercial brokers do not personally own any commerical properties, but many do own either apartments, multi-family, and single family homes which I believe are the best asset classes to own in your personal retirement portfolio.

I have a well thought out wealth management process that I wanted to share with all of you. The question you need to ask yourself is what % of my assets should I allocate to my innovative entrepeneurial ventures? What % should I allocate towards real estate and stocks? What % should you allocated to qualified retirement programs, annuities and life insurance?  and What are the expected returns can I expect from each of these asset allocations?

Source: 2013 data from Tax Policy Center

%                Networth                              Estimated 5% passive income (Annual basis)

99.90 %      $30,644,280.00                  $1,532,214
99.50 %      $11,898,128.00                  $594,906
99.00 %      $7,869,549.00                    $393,477
95.00 %      $1,868,640.00                    $93,432 
90.00 %      $943,656.00                        $47,182
80.00%        $428,540.00
70.00%        $247,026.00
60.00%        $147,732.00
50.00%        $81,456.00
40.00%        $38,322.00
30.00%        $14,840.00
20.00%        $4,314.00
10.00%        -$2,066.00

Household Annual Income

99.00 %        $521,411
95.00 %        $208,810 
90.00 %        $148,688
80.00 %        $107,628

 

[momopi]

Panda, I think this depends on the person's risk tolerance level and how they perceive risk.  I've personally meet a few who would lose sleep and develop high blood pressure from the stress of owning a rental property.

Personally, I see real estate as a real, physical asset that's more stable than the stock market.  I can kick the house in person (unlike stocks held at internet brokerage) and, even if the SFR burns down I still have a plot of land to grow potatoes.  But not everyone thinks like me.

 

[panda]

Momopi,

It is good hearing from you again. I believe that one should start out by looking for investment properites in their own backyard, but i can understand that it is extremely difficult to cash flow in a market like Socal where the cap rates are very low. I guess in this case it does make sense of why onw would want to invest out of state. The reason why some people lose sleep and have a miserable time being a landlord is most likely due to bad tenant selection. If you find an "A" caliber, I believe that 95% of all property mangement issues and headache will go away. From a passivity standpoint and according to my research, I believe that Single Family Home rentals are best passive assets vs retail, office, industrial and even larger apartment complexes and multi-family.

It is not a question of whether one should invest stocks or real estate as I believe that there is place for both asset classes in one's portfolio. When I look at the portfolio of my wealthier clients, most of their asset allocation is split between their S-Corporations, Real Estate Income Properties, and Stocks. I see minor allocations between 5-7% in their qualified retirement accounts, annuities, and life insurance.  Rarely do i see an allocation that is higher than 25% in stocks, more than often the allocation is between 20 - 25% split between their after tax and before tax equity positions.

I believe that innovative entreprises (SCorps) and a portfolio of income properties are two of the best vehicles that will accelerate the velocity of one's wealth.

 

[panda]

 

[panda]

I have read a lot of books in finance and real estate since my early 20s, but on thing that has always been consistent in my readings for the past 18 years is the wealth profile of a millionaire. In chart above you can see what I consider to be an ideal asset allocation wealth profile for the middle class millionaire. Middle Class Millionaires are defined by anyone with a networth between $1M to $3M. Upper class millionaires have a net worth between $3M to $10M. One thing that is interesting is that you can see that only a small allocation (between 5-7%) of a millionaire's networth is allocated to annuities and life insurance. Anybody want to take a guess why that is? Another question I have for all of you is why do you thinking planning for estate taxes is not very important for the middle class millionaire, but extremely important for the upper class millionaire?

Here is how the middle class and the upper class millionaire differ in interests and responsibilities.
                                                                          Middle Class Millonaire                Upper Class Millionaire
1) Making sure your heirs are taken care of :                    66.9%                                  93.6%
2) Having adequate medical insurance:                            78.1%                                    76.4%
3) Having enough money for retirement:                          87.3%                                    53%
4) Paying for children education (529 etc)                          65.2%                                  28.6%
5) Losing your job or business                                          48.4 %                                      30.5%
6) Taking care of parents                                                38.4%                                    16.1%
7) Mitigating income taxes                                              90.1%                                    77.3%
8) Mitigating estate taxes                                                21.7%                                    81.3%
9) Mitigating capital gains taxes                                        27.1%                                    58.5%                     
   
               

 

[jerometl]

One thing that is interesting is that you can see that only a small allocation (between 5-7%) of a millionaire's networth is allocated to annuities and life insurance. Anybody want to take a guess why that is? Another question I have for all of you is why do you thinking planning for estate taxes is not very important for the middle class millionaire, but extremely important for the upper class millionaire?

Life Insurance sole purpose should only be to protect your family in case something happens to the bread winner.  Most of the millionaire don't really need this protection as they would already have enough assets/savings elsewhere.  As for annuities, I still don't know any possible scenario why you would buy annuities vs other alternative investments.

For estate taxes, for a middle class millionaire, i would think a huge chunk of their asset would still be within the tax exemption limit if they die, thus taxable estate would not be that huge (thus not a top priority).  Taxable estate though would be huge for upper class millionaire thus the need to plan for it.

 

[irvinehomeowner]

Notice how retirement is 2nd to reducing income taxes. Much higher than children's education.

+1 for the QwerIHO bros.

 

[Bullsback]

One thing that is interesting is that you can see that only a small allocation (between 5-7%) of a millionaire's networth is allocated to annuities and life insurance. Anybody want to take a guess why that is? Another question I have for all of you is why do you thinking planning for estate taxes is not very important for the middle class millionaire, but extremely important for the upper class millionaire?

Life Insurance sole purpose should only be to protect your family in case something happens to the bread winner.  Most of the millionaire don't really need this protection as they would already have enough assets/savings elsewhere.  As for annuities, I still don't know any possible scenario why you would buy annuities vs other alternative investments.

For estate taxes, for a middle class millionaire, i would think a huge chunk of their asset would still be within the tax exemption limit if they die, thus taxable estate would not be that huge (thus not a top priority).  Taxable estate though would be huge for upper class millionaire thus the need to plan for it.

On 2nd question, I completely agree with you. Someone from 1-3M shouldn't be concerned with estate taxes. They might have estate concerns, i.e., ensuring process is smooth for their family / trust structures, etc, but taxes really shouldn't be a concern (Fed Exemption is just north of $5M). 

In terms of Life, I presume the reason you don't see a significant allocation is, it depends on the product and needs and products have significant differences. Many might prefer the standard term protection vs. the more complex life products. The more complex life products and annuities, provide some of the largest value, to the more wealthy clients, but those are still protection type products so why would a significant portion of your asset class reside their? A lot of it is one of many ways to structure potential wealth transfers between families for those very wealthy families. 

Panda - Also note, I don't know why someone would need CD @ 100K, FDIC insured limits are 250K.  Your table is also pretty limiting, imo, as you just presume someone should own a business and have that as a portion of their asset class.

 

[panda]

GH, Good answer! I believe in life insurance for two things. Term Life Insurance makes sense for a young family who does not have much assets. If breadwinner has a million dollar term life insurance suddenly passes away, his wife and young children will be taken care of for a while. A millionaire is now self-insured with his own business and investments where the life insurance policy is less important to him or her.

Any net worth above 5,450,000 as of 2015 will be taxed at 40%. This is why i also believe in life insurance as an estate planning tool and the reason why estate taxes are extremely for the penta millionaire and above. 

One thing that is interesting is that you can see that only a small allocation (between 5-7%) of a millionaire's networth is allocated to annuities and life insurance. Anybody want to take a guess why that is? Another question I have for all of you is why do you thinking planning for estate taxes is not very important for the middle class millionaire, but extremely important for the upper class millionaire?

Life Insurance sole purpose should only be to protect your family in case something happens to the bread winner.  Most of the millionaire don't really need this protection as they would already have enough assets/savings elsewhere.  As for annuities, I still don't know any possible scenario why you would buy annuities vs other alternative investments.

For estate taxes, for a middle class millionaire, i would think a huge chunk of their asset would still be within the tax exemption limit if they die, thus taxable estate would not be that huge (thus not a top priority).  Taxable estate though would be huge for upper class millionaire thus the need to plan for it.

 

[panda]

Bullsback,
If you research the vocational occupations of millionaires, you will find that 32% are business owners, 16% senior corporate executives, 10% attorneys, 9% physicians, 33% are others. I believe the greatest tax benefits are given to S-Corporations and real estate investors. You want to focus on building your net worth and passive income more than growing your income as your earned income is taxed at 50%, portfolio income at 20%, and if you are smart, you will pay 0% on your passive income.

I personally believe somewhere between $200k - $250k is the optimal household income of happiness and you will be taxed at a much higher rate if you in the top 1% income earner in state of California which is about $500k.

Why is owning a Corp important? Because if I look back at my investment track record for the past 18 years. I can't tell you that I have consistently grew my stock portfolio and real estate portfolio at 26% a year ( where assets double every 3 years), but Corps as an asset class has grown between 25-50% a year if you look at small profitable businesses as an asset class. This is the reason, why 1/3 of the millionaire population are business owners.

One thing that is interesting is that you can see that only a small allocation (between 5-7%) of a millionaire's networth is allocated to annuities and life insurance. Anybody want to take a guess why that is? Another question I have for all of you is why do you thinking planning for estate taxes is not very important for the middle class millionaire, but extremely important for the upper class millionaire?

Life Insurance sole purpose should only be to protect your family in case something happens to the bread winner.  Most of the millionaire don't really need this protection as they would already have enough assets/savings elsewhere.  As for annuities, I still don't know any possible scenario why you would buy annuities vs other alternative investments.

For estate taxes, for a middle class millionaire, i would think a huge chunk of their asset would still be within the tax exemption limit if they die, thus taxable estate would not be that huge (thus not a top priority).  Taxable estate though would be huge for upper class millionaire thus the need to plan for it.

On 2nd question, I completely agree with you. Someone from 1-3M shouldn't be concerned with estate taxes. They might have estate concerns, i.e., ensuring process is smooth for their family / trust structures, etc, but taxes really shouldn't be a concern (Fed Exemption is just north of $5M). 

In terms of Life, I presume the reason you don't see a significant allocation is, it depends on the product and needs and products have significant differences. Many might prefer the standard term protection vs. the more complex life products. The more complex life products and annuities, provide some of the largest value, to the more wealthy clients, but those are still protection type products so why would a significant portion of your asset class reside their? A lot of it is one of many ways to structure potential wealth transfers between families for those very wealthy families. 

Panda - Also note, I don't know why someone would need CD @ 100K, FDIC insured limits are 250K.  Your table is also pretty limiting, imo, as you just presume someone should own a business and have that as a portion of their asset class.

 

[Bullsback]

Bullsback,
If you look research the vocation occupations of millionaires, you will find that 32% are business owners, 16% senior corporate executives, 10% attorneys, 9% physicians, 33% are others. I believe the greatest tax benefits are given to S-Corporations and real estate investors. You want to focus on building your net worth and passive income more than growing your income as your earned income is taxed at 50%, portfolio income at 20%, and if you are smart, you will pay 0% on your passive income. I believe somewhere between $200k - $250k is the optimal household income of happiness and you will be taxed at a much higher rate if you in the top 1% of income earner which is about $500k for California residents.

Why is owning a Corp important? Because if I look back at all of my investments in the past 18 years. I can't tell you that I have consistently grew my stock portfolio and real estate portfolio at 26% a year ( where assets double every 3 years), but Corps as an asset class has grows between 25-50% a year if you look at small profitable businesses as an asset class. This is the reason, why 1/3 of the millionaire population are business owners.

One thing that is interesting is that you can see that only a small allocation (between 5-7%) of a millionaire's networth is allocated to annuities and life insurance. Anybody want to take a guess why that is? Another question I have for all of you is why do you thinking planning for estate taxes is not very important for the middle class millionaire, but extremely important for the upper class millionaire?

Life Insurance sole purpose should only be to protect your family in case something happens to the bread winner.  Most of the millionaire don't really need this protection as they would already have enough assets/savings elsewhere.  As for annuities, I still don't know any possible scenario why you would buy annuities vs other alternative investments.

For estate taxes, for a middle class millionaire, i would think a huge chunk of their asset would still be within the tax exemption limit if they die, thus taxable estate would not be that huge (thus not a top priority).  Taxable estate though would be huge for upper class millionaire thus the need to plan for it.

On 2nd question, I completely agree with you. Someone from 1-3M shouldn't be concerned with estate taxes. They might have estate concerns, i.e., ensuring process is smooth for their family / trust structures, etc, but taxes really shouldn't be a concern (Fed Exemption is just north of $5M). 

In terms of Life, I presume the reason you don't see a significant allocation is, it depends on the product and needs and products have significant differences. Many might prefer the standard term protection vs. the more complex life products. The more complex life products and annuities, provide some of the largest value, to the more wealthy clients, but those are still protection type products so why would a significant portion of your asset class reside their? A lot of it is one of many ways to structure potential wealth transfers between families for those very wealthy families. 

Panda - Also note, I don't know why someone would need CD @ 100K, FDIC insured limits are 250K.  Your table is also pretty limiting, imo, as you just presume someone should own a business and have that as a portion of their asset class.

Panda - I understand that the majority of millionaires are business owners. However, if you are not a business owner, your asset allocation is worthless. If I am an executive or lawyer for legal firm, unless I plan on going independent (which for an executive...unlikely unless you want to be a consultant and for a lawyer, more doable, but even than, depending on what you do, might not be in your best interest, all depends on your skillsets). 

Now if you are saying as someone who works in Corporate America, I should just go buy a business and make that part of my allocation, well than I understand, but I'd also argue that my time is best served doing what I do best and enhancing what I do best. Working a full time job and than buying a company (say starting a franchise or whatever it might be) might be the dumbest possible thing I could do. Upside could exist, but the responsibility and time that it truly takes to be successful is substantial and to put that time in, I'm tossing my existing pay away and in reality changing career paths.  Not something I'm interested in and I presume most people that fit this bill would be uninterested in it as well (and would much prefer to use their excess capital on potential rental properties or investing in the markets through (via index or whatever suits your boat). 

 

[panda]

I would like to ask question to the TI audience. Can someone who works a J.O.B. and makes between $200k - $250k / year as a W2 employee share with us what your annual net is after you pay federal taxes, california state tax, medicare, and social security?

Can someone please explain to me why S-Corporations are valuable in growing wealth and why large % of millionaires own 1,2 or multiple S-Corps?

Bullsback,
If you look research the vocation occupations of millionaires, you will find that 32% are business owners, 16% senior corporate executives, 10% attorneys, 9% physicians, 33% are others. I believe the greatest tax benefits are given to S-Corporations and real estate investors. You want to focus on building your net worth and passive income more than growing your income as your earned income is taxed at 50%, portfolio income at 20%, and if you are smart, you will pay 0% on your passive income. I believe somewhere between $200k - $250k is the optimal household income of happiness and you will be taxed at a much higher rate if you in the top 1% of income earner which is about $500k for California residents.

Why is owning a Corp important? Because if I look back at all of my investments in the past 18 years. I can't tell you that I have consistently grew my stock portfolio and real estate portfolio at 26% a year ( where assets double every 3 years), but Corps as an asset class has grows between 25-50% a year if you look at small profitable businesses as an asset class. This is the reason, why 1/3 of the millionaire population are business owners.

One thing that is interesting is that you can see that only a small allocation (between 5-7%) of a millionaire's networth is allocated to annuities and life insurance. Anybody want to take a guess why that is? Another question I have for all of you is why do you thinking planning for estate taxes is not very important for the middle class millionaire, but extremely important for the upper class millionaire?

Life Insurance sole purpose should only be to protect your family in case something happens to the bread winner.  Most of the millionaire don't really need this protection as they would already have enough assets/savings elsewhere.  As for annuities, I still don't know any possible scenario why you would buy annuities vs other alternative investments.

For estate taxes, for a middle class millionaire, i would think a huge chunk of their asset would still be within the tax exemption limit if they die, thus taxable estate would not be that huge (thus not a top priority).  Taxable estate though would be huge for upper class millionaire thus the need to plan for it.

On 2nd question, I completely agree with you. Someone from 1-3M shouldn't be concerned with estate taxes. They might have estate concerns, i.e., ensuring process is smooth for their family / trust structures, etc, but taxes really shouldn't be a concern (Fed Exemption is just north of $5M). 

In terms of Life, I presume the reason you don't see a significant allocation is, it depends on the product and needs and products have significant differences. Many might prefer the standard term protection vs. the more complex life products. The more complex life products and annuities, provide some of the largest value, to the more wealthy clients, but those are still protection type products so why would a significant portion of your asset class reside their? A lot of it is one of many ways to structure potential wealth transfers between families for those very wealthy families. 

Panda - Also note, I don't know why someone would need CD @ 100K, FDIC insured limits are 250K.  Your table is also pretty limiting, imo, as you just presume someone should own a business and have that as a portion of their asset class.

Panda - I understand that the majority of millionaires are business owners. However, if you are not a business owner, your asset allocation is worthless. If I am an executive or lawyer for legal firm, unless I plan on going independent (which for an executive...unlikely unless you want to be a consultant and for a lawyer, more doable, but even than, depending on what you do, might not be in your best interest, all depends on your skillsets). 

Now if you are saying as someone who works in Corporate America, I should just go buy a business and make that part of my allocation, well than I understand, but I'd also argue that my time is best served doing what I do best and enhancing what I do best. Working a full time job and than buying a company (say starting a franchise or whatever it might be) might be the dumbest possible thing I could do. Upside could exist, but the responsibility and time that it truly takes to be successful is substantial and to put that time in, I'm tossing my existing pay away and in reality changing career paths.  Not something I'm interested in and I presume most people that fit this bill would be uninterested in it as well (and would much prefer to use their excess capital on potential rental properties or investing in the markets through (via index or whatever suits your boat). 

 

[panda]

Bullsback,
If you love your job and this job fully utilizes your aptitude and abilities more power to you. Personally I believe that a W2 J.O.B. is legalized slavery in America. Sorry if i offended anyone.

I am just a firm believer that Corps (Innovative enterprises) and real estate investments are best asset classes to reach financial freedom mostly due to the tax advantages you get over a W2 employee. As a W2 your qualified retirement plans like the 401k, IRAs are probably going to be a much larger percentage of your net worth compared to the 20-25% allocation I have in my chart. I believe in self-insuring your retirement way before you are 59.5. When you start withdrawing from your 401k at 59.5 and who is say that you are going to be living past 65?

If you haven't take care of your health all these years and have had high LDL cholesterol at 400, your A1C blood sugar at 10%+, diabetes, high levels of stress etc, and suddenly die at the age of 65 from a sudden heart attack, you just sacrificed and worked your butt off in a W2 J.O.B. all these years to enjoy your 401k for ONLY 5 years? That seems a little backwards to me. 

Bullsback,
If you look research the vocation occupations of millionaires, you will find that 32% are business owners, 16% senior corporate executives, 10% attorneys, 9% physicians, 33% are others. I believe the greatest tax benefits are given to S-Corporations and real estate investors. You want to focus on building your net worth and passive income more than growing your income as your earned income is taxed at 50%, portfolio income at 20%, and if you are smart, you will pay 0% on your passive income. I believe somewhere between $200k - $250k is the optimal household income of happiness and you will be taxed at a much higher rate if you in the top 1% of income earner which is about $500k for California residents.

Why is owning a Corp important? Because if I look back at all of my investments in the past 18 years. I can't tell you that I have consistently grew my stock portfolio and real estate portfolio at 26% a year ( where assets double every 3 years), but Corps as an asset class has grows between 25-50% a year if you look at small profitable businesses as an asset class. This is the reason, why 1/3 of the millionaire population are business owners.

One thing that is interesting is that you can see that only a small allocation (between 5-7%) of a millionaire's networth is allocated to annuities and life insurance. Anybody want to take a guess why that is? Another question I have for all of you is why do you thinking planning for estate taxes is not very important for the middle class millionaire, but extremely important for the upper class millionaire?

Life Insurance sole purpose should only be to protect your family in case something happens to the bread winner.  Most of the millionaire don't really need this protection as they would already have enough assets/savings elsewhere.  As for annuities, I still don't know any possible scenario why you would buy annuities vs other alternative investments.

For estate taxes, for a middle class millionaire, i would think a huge chunk of their asset would still be within the tax exemption limit if they die, thus taxable estate would not be that huge (thus not a top priority).  Taxable estate though would be huge for upper class millionaire thus the need to plan for it.

On 2nd question, I completely agree with you. Someone from 1-3M shouldn't be concerned with estate taxes. They might have estate concerns, i.e., ensuring process is smooth for their family / trust structures, etc, but taxes really shouldn't be a concern (Fed Exemption is just north of $5M). 

In terms of Life, I presume the reason you don't see a significant allocation is, it depends on the product and needs and products have significant differences. Many might prefer the standard term protection vs. the more complex life products. The more complex life products and annuities, provide some of the largest value, to the more wealthy clients, but those are still protection type products so why would a significant portion of your asset class reside their? A lot of it is one of many ways to structure potential wealth transfers between families for those very wealthy families. 

Panda - Also note, I don't know why someone would need CD @ 100K, FDIC insured limits are 250K.  Your table is also pretty limiting, imo, as you just presume someone should own a business and have that as a portion of their asset class.

Panda - I understand that the majority of millionaires are business owners. However, if you are not a business owner, your asset allocation is worthless. If I am an executive or lawyer for legal firm, unless I plan on going independent (which for an executive...unlikely unless you want to be a consultant and for a lawyer, more doable, but even than, depending on what you do, might not be in your best interest, all depends on your skillsets). 

Now if you are saying as someone who works in Corporate America, I should just go buy a business and make that part of my allocation, well than I understand, but I'd also argue that my time is best served doing what I do best and enhancing what I do best. Working a full time job and than buying a company (say starting a franchise or whatever it might be) might be the dumbest possible thing I could do. Upside could exist, but the responsibility and time that it truly takes to be successful is substantial and to put that time in, I'm tossing my existing pay away and in reality changing career paths.  Not something I'm interested in and I presume most people that fit this bill would be uninterested in it as well (and would much prefer to use their excess capital on potential rental properties or investing in the markets through (via index or whatever suits your boat). 

 

[Bullsback]

Bullsback,
If you love your job and this job fully utilizes your aptitude and abilities more power to you. Personally I believe that a W2 J.O.B. is legalized slavery in America. Sorry if i offended anyone.

I am just a firm believer that Corps (Innovative enterprises) and real estate investments are best asset classes to reach financial freedom mostly due to the tax advantages you get over a W2 employee. As a W2 your qualified retirement plans like the 401k, IRAs are probably going to be a much larger percentage of your net worth compared to the 20-25% allocation I have in my chart. I believe in self-insuring your retirement way before you are 59.5. When you start withdrawing from your 401k at 59.5 and who is say that you are going to be living past 65?

If you haven't take care of your health all these years and have had high LDL cholesterol at 400, your A1C blood sugar at 10%+, diabetes, high levels of stress etc, and suddenly die at the age of 65 from a sudden heart attack, you just sacrificed and worked your butt off in a W2 J.O.B. all these years to enjoy your 401k for ONLY 5 years? That seems a little backwards to me. 

Bullsback,
If you look research the vocation occupations of millionaires, you will find that 32% are business owners, 16% senior corporate executives, 10% attorneys, 9% physicians, 33% are others. I believe the greatest tax benefits are given to S-Corporations and real estate investors. You want to focus on building your net worth and passive income more than growing your income as your earned income is taxed at 50%, portfolio income at 20%, and if you are smart, you will pay 0% on your passive income. I believe somewhere between $200k - $250k is the optimal household income of happiness and you will be taxed at a much higher rate if you in the top 1% of income earner which is about $500k for California residents.

Why is owning a Corp important? Because if I look back at all of my investments in the past 18 years. I can't tell you that I have consistently grew my stock portfolio and real estate portfolio at 26% a year ( where assets double every 3 years), but Corps as an asset class has grows between 25-50% a year if you look at small profitable businesses as an asset class. This is the reason, why 1/3 of the millionaire population are business owners.

One thing that is interesting is that you can see that only a small allocation (between 5-7%) of a millionaire's networth is allocated to annuities and life insurance. Anybody want to take a guess why that is? Another question I have for all of you is why do you thinking planning for estate taxes is not very important for the middle class millionaire, but extremely important for the upper class millionaire?

Life Insurance sole purpose should only be to protect your family in case something happens to the bread winner.  Most of the millionaire don't really need this protection as they would already have enough assets/savings elsewhere.  As for annuities, I still don't know any possible scenario why you would buy annuities vs other alternative investments.

For estate taxes, for a middle class millionaire, i would think a huge chunk of their asset would still be within the tax exemption limit if they die, thus taxable estate would not be that huge (thus not a top priority).  Taxable estate though would be huge for upper class millionaire thus the need to plan for it.

On 2nd question, I completely agree with you. Someone from 1-3M shouldn't be concerned with estate taxes. They might have estate concerns, i.e., ensuring process is smooth for their family / trust structures, etc, but taxes really shouldn't be a concern (Fed Exemption is just north of $5M). 

In terms of Life, I presume the reason you don't see a significant allocation is, it depends on the product and needs and products have significant differences. Many might prefer the standard term protection vs. the more complex life products. The more complex life products and annuities, provide some of the largest value, to the more wealthy clients, but those are still protection type products so why would a significant portion of your asset class reside their? A lot of it is one of many ways to structure potential wealth transfers between families for those very wealthy families. 

Panda - Also note, I don't know why someone would need CD @ 100K, FDIC insured limits are 250K.  Your table is also pretty limiting, imo, as you just presume someone should own a business and have that as a portion of their asset class.

Panda - I understand that the majority of millionaires are business owners. However, if you are not a business owner, your asset allocation is worthless. If I am an executive or lawyer for legal firm, unless I plan on going independent (which for an executive...unlikely unless you want to be a consultant and for a lawyer, more doable, but even than, depending on what you do, might not be in your best interest, all depends on your skillsets). 

Now if you are saying as someone who works in Corporate America, I should just go buy a business and make that part of my allocation, well than I understand, but I'd also argue that my time is best served doing what I do best and enhancing what I do best. Working a full time job and than buying a company (say starting a franchise or whatever it might be) might be the dumbest possible thing I could do. Upside could exist, but the responsibility and time that it truly takes to be successful is substantial and to put that time in, I'm tossing my existing pay away and in reality changing career paths.  Not something I'm interested in and I presume most people that fit this bill would be uninterested in it as well (and would much prefer to use their excess capital on potential rental properties or investing in the markets through (via index or whatever suits your boat). 

So I work a J.O.B. as you describe it. Working a job does not prevent me from getting in real estate, but as you put it, I should never have gotten a job and just went into real estate.  How exactly do you go about this without starting with a big hand me down from someone, how do I go about obtaining the capital to just begin buying up real estate? Just curious? If I don't work a J.O.B. and leverage that JOB to accumulate capital, how exactly do I launch my own business or buy a bunch of real estate (outside of having a skillset to innovate and come up with a creative invention...which is not my forte...I'm a numbers guy). 

Certainly, had I invented something or engineered something, you could get to a different answer, but kick-starting a business isn't incredibly easy and even to open up a franchise takes access to cash and has its own risks. If you consider making in the 200 - 400K range in JOB income slavery, than I think you have no idea what slavery is (and while yes...I do get taxed at a higher rate and I find that absolutely absurd...I also get plenty of benefits I wouldn't get as a business owner...subsidized health costs, 401K matches, flexibility for time off, etc).  And any successful business owner I know (and my dad is a business owner) has gotten their by being a "slave" to their business (that said, I hate even using the world slave)...unless you got something handed to you.  You seem to come up with a lot of assumptions based upon "Theory's" and just well these are the stats, so this must be what you do. You can't just say, lets see, become business owner, now invest at this allocation.  The key somewhere along the line is to be a successful business owner and to do that takes a variety of skil-sets and a certain risk appetite (and their are other avenues that you can do in life). I do agree, working a JOB, I'll never become a billionaire or be worth tens of millions, but I'm okay with that (I also feel via my projected path, I have limited downside of filing a BK or being concerned about my retirement prospects or even providing my kids with some help.

Lets look at Donald Trump and study him...be obnoxious, get handed buttloads of money to start an empire, invest in real estate (when stuff goes wrong, file BK, leverage protections...start over). Okay...I suppose I could hit the be obnoxious part and invest in real estate part, but the part of get handed buttloads of money from my parents just doesn't apply.  And if you just graduate college, a bank isn't going to just hand you a loan to start a business (you got to get the money / experience somewhere to understand what you are doing and even have a shot at succeeding). 

If you could just look at what all mega millionaires did and copy it, everyone would be a mega millionaire.  Now my strategy might have been different if I had inherited a few million bucks and had some capital as a starting point, but otherwise, you are going to have to work it up and build it up slowly over time...only way I personally know how to do that is leveraging my skills at a JOB. 

 

[panda]

Bullsback,

The difference between a true millionaire who built his wealth from scratch through hard work, wise investing, and discipline vs a fake millionaire who inherited  a million dollars from his wealthy parents is that the true millionaire will have the financial wisdom, discipline, and IQ to know how to multiply his wealth and become a multimillionaire, then a penta millionaire ($5M), and if he is a financial genius will become a deca millionaire ($10M) in his 50s.

More likely the fake millionaire will lose wealth as quickly as he or she has inherited it as he or she never acquired the financial IQ and wisdom to build his or her first million dollars in the first place. Most of the millionaires I have met, including several close friends and personal clients, did not grow up in a gated community or from an affluent neighborhood, but they grew up from solid middle class families. As wealthy as they are today, they are still hold middle class values at heart.

 

[Bullsback]

By the way Panda, I should point out, I fully expect to fall somewhere in the penta and deca range (in today's dollars) when I am in my 50's and 60's.  So I would like to think I will fit into the topics you are pointing out, I'm just saying that I'm leveraging what I feel are my best skills to get their (while also considering risk) and in my case at the current point in time, I feel that I'm best suited working a job in Corporate America. 

 

[qwerty]

Panda - you seem to think an S-Corp itself is the pathway to riches? The S-Corp is just one of the mechanisms for legal/tax reasons to protect the monetary benefits generated by a business with a good/great idea. The key is having the idea to make the money, the s-Corp has nothing to do with it.

Like bullsback said, many business owners are slaves to their businesses - it takes a certain personality to own your own business, thats why there aren't many business owners relative to w2 workers.

 

[panda]

Congratulations Bullsback,

You seem to be very healthy financially. If you are penta by the time you in your mid to late 40s, your net worth is in the top 1% of wealth.

In opinion, a penta can retire and live a very nice and comfortable lifestyle even in the nicer parts of Irvine. As a penta, you would not have to worry about being hit by a 40% estate tax like a deca would. I like the penta.

By the way Panda, I should point out, I fully expect to fall somewhere in the penta and deca range (in today's dollars) when I am in my 50's and 60's.  So I would like to think I will fit into the topics you are pointing out, I'm just saying that I'm leveraging what I feel are my best skills to get their (while also considering risk) and in my case at the current point in time, I feel that I'm best suited working a job in Corporate America. 

 

[panda]

Qwerty,
You are right that most businesses fail. I am not qualified to tell people what innovative entreprises to start as their own business. I would assume for one to have the best chances to succeed, the business they are in is a vocation of love that would fully utilize his or her passions, aptitude, and abilities. 

Corps, Stocks, and Real Estate are all just vehicles and asset classes to build wealth. I just think that Corps have the highest velocity to build wealth.

You can also lose your shirt investing in stocks and even real estate if you don't know what you are doing. And yes, you can also fail in your own business if you are not passionate about the business you are in. If you do your research on what a millionaire's wealth profile looks like, you will see that many are successful business owners who operate as a corporation. 

Panda - you seem to think an S-Corp itself is the pathway to riches? The S-Corp is just one of the mechanisms for legal/tax reasons to protect the monetary benefits generated by a business with a good/great idea. The key is having the idea to make the money, the s-Corp has nothing to do with it.

Like bullsback said, many business owners are slaves to their businesses - it takes a certain personality to own your own business, thats why there aren't many business owners relative to w2 workers.

 

[eyephone]

I like Panda's insights.

From a liability perspective, a business should be incorporated or LLC.