Fewer Self-Made Millionaires Than You Think: A Problem?

Everyone aspires to be a self-made millionaire, but surprisingly, there are fewer self-made millionaires than commonly thought. Before finding out the answer, what percentage of millionaires do you think are self-made with no inheritance or significant financial help from their parents or relatives?

Here’s a Bank of America Private Bank Survey of Wealthy Americans that gives us some fascinating data about self-made millionaires and what the wealthy do. According to Bank of America, “wealthy” is defined as having $3 million in investable assets or more. Investable assets are assets outside your primary residence. At a 4% rate of return, $3 million would generate $120,000 a year in passive investment income.

The definition of wealth can be somewhat arbitrary, depending on factors such as personal desires, cost of living, health, and household size. However, for the most part, I believe anything above $1 million in investable assets is considered wealthy in America. With a paid-off home, $1 million in investments, and some passive income, most people can lead a comfortable life.

The survey conducted by Bank of America involved 1,052 participants with household investable assets exceeding $3 million, all aged 21 and above. “The aim was for the survey to be a statistically representative sample of the U.S. population meeting these criteria,” wrote the report.

Here are some key findings from the survey.

OK Boomers Are Wealthiest

To nobody’s surprise, the Boomer generation had the largest percentage of wealth individuals at 62% followed by my generation, Generation X at 20%. The older you get, usually the wealthier you get. The larger the population of your generation, the greater the percentage of wealthy individuals.

Less Self-Made Millionaires Than Expected

The most surprising revelation from the survey was the following information: Only 27% of respondents claimed to be self-made (with over $3 million)! In the context of the survey, being self-made referred to individuals with a middle-class or poor upbringing and no inheritance.

Conversely, a significant 28% of respondents stated that they grew up in affluence with the benefit of an inheritance. Furthermore, 46% of respondents with over $3 million in investable assets reported growing up either in affluence with no inheritance or in a middle-class environment with some inheritance.

Growing up in a middle-class environment with some inheritance is the gray area. This could include most of us eventually.

The number of self-made millionaires is fewer than you think - Chart breaking down individuals with over $3 million in investable assets and how they got their wealth

Thought The Vast Majority Were Self-Made Millionaires

For the longest time, I held the belief that 90% of wealthy individuals were self-made, not just 27%. Even if you were to add the “Head start” category of 46% to 27%, that would still only equate to 73% as self-made.

While acknowledging the existence of those who live off trust funds and secure jobs that create an illusion of self-made success, I perceived them as a tiny minority, often associated with exclusive clubs or private universities.

However, based on this data, it appears that at least 28% (Legacy wealth), and possibly up to 74% (Legacy wealth + Head start) of these millionaires, received significant financial support to get them to above $3 million in investable assets.

I see this as a problem because the ability to generate personal wealth independently is immensely gratifying. There’s a profound sense of accomplishment in realizing what one can achieve through their own efforts, especially after years of education.

With such a high percentage of affluent Americans inheriting millions, it’s understandable why there is a growing sense of dissatisfaction in our nation. As the country becomes wealthier, we risk depriving people of purpose and self-satisfaction.

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Saving About $3 Million And Then Retiring Early

Bank of America’s definition of wealthy—requiring $3 million in investable assets—is intriguing to me. The first reason is because I believe you need to have a $3 million net worth to be a real millionaire today due to inflation. When we think millionaire, we think of someone living a fabulous lifestyle.

$3 million is also an interesting threshold to be described as wealthy due to my own circumstance. When I left my job in 2012, my total net worth was around $3 million, with investable assets near $2 million, generating about $80,000 annually in passive income. The remaining one million was tied up in my primary residence, which I eventually sold in 2017.

The main reason why I felt wealthy was due to my newfound freedom. However, I didn’t feel wealthy from a financial sense because $80,000 in passive income isn’t a lot in San Francisco. If I had $3+ million in investable assets instead of ~$2 million, I probably would have felt financially wealthy.

Feel Like I’m Self-Made, But Maybe Not

Raised by middle-class federal government employees, my parents drove an eight-year-old Toyota Camry, and I commuted to school on foot or by bike. After attending a public high school, I chose The College of William & Mary partly for its affordable $2,800 annual tuition.

If surveyed by Bank of America, I would be classified as self-made. And you know what? It feels incredibly satisfying to have created my own wealth without receiving any inheritance or outside of the normal financial assistance. Building wealth involved long hours, risk taking, and luck, but I wouldn’t have it any other way.

I am grateful to have two working parents who stuck together throughout my entire childhood. They were strict about education and provided supplemental education when needed.

In December 2004, I asked my grandfather for a bridge loan to help me come up with part of my 20% downpayment on a house. However, I paid back the bridge loan within three months with interest. I knew I was getting a year end bonus, but it wouldn’t hit my bank account until February 2005.

Even though this wasn’t an inheritance or free money, being able to get a short-term loan helped me buy a house that ended up providing for a nice profit 12 years later. Hence, this is a gray area and maybe I’m not self-made after all.

Getting Lucky With Wealth Might Be A Curse

Certainly, some individuals inevitably receive inheritances or gifts from their parents or grandparents, contributing to a significant portion of substantial wealth. A large percentage of outsized wealth is due to luck.

While graciously accepting such financial gifts is logical, there’s a risk of losing motivation to earn your own money, especially if the gift is sizable enough to cover major expenses like a house, car, or top-tier education for your children. If not careful, the Bank of Mom & Dad can be real debilitator for adult children who end up never launching.

To counter this risk, I’m committed to ensuring my kids work during every summer and winter before adulthood. Engaging in minimum wage jobs will instill a robust work ethic and foster deep appreciation for subsequent employment opportunities. By discussing the costs of things, they can easily correlate the number of hours worked to the items they already possess.

Of course, money doesn’t corrupt all children. There are plenty of instances where wealthy children end up getting much wealthier due to their own self initiative. A classic example is William Henry Gates III, who grew up rich given his dad was a partner at his law firm. Now Bill is a leading philanthropist.

Such A Massive Wealth Transfer

From the report, “According to Cerulli Associations, an estimated $84 trillion is expected to transfer from baby boomers to Generation X and millennials by 2045. Of this, $72 trillion is predicted to pass to heirs, while $12 trillion is earmarked for philanthropy.”

This impending wave of wealth transfer carries the potential danger of demotivating a younger generation, leading to reduced productivity. But ultimately, this reduced productivity may potentially lead to decreased happiness.

Younger Wealthy Investors Hold Less Stocks

Another interesting finding from the survey is that younger wealthy investors and legacy wealth respondents hold less stocks.

The report says,

“Conventional investment advice suggests that younger investors hold more stocks, not fewer, than older investors. Yet the 21 to 42 age group holds just a quarter of their portfolio in stocks, compared with 55% of investors aged 43 and older.

The difference in stock holdings may be connected to confidence in traditional asset classes. Seventy-five
percent of younger people agreed that “It’s no longer possible to achieve above-average returns” on traditional
stocks and bonds alone. In comparison, only a third of the older group showed the same skepticism.”

So what are these wealthy Americans trending towards? Alternatives.

Below is a chart that shows real estate investments as the #2 post popular asset for wealthy investors after domestic equities. However, notice how investing in private growth companies, private equity, crypto, private debt, and your own personal brand/company are much higher for those ages 21-42.

Mirrors My Investing Path

Real estate has consistently been my preferred asset class for wealth-building. It stands out as a tangible asset with clear improvement potential, income generation, tax advantages, and generally lower volatility.

However, over the past fifteen years, I’ve diversified into alternative investments, driven in part by my aversion to the stock market’s volatility. As net worth grows, so does the aversion to significant market fluctuations.

This diversification led me to invest in private growth companies through various venture capital funds and venture debt funds. Simultaneously, I’ve dedicated significant effort to the growth of Financial Samurai, a source of robust cash flow.

Interestingly, despite exploring various investment avenues, the S&P 500 remains one of the most compelling long-term investments. Dividend-paying stocks, in particular, retain their status as my favorite source of passive income. Consequently, I aim to consistently allocate between 20% and 30% of my net worth to domestic U.S. equities.

When It’s Time To Transfer Assets To Our Children

To facilitate a smooth wealth transfer, my wife and I have established revocable living trusts and compiled comprehensive death files with clear instructions.

Our ideal scenario involves raising children who embody humility, a strong work ethic, and gratitude for their blessings. The intention is to assist them while we’re alive rather than leaving everything for posthumous distribution.

However, we acknowledge the possibility of raising entitled children, in which case we’re hesitant to provide financial assistance. Doing so could inadvertently reinforce a negative attitude toward work and life. We understand the need to be adaptable and flexible in these matters.

While our desire is to provide our kids with everything they need, there’s a genuine concern that having everything might lead to a lack of appreciation for anything. It’s a delicate balance we aim to navigate thoughtfully.

Reader Questions and Suggestions

Are you surprised by how low the self-made percentage is? with such a massive generational wealth transfer, how do we prevent generations from slacking off and becoming unproductive members of society? Or does it not really matter?

To smartly manage your finances for free, check out Empower and link all your assets. I’ve been using Empower (previously Personal Capital) since 2012 to track my net worth, x-ray my portfolios for excessive fees, and plan for my retirement cash flow.

To invest in private growth companies, check out the Fundrise Innovation Fund. It’s an open-ended fund with only a $10 minimum. You can see what the fund invests in before committing any capital, unlike closed-end venture capital funds. Roughly 35% of the fund is invest in artificial intelligence, which will significantly alter our future.

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