Are you technically rich? Why it matters.

When I was a kid, we used to talk about the rich being millionaires. Based on the rundown house I saw that just sold for a million in Toronto’s Beach neighbourhood, my image of the millionaire is now blown.

In 2015, what is rich anyway? The definition can be important as I have seen many people who I would define as rich, but who live their life as though their wealth could disappear any day. They may have plenty of money, but they certainly aren’t comfortable spending it.

We all know people who spend a lot of money and drive very nice cars. But what if it is largely built on debt? What if someone has $5 million in an investment account, but drives a 12-year-old car and hasn’t fixed up their home in 30 years? Are they rich?

One question is whether the answer even matters. As a Financial Planner I truly believe it does. There are three reasons.

The first is that peace of mind is something very valuable. A number of people who do not have financial peace of mind because of their fears of running out of money can lower their stress if they see clearly that they are in very good financial shape — even under a bad scenario.

The second is that if you truly understand and accept that you are financially in good shape, it can change your behaviour around money. You may spend more on yourself, you may be more generous with family who may need it, you may be more generous with charities.

Thirdly, there are potential tax and investing benefits to knowing that you are “rich.” On the investing side, rather than leaving $500,000 in cash because “you never know,” you can invest more for growth with the knowledge that you can easily withstand any short or medium downturns in your wealth. On the tax side, we often ask the question “if you are virtually certain to be able to cover all of your financial needs for the rest of your life, with a healthy cushion, would you rather pay $1.5 million in lifetime taxes or $1 million in lifetime taxes?” The question is relevant because there are a number of planning options that can be done differently if you are not worried about spending all of your money in your lifetime.

What about wealth by actual numbers? To find some of those answers I turned to the Cap Gemini/RBC Wealth Management 2015 World Wealth Report. In this analysis, they break “rich” down into three categories: High net worth Those with US$1 million to US$5 million of investable assets — not including the primary residence and other hard assets like cars or jewelry. Canada has roughly 298,000 individuals in this category — a little less than one per cent of the population. Mid-tier millionaires Those with US$5 million to US$30 million of investable assets. Canada has roughly 30,000 in this category — a little less than 0.1 per cent of the population. Ultra-high net worth Those with more than US$30 million of investable assets. Canada has roughly 3,300 in this category — about .01 per cent of the population.

Of course, one of the challenges with these criteria is that it doesn’t include a primary residence. For an awful lot of Vancouver and Toronto residents, all they have to do is sell their house and they will instantly become high net worth. Another challenge is the value of the Canadian dollar. When the dollar was at par, there were a lot more high-networth Canadians than when it is at 75 cents. However, if you live in Canada most of the year, you didn’t really become any poorer just because the Canadian dollar declined.

As you can see, defining if you are rich can take on many different measures.

If you’re still not sure you qualify, here is a little test to determine if you are “rich”: 1. Is your total household net worth, including your primary residence, worth more than $2 million (in Canadian dollars)? 2. In a typical year, does your net worth grow in value? More specifically, does your household spend less in a year than your after-tax income from employment plus aftertax growth on investments and real estate? 3. Would you agree with the statement “I rarely or never worry about running out of money?” 4. Would you agree with the statement “I rarely or never worry about being able to afford the items that I reasonably want to get (not including the dream items)?” 5. I believe I will likely leave an estate to family and/ or charity that will exceed $2 million (Canadian) in today’s dollars.

If you answered “yes” to at least four of the five questions, I believe from a Canadian standpoint, you would be considered rich (as subjective as this is).

Having said that, I find that most Canadians do not consider themselves rich, regardless of their current wealth, income, spending habits or comfort level.

Maybe it is something in our culture that keeps many of us modest about money. It seems that no matter what we have, there is always a fear of what may come up around the corner. This fear often causes those who have a fair amount of wealth to live cautiously. I guess that is likely what made many of them wealthy in the first place.

The only challenge with this cautious approach is whether wealth is wasted on the rich. After all, if you have the money and the latest research says you can’t take it with you, how can you make the most of it?

That is a topic for another day.

Ted Rechtshaffen is President and Wealth Advisor at TriDelta Financial, a boutique wealth management firm focusing on investment counselling and estate planning.

We all know people who spend a lot of money and drive very nice cars