Here is how the dream of wealth works: you work hard, you receive a bit of good fortune, you make your money, your money makes more money, and eventually you are wealthy enough to pay for everything you need or want in cash.
Perhaps surprisingly, that is not how all of the wealthy people live. In fact, a significant percentage of wealthy investors maintain a notable level of debt and liabilities.
Our fourth quarter wealth segmentation series study every year looks at the way affluent investors invest and spend their money. Asset Allocation, Portfolios and Primary Providers examines the financial decisions investors make and how those decisions change from year to year.
The report looks at investors from three different wealth segments, including the wealthiest segment, the Ultra High Net Worth Investor with a net worth between $5 million and $25 million Not Including Primary Residence.
While the value of the residence is not a part of the equation of a UHNW investor’s net worth, the cost of ownership is considered a liability when those investors maintain a mortgage on that residence, and many investors do.
“A majority of Ultra High Net Worth investors work with a financial advisor, and it can be a joint decision to maintain a level of liability and debt, even for those who seem to be wealthy enough to eliminate that financial burden,’’ said Spectrem president George H. Walper Jr. “There are tax considerations that make such decisions wise. Some strategic use of loans for funding other investments can add to liabilities as well.”
Among UHNW investors, 31 percent still have a first mortgage, and the average value of that mortgage is $346,000, according to our study. That includes 61 percent of UHNW investors under the age of 48, who are holding mortgages valued at an average of $281,000. Even among UHNW investors over the age of 64, 28 percent have first mortgages, and the value of those mortgages averages $386,000.
Twelve percent of UHNW investors have second mortgages or home equity loans at an average value of $199,000.
Seventeen percent of UHNW investors have credit card debt, to the tune of an average of $98,000. That again includes more than half (58 percent) of UHNW investors under the age of 48, who have credit card debt equaling $143,000.
Similarly, 17 percent of UHNW investors have automobile loans, and the average loan amounts equal $91,000.
For comparison purposes, note that 40 percent of Millionaire investors have first mortgages, 21 percent have credit card balances and 25 percent have automobile loans. Among Mass Affluent investors, 52 percent have first mortgages, 38 percent report credit card liabilities and 35 percent have automobile loans.
Notably, the wealthiest UHNW investors are the ones most likely to have liabilities in the form of loans and credit. Among those with $15 million to $25 million in net worth, 32 percent still have a first mortgage, 22 percent have credit card balances totaling $359,000 by average and 15 percent have automobile loans.