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Just wanted to point out I made a mistake in language in the original post.

http://boards.fool.com/Message.asp?mid=14479504

The following paragraph has been revised with the correction in bold.

"Let's assume that the 23-years-plus millionaires (183 millionaires) are among the 50% that have little or no mortgage (<$100,000). What you'll then find is that of the millionaires who have lived in their home for LESS THAN 23 years (550 millionaires), 80% CARRY MORTGAGES. In fact 45% of those remaining millionaires (<23 years) have mortgages of more than $300,000."

LF
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". In fact 45% of those remaining millionaires (<23 years) have mortgages of more than $300,000."

Could be that in STanley's skewed distribution of looking for millionaires (and he did say he had pockets), that he missed the average signficantly....you can slice and dice this forever.

Stanley did not survey all millionaires. He admits his selection criteria only covered pockets.....and these are not representative of ALL millionaires. He concentrated on urban/suburban areas primarily, and only those with multiple households per SIC.

The IRS says the average household value for the millionaires they know about, and that is a lot more than the 773 sample, is

$277.000

STanley says 40% have no mortgage. 10% under 100K. The top side is top heavy, which he admits....People over 5 or 10 million net worth have lots of money to spend, especially since 80% of them are still working and making big incomes.


I find it absolutely amazing then, to believe that 45% of millionaires have a $300,000 mortage, when over half of them live in a house worth less than $277,000.

Bill GAtes lives in 109 million dollar house.....so do the hollywood movie stars... add them in, and it skews things to pieces...yet the IRS does do that, and it is still $277K house.

That just doesn't compute. I don't buy the big house big debt.

Sorry.

Those silicon valley two income couples buying a 'small house' in inflated California market skew things way out of proportion...we 'average' people just don't need a mega mansion.

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tele,

1. Let me clarify that I am not taking any position on the amount of mortgage debt that millionaires hold, per se. What I have done is try to argue the point that most millionaires (in the Stanley study) do not pay down their mortgages.

Please also understand that I said one could assume 45% of millionaires, who have owned their homes LESS than 23 years in Stanley's sample currently carry mortgages of $300,000 or more. I never suggested that of ALL millionaires 45% carry that amount in mortgage debt. I cited the $300,000 figure to show that it appeared to be a significant amount of the original purchase price of the millionaire home. Comparing the outstanding mortgage to the original purchase price of the home, suggests more about the how the mortgage was treated than comparing that same mortgage to the current value of the home.

2. Admittedly, Stanley used a “sample” of the millionaire population in which the average net worth was close to $10,000,000. A decidedly “richer” group than the millionaire population as a whole. So I understand that one might be led to believe that the numbers may be skewed upward a bit. However, I think the figures for average net worth and home value are more skewed by how many millionaires are in each group than by the actual figures themselves. (I show this in point 3). In any regard, that's why I made it a point to say that I don't think you can combine statistics from the Stanley study with those from the IRS.

Keep in mind that the IRS study also uses a “sample” of millionaires to come up with its figure. They [IRS] use the Federal estate tax returns filed for decedents who died in a particular year. Estimates of the living population are then derived by using a multiplier, based on appropriate mortality rates, and then are applied to this sample.

In addition the IRS's Study of Income (SOI) pointed out that one of limitations of using estate taxes is the natural tendency for the values reported for all assets to be conservative. This is especially true for hard to value assets, such as real estate and closely held businesses.

3. Let's look at the IRS study vs. Stanley's.

In Stanley's study the average wealth was about $9.2mm.

In the IRS's study the average net worth of those with a net worth GREATER THAN $5mm (N=85,000) is $14.1mm. This is the group that is most comparable to the Stanley group of 733. The average home value of this group is $660,000.

$660,000 is quite a bit more than the average home value of $277,000 for the entire sample. The average home value for those whose net worth is LESS THAN $5mm (N=963,000) is $244,000. Thus the LOWER wealth group, the group worth less than $5mm, the group that is NOT comparable to the Stanley group of 733, influences the home value figure much MORE than the highest groups.


Now,

If you look at the IRS study, you must agree that most millionaires probably do not have mortgages greater than $300,000. But I (or Stanley) was never talking about MOST millionaires. Only the ones in the Stanley study. In addition, I wasn't commenting on the amount of mortgage debt. I was commenting on the treatment of the mortgage. The amount of debt is only a clue in that regard.

All this to say, that I think my assessment of the Stanley millionaires, the 733, is right on.

- They tend NOT to pay off their mortgages early
- 60% of all surveyed carry mortgages
- 80% of those that bought their homes less than 23 years ago carry mortgages
- 45% of those that bought their homes less than 23 years ago carry mortgages of more than $300,000


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All this to say, that I think my assessment of the Stanley millionaires, the 733, is right on.

- They tend NOT to pay off their mortgages early
- 60% of all surveyed carry mortgages
- 80% of those that bought their homes less than 23 years ago carry mortgages
- 45% of those that bought their homes less than 23 years ago carry mortgages of more than $300,000


And they are likely the ones still working to make their payments...<g>.....not smart enough to realize that if they could cut their high consumption lifestyle (ie, million dollar houses, furnished with $100,000 in furniture, with $10,000/yr tax bills and $10,000 utility bills).....they could have retired 15 years earlier.......ho ho ho....


The smart 20% have retired early before 55.......and live in houses worth $227,000 average.....

So, you can be a 'consumer' , or you can be retired.....but as Stanley noted in his survey, only 20% of his millionaires were 'retired', despite the typical age being 57.

That means, if you have a $300,000 mortgage and live in a 1.4 million dollar current value house, you have an 80% chance of having to work to pay for your lifestyle...

Love it......

I'm sure many out there will emulate them.....lifestyles of the rich and not so smart...

telegraph
happily retired at 52 with no need to ever even think about going back to work.....in his $200,000 house with NO mortgage.......

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Just curious, how does the IRS know the total assets of millionaires ? (or anyone, for that matter)

All the documentation that I, or my banks, or brokerages supply to the IRS doesn't contain the numbers they need for that purpose.
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Just curious, how does the IRS know the total assets of millionaires ? (or anyone, for that matter)

All the documentation that I, or my banks, or brokerages supply to the IRS doesn't contain the numbers they need for that purpose.


I suspect that

1) most businesses depreciate assets, and have to file a tax return....and for a single owner, the 'profits' of the business translate into the income....there is a link.

2) Most millionaires probably have interest and dividend income, as well as cap gains distributions on funds......simple to 'reverse' engineer if you are getting $100,000 in bond interest where you are at.

3) All money that goes into a 401K or IRA, to be tax deferred, is listed year after year on your tax return....so they cummulatively know how much you have squirreled away...waiting for the time they get their taxes.

4) they know how much 'debt' you have since you itemize it, most likely, to take the deduction for interest.

And I suppose anyone who has an income over 1 million a year, they figure has assets of 1 million.....

Dunno exactly..... they have their ways, I'm sure....

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Just curious, how does the IRS know the total assets of millionaires ?


From post

http://boards.fool.com/Message.asp?mid=14496541

"...the IRS study also uses a “sample” of millionaires to come up with its figure(s). They [IRS] use the Federal estate tax returns filed for decedents who died in a particular year. Estimates of the living population are then derived by using a multiplier, based on appropriate mortality rates, and then are applied to this sample."
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<<Just curious, how does the IRS know the total assets of millionaires ? >>

From post http://boards.fool.com/Message.asp?mid=14496541

"...the IRS study also uses a “sample” of millionaires to come up with its figure(s). They [IRS] use the Federal estate tax returns filed for decedents who died in a particular year. Estimates of the living population are then derived by using a multiplier, based on appropriate mortality rates, and then are applied to this sample."


So the IRS knows a lot about dead millionaires and extrapolate this information to live ones.

But aren't dead millionaires usually older than live ones ? And don't older people usually have smaller mortgage balances than younger people ?

Besides, does the estate tax return specifically list mortgage balance ?
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"
But aren't dead millionaires usually older than live ones ? And don't older people usually have smaller mortgage balances than younger people ?

Besides, does the estate tax return specifically list mortgage balance ?

But aren't dead millionaires usually older than live ones ? And don't older people usually have smaller mortgage balances than younger people ?

Besides, does the estate tax return specifically list mortgage balance ?"


Yes, the estate tax return lists all assets and all outstanding debts. AS well as credit card balances, other debt, all accounts, value of house, cars, stocks, bonds, MMF, checking account, money under the mattress, jewelry, personal property, boats, summer homes, airplanes, business interests, trusts, etc.......(I know as I just am finishing up my mother's estate).....

Not all millionaires live to rich old age....most men have their first heart attack in the 50s......some die in accidents....some work themselves to death.....

Most 'older' people have no mortgage.....40% of Stanley's survey people had no mortage. another 10.1% had under $100,000. That is more than half that had no mortgage of significance, and the average for 'half' of his millionaires was less than $20,000 mortgage....maybe half of that, since he didn't break it out.....

Only 20% of his survey people were retired.....

Not only that, the IRS knows how much interest you pay, and who holds your mortgage.....up until 5 years ago, you had to file a form if you bought/sold house and rolled the proceeds over....so they knew who was buying/sellling how much house..you had to file the form......

They can also look at the 1040 forms and see if you itemize mortgage interest....if there is none, then they assume you have a small mortgage or none at all...if you did itemize and have no mortgage interest, then they know absolutely you have no mortgage.




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But aren't dead millionaires usually older than live ones ? And don't older people usually have smaller mortgage balances than younger people ?

Besides, does the estate tax return specifically list mortgage balance ?


The IRS points out a few limitations in their method.

1. The mortality rate multiplier may be somewhat flawed. In general, wealthy people live longer primarily because of access to better health care. So applying a rate to the general living population is difficult. But the attempt is paint a picture as accurately as possible of the living population. So adjustments are made for things like age, time in workforce, sex (a lot of widow millionaires), self employment status, etc.

The IRS I'm sure collects figures on specific debts. But in the report that I viewed, and the one Stanley mentions, debts were considered as one item. So the debt thing is probably worked in on an aggregate level.

2. Before wealthy people die, they generally try to lessen the tax burden on their estate. So they may take actions that reduce their wealth. Their wealth at the time of death is probably lower than it was at some point during their lives.

3. The wealthier one becomes the more in hard to value assets one is likely to possess. Thus the tendency is to be conservative in the valuation of these assets.
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Frankly, I couldn't agree more. I have been priviledged to associate for some time now with several millionaires and multi-millionaires (8 couples actually) and not a single one carries any mortgage on their homes at all.

RAB
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Hi folks,

I've been following this thread on whether to carry a mortgage with interest and a degree of mirth.

The fact is that there are pros and cons to a mortgage. It is not a simple case of black and white.

Whenever I see posts saying that mortgages should be paid off as quickly as possible, however, I just remember than Buffett took out a mortgage when he bought a house in California a few years ago.

Just a thought,

Lost
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I just remember than Buffett took out a mortgage when he bought a house in California a few years ago.


Was this Warren or Jimmy?
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Er, Warren.

Lost
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I disagree with the notion that carrying a mortgage has pros and cons. If you approach this problem from a financial view, it's clear that carrying a mortgage will allow you to be better off financially.

But clearly, this is not simply a financial problem. Emotions play a huge part in personal finance and carrying a mortgage is no exception.

I have a friend who'll be getting married soon. With his and his wife's combined incomes, they will be able to pay off his existing mortgage in a very short time. And they will probably go ahead and do just that. My friend also understands that he'll be better off financially if he never accelerated his payments. When I asked him why he planned on paying the mortgage off early knowing what he knows he simply stated, "'Cause debt don't feel good."

Debt not feeling good is not financial. It's emotional. No pros or cons involved.

From Stanley's writing, I got the feeling that most millionaires are "less" emotional when approaching their own personal finances. Which is why statistics show the most millionaires (not all) carry mortgages full term. I get the feeling that when millionaires approach a financial decision, they choose the alternative that puts the odds of being wealthier in their favor. This is why they save instead of spend, buy stocks more than bonds, stay married instead of getting divorced, run their own business instead of working for "the man".

One of the characteristics Warren Buffet looks for in managers of the companies he owns (read: "The Warren Buffet Way" by Rob Hagstrom) is rationality. Emotions aren't usually rational. I think most millionaires exhibit some form of rationality.

Paying down a mortgage early isn't rational. But like my friend says, debt just don't feel good. And maybe that's more important but it won't help your wallet.
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