The Problems With Prosperity

Hi, Tom here.

Quick reminder: our next Wealth Workshop is next week on July 9th at 11AM CT. I will be answering your questions live.

Register here.

Inflation is here to stay.

This week, let’s cut through the noise and talk about what that really means—the good, the bad, and how it affects your ability to fund the lifestyle you’ve worked so hard to build in retirement.

Let’s dive in.

“These are problems with prosperity”

Ken Griffin, founder of Citadel Securities, recently sat down with Bloomberg’s Bullish team for an interview. He was asked about relocating his company to Miami, a city now grappling with soaring costs, skyrocketing rents, and overstretched schools.
Griffin responded insightfully:

The problems of prosperity.

I can't think of a better phrase to describe the conversations I'm having with clients and with many of you who book calls with me. Just last Friday, two separate conversations revolved around the same underlying tension:
"I've done well, but where do I take things from here?"

Though inflation peaked in the summer of 2022, its lingering effects remain real, especially for families with $1–10 million in assets.

A recent Wall Street Journal article captured this tension. They profiled a California couple in their 40s making around $350k annually. Solid careers, great income, but between housing, taxes, kids, and daily expenses, their dollars don’t stretch like they used to.

Inflation, as you’ve undoubtedly experienced, affects people differently. Here’s how this has shaken out for different people:

• The Ultra-Wealthy: Post-COVID, inflation surged dramatically, but uniquely, in asset prices. Exceptional assets worth holding (think ski homes in Vail) became rare and significantly pricier. Google can always build more data centers, but Vail can't create more mountains. Inflation happened first in asset prices, then in consumer goods like groceries. If you happened to own a lot of assets, this was great inflation.

• The Lower / Middle Class: There's a common saying you've probably heard: "It's expensive to be poor." Folks living paycheck to paycheck with little to no assets missed the inflation in asset prices, only to get hit hard when everyday inflation followed. It’s a two-fold problem: they missed out on a historically great run in markets and saw their purchasing power erode.

• The Everyday Millionaire: There are now 24 million millionaires in the US. Roughly 1,000 people a day hit this milestone. It’s a great thing. This is where you likely are, reading this newsletter. You are certainly not struggling day-to-day, but you are not immune to the challenges inflation has brought. The market has been good to you, but inflation has still hurt. It’s caused you to ask:

  “How do we fund our current lifestyles without jeopardizing long-term security?”

What Is Wealth, Anyway?

Before diving deeper into the inflation challenges specific to our group, let me quickly define wealth from my vantage point as a wealth manager serving high-net-worth families over the past decade.

Wealth, at its core, revolves around the ability to produce cash flow that covers expenses.

If you attended our Wealth Workshop in May on cash flow, you’ll remember this quote from Michael Dell, founder of Dell Computers:

You might be wondering, “Tom, cool quote, but how does this relate to wealth?”

A company’s finances are more complex than a couple’s, but the problems and opportunities are surprisingly similar.

Dell's point highlights something crucial: cash flow gives you freedom.

Freedom means having the resources to spend or invest opportunistically, when you want, how you want.

Cash flow is what makes wealth feel real.

Wealth isn't a single number per se. Rather, it’s about owning assets capable of generating sufficient cash flow for the lifestyle you want, independent of your labor.

Consider another recent example: Mark Zuckerberg and Meta are aggressively hiring the world’s top AI talent, spending tens of millions of dollars to poach them.

Every article covering this assumes Meta has ample resources (cash and equity) for these hires.

And they do.

Their ability to invest so heavily is made possible through strong, consistent cash flow.

Cash Flow for the $1–10M Crowd

For millions of Americans, even those with 7-figure balance sheets heading into retirement, Social Security is the bedrock of retirement cash flow.

Here's an important consideration: the wealthier you are, the less Social Security funds your retirement, proportionally speaking.

An example:

• A couple retiring with $2 million in assets planning to spend $120k annually: Social Security likely covers around half of their needs, leaving the other half to come from assets.

• Increase their desired lifestyle to $200k annually, and Social Security now covers only around 30%, meaning 70% must come from their investments.

Inflation complicates this scenario significantly.

Think about what you've become accustomed to: family vacations, dinners out, house cleaners, new golf clubs occasionally, and reasonably new cars. These aren't extravagant luxuries, but they're certainly not getting cheaper.

In my experience, clients never come to us wanting a lifestyle downgrade in retirement.

No, everyone wants to maintain their current way of life indefinitely, myself included.

Here's the good news, and the challenge, for most of you:

• The Good: Your assets have likely appreciated significantly over the past five years because you’ve participated in the inflation of asset prices. This is fantastic.

• The Challenge: Inflation has materially increased the costs of maintaining your lifestyle.

Today, every $10,000 in annual spending requires about $200,000 in invested assets at a 5% withdrawal rate.

Put another way: the experiences and comforts that fill your memory banks now cost more, and will continue to cost more in the decades to come.

Moreover, the psychological burden of inflation can't be understated. Even when financial stability is present, uncertainty about the future weighs heavily. The subtle anxiety of "having enough" creeps in, causing even financially secure people to question decisions they previously wouldn't have thought twice about.

Additionally, inflation doesn't impact everyone evenly, even within the $1–10 million group. Families who rely heavily on fixed income may feel the pinch more acutely than those diversified into equities and real estate. Conversely, those with more aggressive portfolios must contend with volatility risks that can threaten consistent cash flow.

This balancing act between risk and reward becomes increasingly delicate in inflationary times. Finding the optimal asset mix, adjusting spending expectations realistically, and creating sustainable withdrawal strategies are crucial to navigating this landscape effectively.

Because of that, improving your cash flow isn't just prudent; it's essential.

As Ken Griffin insightfully noted, prosperity brings its own set of problems.

Your goal is clear: continually identify and solve them.

If you want to talk about your cash flow and ways to improve it, let’s talk.