Why the 'rich' aren't feeling so rich

(Fortune) -- On Tax Day, April 15th, I picked up the Wall Street Journal and was amazed to see an editorial titled "A Message from HENRY" by a California financial advisor. The author, Mike Donahue, condemned the big and growing tax burden shouldered by high-earners like himself, a group he identified as "the HENRYs," in words so scorching that steam practically rose from the page. "We may be only a small percentage of the population, but we pay a large portion of the taxes and employ many," Donahue concluded. "If you take the incentives away, you will lose the HENRYs."

For this writer, it was a proud moment. I invented the name "HENRYs." I wasn't steamed that Mike Donahue didn't credit Fortune for creating the term. On the contrary, just seeing a headline about the HENRYs showed that my brainchild may be entering the culture as a catchy pop label for our times. It may even achieve the same currency as a Fortune invention from the 1980s, "Trophy Wives."

The Journal story inspired me to revisit the folks behind the acronym.

I first wrote extensively about the HENRYs in a November, 2008, cover story called "Look Who Pays for the Bailout." It described the plight of a strata of affluent Americans I called "High Earners, Not Rich Yet," or the HENRYs for short. They're the doctors, attorneys, accountants, owners of real estate agencies and security firms, who earn -- or used to earn -- between $250,000 and $500,000 a year.

These aren't investment bankers, hedge fund managers, CEOs, trust fund babies or other members of the super-rich. No, the HENRYs are generally folks in their 30s and 40s who got the best grades in high school, worked their way through college, and logged long hours as law firm associates or consultants on the rise. In most HENRY households, the husband and wife both work to tally those big incomes.

Put simply, the five million HENRYs form the core of the nation's entrepreneurial and professional class.

Obama eyes the HENRY class

When my story appeared, just before the presidential election, Barack Obama was targeting the HENRYs for big tax increases, declaring that families making over $250,000 a year were "the rich" and needed to "pay their fair share." Even then, I argued, the HENRYs were so squeezed between their big expenses for the things they considered staples -- private schools and day care for the kids, for example -- and an immense tax burden that typically took at $100,000 from a $350,000 income, that they not only weren't rich, but stood little chance of ever saving the big nest egg to qualify as truly wealthy.

The story predicted that the squeeze would become far tighter as Obama raised the top tax rates, and the AMT -- the dreaded parallel system that bars the high-earners from deducting their heavy property and state income taxes -- trapped more and more of the HENRYs. To be sure, the promised increases are scheduled to hit next year, along with a new Medicare surtax aimed straight at the HENRYs.

The high earner in a recession-scarred era

But the world has changed immensely since late 2008 in the wake of the financial crisis and soaring jobless rate. So as it turns out, the rising levies, though painful, aren't the biggest problem the HENRYs are now facing.

To examine the HENRYs new challenges, I called one of the financial planners who proved so helpful in the 2008 story, Barry Glassman of McLean, Virginia. Most of Glassman's high-earner clients are classic HENRYs: physicians, partners in law firms, and business owners. "Most of these people have seen their incomes drop by 20% to 25%," says Glassman. "The families that were earning $400,000 two years ago now make maybe $300,000, and the $250,000 families are below $200,000." The latter are even dropping out of HENRY range.

The HENRYs, says Glassman, saw their incomes jump in the great economy of the early-to-mid 2000s. During those flush years, they took on bigger and bigger fixed expenses and commitments, from big mortgage payments to private school tuition to college saving plans. "Now, the HENRYs are trying to cut their costs by shortening vacations and considering public schools," he says.

The rub is that the drop in their incomes is so dramatic that they can't economize fast enough to maintain a decent flow of savings for retirement. "The HENRYs weren't saving much before," says Glassman. "Now, they're dipping into their savings and investments to maintain something close to their former lifestyles."

What does that mean for their future? What looked like a far from luxurious retirement -- even in the good times, they could forget about getting rich¬¬ -- is now looking even more modest. "The HENRYs will typically end up with $1 to $2 million in savings," says Glassman. So at 4%, they will have incomes of maybe $100,000 a year in retirement, including Social Security. And that $100,000, points out Glassman, will be worth a lot less than it is today.

Of course, an economic rebound could raise their incomes to the pre-crash levels. If so, their biggest burden will shift back to gigantic looming tax increases. So as I've warned before, we might have to Gallicize the name of these members of Yankee bourgeoisie to HENRIs -- High Earners, Not Rich Indefinitely.