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View Poll Results: What is your Wealth Conversion Efficiency (WCE)?
Less than 30% 1 3.03%
30-40% 1 3.03%
40-50% 3 9.09%
50-60% 4 12.12%
60-70% 3 9.09%
70-80% 5 15.15%
80-90% 4 12.12%
90-100% 3 9.09%
Greater than 100% 9 27.27%
Voters: 33. You may not vote on this poll

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Poll:Wealth Conversion Efficiency (WCE)
Old 12-02-2017, 12:42 PM   #1
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Poll:Wealth Conversion Efficiency (WCE)

Here’s a great article by Harry Sit (The Finance Buff) on how efficient we have (or have not ) been at converting our income (human capital) into wealth. The higher the WCE, the better. So, for example, someone with a WCE=100% would have converted the equivalent of every dollar of income into Net Worth. As you can see from the article, the expected pattern would be to have lower WCE at younger ages and higher WCE as we age and, hopefully, our investments growth outpaces our income.

https://thefinancebuff.com/wealth-co...inflation.html

I’ve also started a poll. Here are answers to some expected poll questions.

1. NW=All assets - All Liabilities
2. Do not include household effects, vehicles & the like
3. Do include real estate
4. Do include the NPV of any guaranteed income streams (pensions, annuities & SS)
5. Do adjust your income for inflation (and follow other guidelines in the article).
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Old 12-02-2017, 01:57 PM   #2
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The article's Wealth Conversion Efficiency percentage reminds me of a more comprehensive, sophisticated version of the PAW / UAW concept introduced in The Millionaire Next Door, one of my all-time favorite personal finance books. I remember being happy to learn I was a PAW back when I first read it 20 years ago, and I'm pleased to see now that I score much higher for my age than the author's "good benchmark numbers" for WCE. Seems to be somewhat of a pattern here.
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Old 12-02-2017, 02:06 PM   #3
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I'm wondering if there might be a fairly easy method by which these Wealth Conversion numbers could somehow be adjusted to reasonably compare singles vs. couples? (Keeping in mind that some couples have dual incomes and some are single income. So, perhaps it could be done on the basis of income-earners?

As I was just reading elsewhere on his site, https://thefinancebuff.com/who-is-a-millionaire.html , it says a couple with NW of a million are not millionaires. It would take $2 million (divided by 2) for them to each be millionaires.

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Old 12-02-2017, 02:12 PM   #4
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Looks like some serious homework!
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Old 12-02-2017, 02:18 PM   #5
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I presume you mean to exclude your primary residence, and not investment real estate? The majority of our net worth is income property.
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Old 12-02-2017, 02:24 PM   #6
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The inflation adjustment makes this exercise too much like w*rk for my taste.
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Old 12-02-2017, 02:24 PM   #7
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I found it fairly easy to cut and paste all my earnings off the SS site and paste them into a spreadsheet, then just do a sum.
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Old 12-02-2017, 02:56 PM   #8
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This is exactly what I meant to do for a while, but never got around to. The article's author has a downloadable spreadsheet, which makes it easy to account for inflation.

I need to get my total wage earnings however. I obtained them somewhere (past tax records?), and entered them into mypia.exe program from SSA.gov. That got truncated to the max SS contribution limit, and does not represent the total income.

If that is available in SSA.gov, I need to log in again. Have not done so in quite a few years.
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Old 12-02-2017, 03:06 PM   #9
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Originally Posted by audreyh1 View Post
Looks like some serious homework!
Yeah, I think I'm going to put this one off, for now anyway. Might take a nap instead...
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Old 12-02-2017, 03:41 PM   #10
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Pay down and payoff of leveraged real estate plus the power of compounding puts me well over 100 percent, unless you count rent as earnings. You do have to subtract out inheritances, I assume. The author does include home equity.
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Old 12-02-2017, 04:11 PM   #11
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I came up with 72%.

I don't have info on our tax-deferred savings to gross up the denominator so I just used the Medicare earnings but checked the 60-70% box in the poll.

For the numerator I used NW excluding vehicles & boats + value of my joint life pension by reference to an immediate annuity from immediateannuities.com

SS was a bit of a SWAG... since my SS benefit is much higher than DW's I took the immediateannuitiies.com equal to the value of a joint life pension for my benefit * 150% since the benefits are COLAed. DW will receive 1/2 of mine so for hers I took the immediateannuities value of her benefit * 1/2 since once one of us passes her benefit will go away.

I wish I had seen W2R's post first because if I had I would have napped instead.
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Old 12-02-2017, 04:26 PM   #12
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Yeah, I think I'm going to put this one off, for now anyway. Might take a nap instead...
I already took a nap, after trying to open the .xlsx file I downloaded but couldn't open because of its file type and my older version of excel unable to handle it. Maybe I save the file to a thumb drive and go to my local library which has a newer version? Seems like a lot of trouble to go through.
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Old 12-02-2017, 04:36 PM   #13
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I misread and did not include guaranteed income streams so ignore my response of less than 30%. My WCE is probably in the 50-70% range at age 62.

Backcalculated inflation adjusted earnings using my Social Security PIA but did not account for all the years I made more income than the Social Security contribution limits. So my earnings are off by at least $1M.
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Old 12-02-2017, 04:47 PM   #14
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Quote:
Originally Posted by Sojourner View Post
The article's Wealth Conversion Efficiency percentage reminds me of a more comprehensive, sophisticated version of the PAW / UAW concept introduced in The Millionaire Next Door, one of my all-time favorite personal finance books. I remember being happy to learn I was a PAW back when I first read it 20 years ago, and I'm pleased to see now that I score much higher for my age than the author's "good benchmark numbers" for WCE. Seems to be somewhat of a pattern here.
I havenít thought of that in years but, youíre right! It is very similar.
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Old 12-02-2017, 04:54 PM   #15
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Originally Posted by kevdude View Post
I presume you mean to exclude your primary residence, and not investment real estate? The majority of our net worth is income property.
Include ALL real estate; both the Asset (assessed value) & Liability (mortgage) sides

Quote:
Originally Posted by Another Reader View Post
Pay down and payoff of leveraged real estate plus the power of compounding puts me well over 100 percent, unless you count rent as earnings. You do have to subtract out inheritances, I assume. The author does include home equity.
I hadnít thought about rental real estate income. My reread of his blog post & considering the fact that much/most real estate income is tax sheltered by depreciation, persuades me to exclude rental income.

Quote:
Originally Posted by pb4uski View Post
I came up with 72%.

I don't have info on our tax-deferred savings to gross up the denominator so I just used the Medicare earnings but checked the 60-70% box in the poll.

For the numerator I used NW excluding vehicles & boats + value of my joint life pension by reference to an immediate annuity from immediateannuities.com

SS was a bit of a SWAG... since my SS benefit is much higher than DW's I took the immediateannuitiies.com equal to the value of a joint life pension for my benefit * 150% since the benefits are COLAed. DW will receive 1/2 of mine so for hers I took the immediateannuities value of her benefit * 1/2 since once one of us passes her benefit will go away.

I wish I had seen W2R's post first because if I had I would have napped instead.
I think using immediateannuities.com is a good way to value pensions, SS, etc. and thatís what I did.
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Old 12-02-2017, 05:02 PM   #16
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.... I think using immediateannuities.com is a good way to value pensions, SS, etc. and thatís what I did.
I agree for non-COLAed pensions.

For SS you need to improvise... I used a factor of 1.5 to convert the fixed SPIA value to a COLA SPIA value. Another approach would be to take the annual
benefit divided by 4% which is about a 1.55 factor.

For us as a coule it is even harder as we will received 150% of my PIA while we are both alive and 100% once only one of us is alive and the benefits are COLA adjusted.
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Old 12-02-2017, 05:06 PM   #17
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Originally Posted by NW-Bound View Post
This is exactly what I meant to do for a while, but never got around to. The article's author has a downloadable spreadsheet, which makes it easy to account for inflation.

I need to get my total wage earnings however. I obtained them somewhere (past tax records?), and entered them into mypia.exe program from SSA.gov. That got truncated to the max SS contribution limit, and does not represent the total income.

If that is available in SSA.gov, I need to log in again. Have not done so in quite a few years.
Use Medicare earnings, since they aren't capped.
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Old 12-02-2017, 05:42 PM   #18
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+1 you can get them right off of your SSA statement.
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Old 12-02-2017, 05:43 PM   #19
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Use Medicare earnings, since they aren't capped.
That is true for earnings after 1990; they were capped before then.
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Old 12-02-2017, 05:44 PM   #20
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True, but how many people here earned more than the cap in 1990 and before? Something to keep in mind if that might have been you.

ETA: As it turns out it was me for 1984-1990.

Quote:
For Medicare's Hospital Insurance (HI) program, the taxable maximum was the same as that for the OASDI program for 1966-1990. Separate HI taxable maximums of $125,000, $130,200, and $135,000 were applicable in 1991-93, respectively. After 1993, there has been no limitation on HI-taxable earnings.
1966-676,600
1968-717,800
19729,000
197310,800
197413,200
197514,100
197615,300
197716,500
197817,700
197922,900
198025,900
198129,700
198232,400
198335,700
198437,800
198539,600
198642,000
198743,800
198845,000
198948,000
199051,300
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