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Again with the "How am I doing?" wealth check.
Old 04-25-2004, 11:20 PM   #1
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Again with the "How am I doing?" wealth check.

While their advice may not be on the same level as "The Economist", MSN Money does come up with some interesting articles. This provides yet another way to calculate your financial progress (financial efficiency?).

It also summarizes a Harvard study which concluded that retirement is mainly a function of savings-- not so much salary, family size, or brilliant investments (whew).

This one isn't dated so I apologize in advance if I'm recycling old news.

http://moneycentral.msn.com/content/...23.asp?Printer
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Re: Again with the "How am I doing?" wealth check.
Old 04-26-2004, 04:29 AM   #2
 
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Re: Again with the "How am I doing?" wealth check.

Hello Nords! I had not seen this info before and found it quite interesting. Since I knew right where my latest
SS annual statement was located, I took the test
measuring net worth against lifetime earnings. Not
surprising that I fell far short of the "ideal". Following
the suggested steps and using SS lifetime earnings, my net worth is about 33%, which they opine may be okay for someone in midcareer, but not fully retired people.
I don't argue with their numbers. I am guessing very few retirees can exceed 100% of lifetime earnings without some unusual event along the way. In my case by far the
major factor was motivation. Nothing else was even close in terms of getting me retired (10 years and counting).

John Galt
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Re:  I don't know if it can be used IN retirement.
Old 04-26-2004, 08:05 AM   #3
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Re:  I don't know if it can be used IN retirement.

John,

I'm not sure that ratio works in retirement if a portfolio is being drawn down. But a dropping ratio during working years would be a big warning signal.

The article's "Financial Lite" approach also doesn't mention that the SS statement doesn't cover tax-free income or compensation. I had an early year or two when my bonus pay was more than 10% of my SS income. Military allowances, civil-service COLAs, and executive compensation can also be tax free or even difficult to value. So of course I have a spreadsheet that attempts to track every dollar that passed through my hands, no matter where it ended up. That's an eye-opener.

Other than Dominguez' book, I don't think there is a good general formula for predicting retirement progress. "The Millionaire Next Door" didn't intend for their analysis to be used as a predictor and in any case didn't have a big-enough study to validate their research. Perhaps many workers look at their retirement savings ("Am I there yet?!") without examining their expenses.

I think the most interesting part of the MSN article is the study's conclusion that savings might be more important than salary, family size, or investment prowess. Everyone can blame lack of progress on low pay, lifestyle, or lack of investment experience. OTOH discretionary spending should be under everyone's control. If a young dreamer decides that ER is important enough, then that spending can be controlled without feeling discouraged about finding a high-paying career, wanting a big family, or having to be an investing wizard.

And as you've demonstrated, the ratio doesn't have to be 100% either.
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Re: Again with the "How am I doing?" wealth check.
Old 04-26-2004, 08:37 AM   #4
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Re: Again with the "How am I doing?" wealth check.

I can testify about high income families with nothing. I've heard some stories about people who have had very high incomes and ended up at the foodbank when they lost their job - still driving their luxury car.



I just estimated my lifetime earnings because I don't have my SS statement at hand, erring on the high side... and I guess I'm doing pretty well. Around 33-35%.

Lately I've been forcing myself to save more (50% pre-tax!) which is a bit painful at first but it's also forcing me to be more frugal. One paycheck then becomes rent; the other becomes everything else. But there are people who are living on less than that, so why can't I?
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Re: Again with the "How am I doing?" wealth check.
Old 04-26-2004, 09:41 AM   #5
 
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Re: Again with the "How am I doing?" wealth check.

Another problem with using the SS earnings statement is that the pre-1994 earnings shown are less than what many people earned in those years as contributions to both SS and Medicare stopped at certain income limits back then.

Joe
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Re: Again with the "How am I doing?" wealth check.
Old 04-26-2004, 11:21 AM   #6
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Re: Again with the "How am I doing?" wealth check.

I liked that article.

As you know I have real problems with the millionare next door formula in part because it doesn't smooth changes in income. This ratio is a lot better at that.

What I don't like is the advice is incredibly vague. If I'm 30 am I one of the "young clients early in their careers" or "clients in midcareer?" And even if you're sure which bracket you fall into 25-100% is a pretty big swing!

I also wonder what the economics professors mean by "explain just X% of the wealth dispersion." I assume they're talking about the R-sqared of a regression, but is it on absolute dollars, or a ratio like wealth to income or lifetime earnings? While there are examples on both sides, I find it very very very hard to believe that there is no relationship (even no statistical relationship)between absolute dollar wealth and absolute dollar income. Also, "chance events" may not explain much of a populations wealth, it can have a huge impact on an individuals wealth. Paris Hilton, of course, and also the guy stuck with medical bills that bankrupt him.
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Re: Again with the "How am I doing?" wealth check.
Old 04-26-2004, 12:05 PM   #7
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Re: Again with the "How am I doing?" wealth check.

The biggest impact for us has been time(power of compounding). In the last eleven years of ER - not having to use 401k/IRA - our net worth has tripled by doing absolutely nothing. The millionaire next door and the article that started this thread are fun to read.

But the fundamentals are fundamentals - LYBM and compound interest tables/chart/graphs. I'm in screaming agreement with all the posters who track expenses - even though ours is 'not spreadsheet' but back of the envelope hand grenade level.

Here's to DeGaul, the Norwegian widow and don't forget to recyle your dryer sheets.

The early $ are the best $ - given the power of 'time in the market'.
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Re: Again with the "How am I doing?" wealth check.
Old 04-26-2004, 12:27 PM   #8
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Re: Again with the "How am I doing?" wealth check.

BTY - triple is only 9.96% - not by any means outstanding compared to some of the indexes over 1993 - 2004. Save early as you can and let it ride as long as you can.
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Re: Again with the "How am I doing?" wealth check.
Old 04-26-2004, 01:48 PM   #9
 
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Re: Again with the "How am I doing?" wealth check.

Whackamole,

Speaking of high income families with nothing. My local paper, The Bergen Record, had an article about this just this weekend.

http://www.northjersey.com/page.php?...VFeXk2NTE5MzU0

Hopefully the link works, otherwise I guess just cut and paste. Unfortunately, the online version does not have the graphic entitled something along the lines of "How to earn $250k per year and saving nothing". $88k for state and federal income tax, $12k for property tax, $48k for mortgage payments, $18k for private schools, about $20k for auto payments, etc. etc.

ciao
Theo
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Re: Again with the "How am I doing?" wealth check.
Old 04-26-2004, 02:12 PM   #10
 
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Re: Again with the "How am I doing?" wealth check.

Great article.

$20K car payment? I don't want to pay $20K for a car, period!

One of the stories I heard about the foodbank was the guy and his wife who were pulling down $100K a year after his wife lost a job... and wanted to know if they could get "financial assistance" because they couldn't make ends meet.
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Re: Again with the "How am I doing?" wealth check.
Old 04-26-2004, 02:57 PM   #11
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Re: Again with the "How am I doing?" wealth check.

Quote:
I am guessing very few retirees can exceed 100% of lifetime earnings without some unusual event along the way.
This was entirely possible for those who invested heavily in equities during the largest bull market in the history of the United States (starting in 1982). I am not so sure that the generation starting out now will have things quite so rosy. No one can amass a portfolio that is twice their life time earnings without a goodly rate of return on their investments.
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Re: Again with the "How am I doing?" wealth check.
Old 04-26-2004, 04:30 PM   #12
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Re: Again with the "How am I doing?" wealth check.

Michael

You're right - just ran the numbers and barely(approx. 103%) passed lifetime earnings in the market this year. Shame on me. I had no business retiring 11 yrs ago at around 33% - unless there's a 'mid-career' ER?
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Re: Again with the "How am I doing?" wealth check.
Old 04-27-2004, 04:59 AM   #13
 
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Re: Again with the "How am I doing?" wealth check.

This is fun (measuring lifetime earnings against
net worth, tweaking the SWR, etc).

The couple making 100K and driving their luxury car to the foodbank reminds me of a story. A company goes bankrupt and the CEO shows up in bankruptcy court to testify. Afterward, he offers his creditors a lift to the
airport in his limo (true story). Some people are
oblivious. Either that or just don't care what anyone thinks. Could be a very relaxed way to live I suppose.

Back on topic. Even if I had not ignored retirement
planning for many years, I doubt that I could have
achieved a 100% net worth to lifetime earnings ratio.
A big chunk of all that money we spent on cars,
houses, country clubs and 3 kids could have compounded impressively, but only with complete
precognition can I envision attaining the suggested
goal. In any case, yesterday is gone and we can't
get it back.

John Galt
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Re: Again with the "How am I doing?" wealth check.
Old 05-07-2004, 11:26 PM   #14
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Re: Again with the "How am I doing?" wealth check.

Quote:
I had no business retiring 11 yrs ago at around 33%
Not at all. It worked out just fine. As long as you have enough to live on, it does not matter whether your portfolio is 33% or 200% of life time earnings. My only point is that someone retiring at 33% today might have to wait a bit longer before his portfolio grows to 103%.

Quote:
In any case, yesterday is gone and we can't
get it back.
Amen brother John. Enjoy your life while you are still healthy enough to do so. Our maker will call us all home soon enough, and money will be worthless.
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Re: Again with the "How am I doing?" wealth check.
Old 06-01-2004, 11:23 AM   #15
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Re: Again with the "How am I doing?" wealth check.

Quote:
Our maker will call us all home soon enough, and money will be worthless.
Dont be so hasty. Wouldnt it suck to discover theres a $10 cover charge to get in?
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