Poll:Wealth Conversion Efficiency (WCE)

[Huston55]

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-conversion-efficiency-adjusted-for-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).

 

[Sojourner]

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.

 

[omni550]

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.

omni

 

[audreyh1]

Looks like some serious homework!

 

[kevdude]

I presume you mean to exclude your primary residence, and not investment real estate? The majority of our net worth is income property.

 

[GrayHare]

The inflation adjustment makes this exercise too much like w*rk for my taste.

 

[travelover]

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.

 

[NW-Bound]

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.

 

[W2R]

Looks like some serious homework!

Yeah, I think I'm going to put this one off, for now anyway. Might take a nap instead...

 

[Another Reader]

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.

 

[pb4uski]

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.

 

[scrabbler1]

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.

 

[ABQ2015]

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.

 

[Huston55]

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 haven’t thought of that in years but, you’re right! It is very similar.

 

[Huston55]

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

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 hadn’t 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.

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 that’s what I did.

 

[pb4uski]

.... I think using immediateannuities.com is a good way to value pensions, SS, etc. and that’s 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.

 

[Gumby]

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.

 

[pb4uski]

+1 you can get them right off of your SSA statement.

 

[jollystomper]

Use Medicare earnings, since they aren't capped.

That is true for earnings after 1990; they were capped before then.

 

[pb4uski]

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.

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.

1966-67	6,600
1968-71	7,800
1972	9,000
1973	10,800
1974	13,200
1975	14,100
1976	15,300
1977	16,500
1978	17,700
1979	22,900
1980	25,900
1981	29,700
1982	32,400
1983	35,700
1984	37,800
1985	39,600
1986	42,000
1987	43,800
1988	45,000
1989	48,000
1990	51,300

 

[NW-Bound]

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...

I also hit the Medicare limit until they raised it to $125K in 1991. That's some serious wage back then. It's more than $220K in today's dollars.

 

[jollystomper]

I am working on the spreadsheet while watching the college football conference championships, so though I do not have a dog in any of the fights, I can be distracted. My WCE is 74%, including pension and SS values from immediateannuities.com (without them it is 38%).

 

[Aiming_4_55]

Interesting exercise. My WCE is based on networth/total income. I feel very fortunate at just over 100%, however I was lazy and did not include NPV of SS and future small pension of $13k, also too lazy to figure out inflation.

 

[Huston55]

Interesting exercise. My WCE is based on networth/total income. I feel very fortunate at just over 100%, however I was lazy and did not include NPV of SS and future small pension of $13k, also too lazy to figure out inflation.

Excellent progress!

If you do take the time to adjust your earnings for inflation, you’ll find that your income is significantly higher when inflation adjusted; likely to make 20-30% difference with your 27 yrs of income, depending on your earning history.

 

[RobbieB]

Over the top for me! See I really was frugal.

Now it's time to Blow That Dough -