Lifetime income vs. net worth

[L Carlisle]

I feel great about the retirement we have been able to save. Having raised 3 children and put them all through college and still able to retire early. My wife was 53 and I just retired 3 months ago at 56. We are no where near my SS lifetime earnings ~2.6M, My wife's was probable ~600 thousand. We have 1.4M in savings and .5M equity in our home, so just under 2M net equity.

 

[target2019]

To no one in particular,
If Medicare wages is used, and 401(k) etc. are in investments, isn't that counting twice?

 

[Out-to-Lunch]

To no one in particular,
If Medicare wages is used, and 401(k) etc. are in investments, isn't that counting twice?

How do you figure? I seem to be missing your point....

To me, Medicare wages is a pretty good estimate of total earnings. That tax is levied on all wages.

Some of those wages were spent. Some were shunted to 401(k).

Where is the double-counting?

 

[RetireAge50]

Our portfolio is 64% of lifetime income. This ratio is increasing as income has stopped and our portfolio is growing faster than we spend it.

 

[Gumby]

How do you figure? I seem to be missing your point....

To me, Medicare wages is a pretty good estimate of total earnings. That tax is levied on all wages.

Some of those wages were spent. Some were shunted to 401(k).

Where is the double-counting?

I'm glad you asked, as I don't get it either.

 

[ArmchairMillionaire23]

Are you using liquid net worth as the numerator in your ratio? Just checking to be sure.

Yes.

 

[indiajust]

I kept track of all income, taxable or not, in quicken. I gave myself credit at 5 bucks an hour for 15 years of house renovation. Including value add for renovation decisions, barter, coupons, unemployment (99k lifetime!). Every little thing i did worked out to 1.3M in gross income. Currently I am at 1.5M and growing faster than I can spend it. So my total asset/total income is greater than 1.

 

[ArmchairMillionaire23]

The discussion in this thread reminds me of something I saw posted here several years ago. The concept was called "wealth conversion efficiency." Basically a measure of how efficient you've been at converting each dollar you earned over your career into a dollar of net worth. From what I recall, it's essentially a more accurate, detailed version of the PAW/UAW concept from The Millionaire Next Door.

Here's the thread: https://www.early-retirement.org/forums/f28/poll-wealth-conversion-efficiency-wce-89592.html#post1973054

That's just another cool thing about this site. Always new things to learn. And I agree that my idea is very similar to "wealth conversion efficiency". I had not heard of this before. Thanks for the link! Unfortunately, the spreadsheet in the article will only open in 'read-only' online and if I download it and try to open it I get that "you are trying to use Office but do not have Office" window. I'm using a licensed copy of Excel 2003 on my computer so it looks like I'll just have to use the read-only file and make my own spreadsheet.

 

[gooddog]

"Petty?" - Not at all. You have found a way to motivate yourself and find another goal. The new goal has the built in advantage of being a moving target that escalates with each year that you work. Great idea actually.

 

[Doingitwrong]

Interesting idea. I’d like to go back and track 25 years of my wife’s medical expenses. She’s the unicorn that was given a 1% chance of being around five years after stage IV cancer diagnosis in 1995.
I’ve started over four times on the savings program.
Now she’s receiving $28k/yr tax free from the VA, a military pension and social security.
Her income offsets (?) our spending on her pre-existing conditions for many years.
Fast forward, we upsized, to our second and retirement home, I work part time, and after two abdominal surgeries and a month and a half in hospital, in 2019, she’s better than ever!
My S Corp will bring in $72k this year. My “employer” and employee contributions to my 401k will total $36K. I’ll issue myself a W-2 for about $30K. From that I’ll deduct about $8k in self employed health insurance (including long term care), HSA contributions, and IRA contribution.
I net nothing from working. LOL. But that’s how Obamacare works.
I introduced myself a few years ago and was exhausted and ready to quit. I’m glad I didn’t.
Pre-ACA, the wife’s expenses over that month and a half in 2019 is where I would have started negotiating with providers. It was about $450K. We walked away at about $12K.
So finally my point.
Life has too many variables for this tax accountant to get anything out of your analysis.
I’ve always been an accumulator, but life didn’t work that way..
I have managed to save about $700K.
I guess I spend all my time now looking forward. My new goal is $8000/month in retirement. We can get by on that after a life of few extras.
W-2s and tax returns present tax reporting for a calendar year, they frequently don’t tell you much more.

 

[Doingitwrong]

Thanks for the link.
I’ve got decades in tax accounting and have had clients around as long. The approaches to wealth creation amaze me.
From the slow and steady brokerage, 401k, IRA approach to the $12 of interest income and no dividends approach.
The latter case is high living serial entrepreneur that started with nothing. Has no savings. Has no investment account. And has a net worth of $40 million in marketable franchises and the dirt under them.

 

[HMMY]

The only metric I cared about is whether my investible portfolio was 25x expenses. I retired at age 52 at 28x expenses. I calculated my net worth against gross earnings (excluding inflation) and it is about 1.28x today. If this metric is a motivator, great. For me, that the only thing that mattered was whether or not my portfolio could generate a "paycheck" large enough to cover my expenses without working for the "man".

 

[Doingitwrong]

We were renting a house in 1995 after we both left the military. Five months after the wife’s discharge she was diagnosed with cancer. I was a full time university student.
Income = ZERO.
Debt = working on $100k in medical bills.
Times change...we bought that house, because we couldn’t afford to move, when the owner put it on the market for $47K.
Sold it and upsized to our retirement home in 2017. $156K.
Thank God for the VA backing.

 

[Milkman]

This is a great thread of a sizable number of like minded people when it comes to money management. If this was read by a number of people not well versed in disciplined long term saving, investing, and living below their means: what would their reaction be?

Oh yes! My tax deferred savings are 95% of lifetime earnings and total liquid savings are 134%. I have been retired 6 years.

 

[target2019]

To no one in particular,
If Medicare wages is used, and 401(k) etc. are in investments, isn't that counting twice?

How do you figure? I seem to be missing your point....

To me, Medicare wages is a pretty good estimate of total earnings. That tax is levied on all wages.

Some of those wages were spent. Some were shunted to 401(k).

Where is the double-counting?

Counting twice was an incomplete way of explaining myself. How about this? If you're counting Medicare wages (rather than SS as some are doing), you're including 401(k) contributions and also as income and as investment in the same year.

Since I'm not a CPA, and have no accounting or financial credentials, I really can't suggest what is correct or otherwise. It was just a comment for discussion, and I thought it to be obvious what the point was...

 

[target2019]

Are you using liquid net worth as the numerator in your ratio? Just checking to be sure.

Yes.

Thanks for responding. You done good with this thread.

 

[ArmchairMillionaire23]

Thanks for responding. You done good with this thread.

Thanks!

In running the numbers as of my last pay stub of 2020, it seems like my new number should be around 1.045885. I'll have to verify this once I get my W2 for 2020.

So far, so good...

 

[ArmchairMillionaire23]

Thanks!

In running the numbers as of my last pay stub of 2020, it seems like my new number should be around 1.045885. I'll have to verify this once I get my W2 for 2020.

IRS info finally posted on the MySocialSecurity site. Total savings and investments ÷ total taxed Social Security (or Medicare since they're the same amount for me) earnings = 1.04888 as of the end of 2020.


So I officially reached the level where my savings & investments have exceeded my total earnings at the age of 50. Hopefully all continues to go as planned until I retire in 2025.

 

[Surewhitey]

Similarly I got my first hourly job in 86 & recently looked at the same guage. We as a couple are at 53% of our combined life earnings after starting with a 0 net worth in 96 (when we married). So many variables to consider. Past marriage and lifestyles.

I was single and never thought of saving until 96...since then, she regrets getting me into saving (I'm a nerd for numbers).

We also took 4 years off (Mexico) with no real income too... And raised, colleged and married of a rug rat. Now have a mini-rug rat.

No inheritances came/coming in my family either. All dumb luck.

 

[gayl]

My total income report to SSA is 885k behind assets so (1) retired (2) won't cross that for 5 years. If I count total assets. Crossed it a few years ago

 

[brett]

The only number that counts is the bottom right hand number. The rest are noise level.

 

[retire48in2018]

I anticipate hitting 100% sometime next year or (1.0). It is amazing to think that all the taxes, spending and other items that have come off the gross number has been made up for with investment growth. I was stunned when I checked.

I would not have guessed that.

Last few years, snowball (investment earning) is substantially larger than income, and we are still adding about 50% of net income into savings as well.

 

[Time2]

We have been retired two years.
Our NW to Lifetime SS statement earnings is 1.2. Our lifetime inflation adjusted average yearly SS income was $71k. Not so high earners but in our 60s time has had time to compound our savings, that helps the ratio.

I posted the above 3 months ago. We retired a little over 2 years ago, so no more work income. Since our lifetime income is not increasing and net worth is growing so far (I wonder how long the good times can last) Our ratio increased from 1.2 to 1.53 in just 3 months.

 

[brett]

There are also tax implications that impact the calculatons.

In my jurisdiction, income, commissions, bonuses, and RSU's were/are taxed at full pop.

Capital gains at half the actual gain. The big kicker for me was that stock options were taxed when exercised and only at 50 percent of the incremental tax rate. For me, these made a significant difference in the calculation of net cash from each source. Plus, by the time I exercised those options I had moved to a new jurisdiction that that reduced the effective tax by another five percent.

 

[scrabbler1]

There are also tax implications that impact the calculatons.

In my jurisdiction, income, commissions, bonuses, and RSU's were/are taxed at full pop.

Capital gains at half the actual gain. The big kicker for me was that stock options were taxed when exercised and only at 50 percent of the incremental tax rate. For me, these made a significant difference in the calculation of net cash from each source. Plus, by the time I exercised those options I had moved to a new jurisdiction that that reduced the effective tax by another five percent.

When I cashed out my company stock (ESOP) to begin my ER, I was able to use NUA (Net Unrealized Appreciation) to greatly reduce the federal tax bite. This lowered my tax bill in 2 big ways. The first was to tax the NUA part (which was 97% of the stock's value) at 15%, the highest CG tax rate at the time. Treating this gain as LTCG also allowed it to escape the 10% surtax (penalty) because I was well under 59.5 years old when I cashed out the stock. (I didn't learn of this until tax time, a most pleasant surprise, as it wasn't made clear to me in my company's literature on the ESOP.) Only the relatively miniscule cost, or par value, was taxed as ordinary income and subject to the 10% penalty.