Lifetime income vs. net worth

[ArmchairMillionaire23]

This is primarily for those here who are still working...


Like many of us here, I've had a plan to retire early before I ever heard of the FIRE movement. So I've budgeted, tracked expenses, saved, invested, lived below my means, etc.
A couple of years ago I was looking at my Social Security earnings record for my entire working life. Of course SSI doesn't count paper routes or cash jobs like when you were a kid and shoveled people's driveways and sidewalks in the winter for $5. Anyway, I thought it would be cool to add up all I've made since my first 'real job' back in 1986 so I created a spreadsheet so I could enter in my yearly taxed SSI earnings and keep a running total of what I had earned so far in life.
Then I got the idea to compare this to my liquid net worth of my savings and investments. I did not include the value of my home or any personal property. I have retirement accounts in both Vanguard and John Hancock and they both offer aggregation services so I can see the value of all my accounts including 401(k) accounts, IRAs, HSAs, checking and savings account balances, and all other investment account balances as a grand total. The JH service also let me input any liabilities (mortgage account balance) as well but since everything is paid off I can now just focus on the asset category.
From the beginning (when I was about 30) I had a goal to save up $1M by the time I was 50. The books I had read said it was definitely possible if I saved 20-25% of my income and invested it sensibly for 20 years. I'll be 50 this month and while I made it to $1M at the beginning of 2020 my next goal is to get to the point where my liquid net worth exceeds my total lifetime earnings.
Petty? Maybe. But I just thought it will be cool to have as much (or more) saved up as I've made in my lifetime. Hopefully I'll get there in the next few years.
Does an idea like this matter to anyone else? Anyone else care to share the age when their liquid net worth passed their total lifetime earnings? I just thought this was a neat idea. Feedback will be appreciated but try not to be too mean about it.

 

[SecondCor521]

Like most interesting ideas, this one has already been thought of. On the upside, someone wrote a book about it, so it seems like a reasonably interesting idea.

https://en.wikipedia.org/wiki/The_Millionaire_Next_Door

(See the definitions of UAW, AAW, and PAW.)

Generally speaking, you get to that point you're describing through investments which have an exponential effect over time. Most people probably never reach that point, so you certainly deserve kudos for aiming high and being disciplined to make progress towards that goal.

Personally I chose not to track your metric. I chose to do my own version of a wall chart, tracking when 4% of my FIRE stash passed my annual expenses. This idea is also not new, having been described in the classic YMOYL book.

https://northernexpenditure.com/ymoyl-wall-chart-best-retirement-tool/

 

[someguy]

To the OP: This is an interesting metric to consider. However, for many of us on this board it would be very limited because it would severely undercount lifetime income for two reasons. First, the income cutoff of $138K for FICA (includes SS). For example, if you make $300K/year, over half your income will not be included in the SS figure. Second, depending on one's exact situation, $50K+/yr of income could be diverted to 401(k) or similar, plus any non-qualified deferred comp and other such programs.

Like most interesting ideas, this one has already been thought of. On the upside, someone wrote a book about it, so it seems like a reasonably interesting idea.

https://en.wikipedia.org/wiki/The_Millionaire_Next_Door

(See the definitions of UAW, AAW, and PAW.)

Aren't those definitions based on current income times an age-based multiplier? Which always had the obvious limitation of what if for the first 29 years you made $20K increasing to $50K/yr and last year you jumped to $150K? What the OP suggests is a more complete way, although perhaps closer to MND's model would be to take average career income instead of current.

 

[RetireBy90]

My goal was always have my stash earn more than I did. Now that I’m FIRE, with different sources of income my after tax income is about as after tax and savings before any earnings from retirement accounts.

 

[RunningBum]

Retired nearly 10 years ago. I have no idea whether I hit it or not. My goal was to make and save enough money so I could retire, while not depriving myself too much while working. I don't see where making this comparison would have helped me. Just because it's a measurable statistic doesn't make it useful. But if it gives you an incentive, by all means use it.

 

[ArmchairMillionaire23]

Like most interesting ideas, this one has already been thought of. On the upside, someone wrote a book about it, so it seems like a reasonably interesting idea.

https://en.wikipedia.org/wiki/The_Millionaire_Next_Door

(See the definitions of UAW, AAW, and PAW.)

Generally speaking, you get to that point you're describing through investments which have an exponential effect over time. Most people probably never reach that point, so you certainly deserve kudos for aiming high and being disciplined to make progress towards that goal.

Personally I chose not to track your metric. I chose to do my own version of a wall chart, tracking when 4% of my FIRE stash passed my annual expenses. This idea is also not new, having been described in the classic YMOYL book.

https://northernexpenditure.com/ymoyl-wall-chart-best-retirement-tool/

The Millionaire Next Door was the first financial book I ever read. I still own it and I re-read it every five years or so. I would definitely consider it one of the two books that helped me get on the path to financial independence. So by their (Stanley, Danko) definition, if I make $50,000 a year and was 50 years old I would have amassed a net worth of: (50 X 50,000 ÷ 10)
$250,000 for the AAW category,
$500,000 (or more) for the PAW category,
$125,000 (or less) for the UAW category.

I wasn't even thinking about that book when I came up with this idea. But the whole UAW/AAW/PAW comparison only takes into account what someone is making right now. I was just trying to be a little more realistic taking into account that a person usually starts out only making a little ($1,012 my first year from a part-time summer job back in 1986) and hopefully the income grows a little each year. I started adding up all my years of earnings and realized at of the end of 2018 that, Holy Cow! I've earned $1M (before taxes) so far in my life. That was definitely an eye-opener!
Then I think of my friends and co-workers in my age group, some of whom still live paycheck-to-paycheck with a lot of debt and not much to show for it, and many of them have earned as much or more than I have but they still struggle to stay out of debt.
I consider myself extremely fortunate to have read those two books when I was in my early 30s. Most of my friends & coworkers don't know that I've reached the 7-figure level in savings and they're shocked when they hear that I plan on retiring by the time I'm 55.

 

[Lewis Clark]

Interesting idea. I think the usefulness of the metric is limited.

For example, as a teacher, employees at some of the schools I worked for don't contribute to social security. They have alternate plans in a 403(b) account that get what would have been my social security contributions.

Active duty military get some of their pay in the form of tax-free allowances, which will throw off the metric calculations since that income won't show up on the social security statements.

If the metric is of interest for you, then by all means continue to calculate it. Doesn't matter if it is relevant in the same way to others.

 

[ArmchairMillionaire23]

To the OP: This is an interesting metric to consider. ...First, the income cutoff of $138K for FICA (includes SS). For example, if you make $300K/year, over half your income will not be included in the SS figure. Second, depending on one's exact situation, $50K+/yr of income could be diverted to 401(k) or similar, plus any non-qualified deferred comp and other such programs...

I hadn't even considered someone making more than $138K a year. I live in a small town in flyover country and making $50K a year means you have a pretty good job. As far as your second point, my Roth IRA, IRA and 401(k) contributions don't seem to affect my SSI earnings shown even though they're shown as "Taxed SSI Earnings". The only contributions that reduce my SSI earnings are my contributions to my (individual) HSA account but that's only around $3,000 a year and it's only been for the last 8 years or so.

 

[ArmchairMillionaire23]

Interesting idea. I think the usefulness of the metric is limited.

For example, as a teacher, employees at some of the schools I worked for don't contribute to social security. They have alternate plans in a 403(b) account that get what would have been my social security contributions.

Active duty military get some of their pay in the form of tax-free allowances, which will throw off the metric calculations since that income won't show up on the social security statements.

If the metric is of interest for you, then by all means continue to calculate it. Doesn't matter if it is relevant in the same way to others.

Again, I hadn't thought of alternate plans or military. I wonder if there's a different way of calculating the total lifetime earnings for those whom the SSI information does not apply or cover all pre-tax earnings. I know we all have different lives, different families and different circumstances but I just thought it was a cool idea to track how much someone has earned over their lifetime and compare it to how much they have saved.

 

[someguy]

I hadn't even considered someone making more than $138K a year. I live in a small town in flyover country and making $50K a year means you have a pretty good job. As far as your second point, my Roth IRA, IRA and 401(k) contributions don't seem to affect my SSI earnings shown even though they're shown as "Taxed SSI Earnings". The only contributions that reduce my SSI earnings are my contributions to my (individual) HSA account but that's only around $3,000 a year and it's only been for the last 8 years or so.

As you're aware, it's all about savings rate and time.

You may very well be correct on the 401(k)/etc. The NQDC stuff would almost surely be limited to those making well past the FICA cutoff anyway. I don't look at my SS earnings login as I consider SS (if it exists when I'm of age) to be mostly icing on the cake.

I think the concept of having a pot that totals more than you have grossed is interesting. It would indicate a combination of high savings rate and decent return on those savings. Although, as others have pointed out, the longer your total timeframe, the more rate of return plays into this. Someone else mentioned a goal of having your savings pot generate more "savings" than your active job grosses -- that is definitely an interesting crossover point.

 

[aaronc879]

My liquid net worth is almost exactly 50% of my lifetime earnings.

 

[CCBoard]

My retirement savings is 238% of my lifetime earnings. I've been very lucky.

 

[HarveyS]

My net worth is 1.33x my lifetime W2 earnings. Gains in real estate (insignificant) and investment returns (significant) are not included in W2 earnings.

 

[Montecfo]

My net worth is 1.33x my lifetime W2 earnings. Gains in real estate (insignificant) and investment returns (significant) are not included in W2 earnings.

Curious, did you dog through tax returns to get your W-2 earnings? Or have you been tracking it always?

It is an interesting metric. I have never checked that.

 

[HarveyS]

I used the taxed medicare earnings listed on my SS statement. Perhaps that is not the same as W2, but that is what I used. I should have been more careful to call that out.

 

[ArmchairMillionaire23]

I think the concept of having a pot that totals more than you have grossed is interesting. It would indicate a combination of high savings rate and decent return on those savings. Although, as others have pointed out, the longer your total timeframe, the more rate of return plays into this. Someone else mentioned a goal of having your savings pot generate more "savings" than your active job grosses -- that is definitely an interesting crossover point.

I've been keeping track of my savings, and the increases from the previous years and there are some years where it's higher than my income and others where my 'earned' income is higher. But since I max out my 401(k), Roth IRA, and HSA accounts, my contributions into my accounts are substantially over 50% of my gross income each year. So, theoretically, if I earn $60,000 this year, but contribute $36,250 into my retirement accounts, I would have to subtract that $36,250 from the amount that my savings generated for the year. So again, if I made $60K and my account balances increased by $100K, in reality my gains for the year would be $63,750. This would still be more than the $60K but a lot closer than $100K vs. $60K.

 

[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 higher earners but in our 60s time has had time to compound our savings, that helps the ratio.

 

[ArmchairMillionaire23]

I used the taxed medicare earnings listed on my SS statement. Perhaps that is not the same as W2, but that is what I used. I should have been more careful to call that out.

My SSI "Taxed Social Security Earnings" and "Taxed Medicare Earnings" have been the same every year. I'm guessing this could be different for some people. I have both lines in my spreadsheet (easier to copy & paste) but they're both the same all the way back to 1986. When comparing those amounts to my last few W2s, the only difference appears to be that my HSA contributions reduce my SSI earnings. For instance: If I make $60K but put $3K into my HSA then my SSI earnings would be $57K for that year.

 

[Perryinva]

Previous to about 1986(?) Medicare contributions were capped same as SS, so both numbers are the same. Afterwards, the Medicare cap was eliminated (or is at least extremely high), so the SS numbers only show your SS taxed amount while Medicare column is much closer (caveats listed in precious posts). Years ago, I did the same thing, for the fun of it. I have 38/39 maxed out years out of 41 real working years. My first listing is 1974, when I worked for Friendly Ice Cream starting my junior year in HS. And I worked every year afterwards. It was depressing. (Not Friendlys, that was a total awesome job for a high school guy. I dated a lot of waitresses, even eventually married one, but the lifetime earnings thing) And that doesn’t include all the summers I worked for free for my old man because he was paying part of my college costs. After two divorces, and the usually stupid youth spending on stuff, my invested portfolio is only equal to maybe the last 15 or so years of working, once I was steadily over 100k & rising each year. Even total net worth including property is less than my total earnings. But I sure had a blast being single & driving my Porsche, and taking expensive dive vacations in the early ‘80’s. Don’t regret it one bit.

 

[jkern]

It's a metric that I never really gave any thought to. However, my IRA and rental RE exceed my gross lifetime earnings by about $150K. While not super duper liquid, I include the rentals since it's part of my investment portfolio.

 

[copyright1997reloaded]

Previous to about 1986(?) Medicare contributions were capped same as SS, so both numbers are the same. Afterwards, the Medicare cap was eliminated (or is at least extremely high), so the SS numbers only show your SS taxed amount while Medicare column is much closer (caveats listed in precious posts). Years ago, I did the same thing, for the fun of it. I have 38/39 maxed out years out of 41 real working years. My first listing is 1974, when I worked for Friendly Ice Cream starting my junior year in HS. And I worked every year afterwards. It was depressing. (Not Friendlys, that was a total awesome job for a high school guy. I dated a lot of waitresses, even eventually married one, but the lifetime earnings thing) And that doesn’t include all the summers I worked for free for my old man because he was paying part of my college costs. After two divorces, and the usually stupid youth spending on stuff, my invested portfolio is only equal to maybe the last 15 or so years of working, once I was steadily over 100k & rising each year. Even total net worth including property is less than my total earnings. But I sure had a blast being single & driving my Porsche, and taking expensive dive vacations in the early ‘80’s. Don’t regret it one bit.

Looking at one of my many spreadsheets (this one has an estimate of my lifetime earnings), 1992 was the first year my Medicare tax amount was larger than my social security tax amount.

In the humble brag area, my current net worth is fairly close (w/i 10%) of my lifetime Medicare earnings #. However, it is an approximation because:
On the "my net worth doesn't include side":
1) It doesn't count my home value, land, other real property.
2) It doesn't count $ lost/given away: $ lost to divorce, $ for child 529 plan/UTMA, $ given to relatives to help them out.
On the "my Medicare earns doesn't include side":
1) It doesn't count years prior to 1992 where I made over the max (which is likely from mid 80's onward).
2) For a couple/few? year when 401K's started, they did not have FICA/Medicare taken out?

If I had to guess or was inclined to spend 10-20 hours rooting through old boxes, I would estimate I am "there", i.e. my net worth of what I have plus real estate plus assets I control (child 529) is > lifetime earnings.

Do I get a prize?

 

[CyclingInvestor]

investment net worth / lifetime earned income =

1.1 at retirement in 2006 at 48
2.4 currently

 

[ArmchairMillionaire23]

investment net worth / lifetime earned income =

1.1 at retirement in 2006 at 48
2.4 currently

I'm hoping to see similar results. I'm estimating the ratio could be around 1.2 to 1.3 around the time I plan to retire in 2025 at 54-55. It would be nice if my net worth doubled 14 years later even after withdrawing living expenses.

 

[2017ish]

Hmm. I'd never looked at this. Luckily, I've got an Excel sheet that has, inter alia, our wage income since we got married in 1983 (so easy to catch the earnings that were over medicare cap prior to 1994). On this metric, we are sorry performers compared to most here!

As of 3 years into retirement our investment portfolio is 66.5% of what we made in wage income commencing with graduate school summer jobs. (At retirement, it appears to have been 55%.)

In our particular case, not an important metric, as we are enjoying far more discretionary spending in retirement than we did when working.

 

[MarieIG]

Don't know my total earnings; and in any event I had very minimal earnings in the early years, gaps due to being a stay at home mom and low paying jobs. Our initial savings (which were for a down payment for a house) were wiped out to pay for my school.

I didn't really understand about saving for retirement and didn't start a SEP IRA (which didn't grow all that much) until about age 33. We bought our house when I was 34. I didn't have the opportunity to invest in a 401k until age 37. I probably did not make an average wage until about age 41. My wages were spent on the mortgage, property taxes and home owners' insurance. After the mortgage was paid off (circa age 41), I assumed most of the bills for school for the (6) kiddos (don't regret that). When salaries rose, we also paid more income tax and started having extra withholdings. Probably my highest rate of saving was in the 1/3 range.

I would think that my life-time earnings exceed the NW that I was able to accumulate by virtue of my efforts. (DH's earnings totally would exceed his savings - as he was continually spending his earnings on the family; luckily he had a good job with decent retirement benefits - and I was able to coax him into putting a little into his 401ks.)

For us the goal was that our savings (and DH's benefits) generate sufficient income to allow for a satisfactory life-style after retirement.