Lifetime income vs. net worth

[LRDave]

I'm like Jimmy Buffett - "I made enough money to buy Miami, but I pissed it away so fast."

If you don't count the present value of our two COLA'd pensions, when we retired in 2019 our net worth was about 50% of our lifetime earnings.

Gumby looks at 40

 

[chassis]

@ArmchairMillionaire23 The idea in the original post is a good one to help setting net worth target at retirement. And, it is one of many ways to set a target.

Over my investing career of 30 years, I have used several target setting methodologies. Lately I like the calculators offered by any of the top tier financial firms. Vanguard, Fidelity and Merrill Lynch are several examples. Portfolio success % analysis and long term income statement modeling are also good in my view. Income statement modelling forces you to have some comprehension of living expenses and taxes, which are important parts of financial planning.

One statistic, metric or KPI does not tell the whole story. Use several tools to guide your path.

 

[Andre1969]

My first mortgage was in 1994, about 3.4x my W2 wages for that year.
My second one was actually an HELOC, on a family property that I "inherited" early when Grandmom put my name on the title. When I first took it out in 2005, the limit was about 3.3x my W2 wages that year. By the time it converted to a fixed mortgage in 2015 (and I had it maxed out, borrowing on the cheap, and investing), it was about 2.3x my W2 wages.

When I bought my current house in 2018, the mortgage was about 5.8x. As interest rates dropped though, I ended up refinancing, twice, with the second one just a couple months ago. It'll probably come in around 5.3x my W2 income this year.

 

[Perryinva]

I guess I never imagined that anyone would buy, live in, work from and retire in the same house or even 2. That is so far outside my realm of possible living, I am quite surprised! Maybe someone should start a poll on that, if there isn’t already one done.

 

[HarveyS]

If I followed the no mortgage more than twice your yearly income rule, I sure as $hit wouldn’t be retired already! Did anyone here actually follow that advice?

I did, and I feel that is one reason why I am able to be retired today. I've owned 3 houses and everyone one of them had a purchase price (not mortgage) less than 2X my gross pay. We did not include spouse earnings as the plan was for DW to stay home with kids. This served us well as we unfortunately lived in three areas with zero home appreciation over the time we owned the homes.
I can see the benefit of leverage if you are getting appreciation. In my case, in three high property tax states, leverage would have raised my expenses and hindered my savings ability.

 

[calmloki]

Fun but the devil's in the details. I made diddly squat working for others and got into rental real estate (IRS "unearned income") early. If I subtract our homes from our net worth and use the tax man's "real market" or "true cash" value for our rental property and then reduce that property value by a 1/3 for tax at sale and then divide THAT number by two because we are a couple it works out that my lifetime earnings are 4.2% of my individual net worth. No Porsche or expensive dive vacations though.. OH - and 70YO here.

 

[NgineER]

We are at 94% lifetime income vs. net worth. But our rental properties are included in the net worth calculation. To be fair, they were all purchased in the last five years, so not too much recapture and taxes yet. Also valuing them based on 100xmonthly rent which based on the last three years of market development is likely 20% below market value.

 

[Time2]

I guess I never imagined that anyone would buy, live in, work from and retire in the same house or even 2. That is so far outside my realm of possible living, I am quite surprised! Maybe someone should start a poll on that, if there isn’t already one done.

My parents did! Bought in 1955 for $6,000, borrowed $1,000 from the seller years later to add on two rooms, (one was my bedroom). Mom died in 2012, now my sister lives in it.

 

[ArmchairMillionaire23]

My parents did! Bought in 1955 for $6,000, borrowed $1,000 from the seller years later to add on two rooms, (one was my bedroom). Mom died in 2012, now my sister lives in it.

Thanks for all the greatly differing replies so far. It's neat to see such diversity among households at varying stages of (pre) retirement and from so many different locations and between contrasting costs-of-living areas.

And this isn't the only metric I'm basing retirement. This was just a fun idea I had. FWIW, my liquid net worth vs. my lifetime earnings ratio was around .904 at the end of 2019 (the latest SSI info I have)
Like mentioned before, I'm hoping it will be up to around 1.2 to 1.3 around the time I plan to retire in 2025 at 54-55.

 

[Gumby]

Gumby looks at 40

Sadly, that point is long past. But I am still a pirate.

 

[target2019]

And this isn't the only metric I'm basing retirement. This was just a fun idea I had. FWIW, my liquid net worth vs. my lifetime earnings ratio was around .904 at the end of 2019 (the latest SSI info I have)
Like mentioned before, I'm hoping it will be up to around 1.2 to 1.3 around the time I plan to retire in 2025 at 54-55.

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

 

[Time2]

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

I used liquid networth, but my home would only add 10% to my networth.

 

[target2019]

I used liquid networth, but my home would only add 10% to my networth.

Did you use liquid net worth as numerator in your calculation?
Just checking.
Thanks.

 

[Sojourner]

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

 

[kcowan]

We had no plan. The game "plan" was to save 15%, not spend more than we needed to, always take a move for more opportunity (even to less desirable goegraphy) and work until we could retire in comfort.

We could barely do it at 50, planned on 55, got divorced at 52 and worked until 60. So far so good!

 

[Starsky]

Seems like an ego stroke rather than a financial plan. I fail to see the value...

 

[captain3d]

Seems like an ego stroke rather than a financial plan. I fail to see the value...

Just came to spoil our fun. Savings targets for whatever reason often have a motivation value to keep you on track.

 

[Lawrencewendall]

You guys/gals made me look. My NW is about the same as my lifetime earnings (NW a little less). Don't know what that means.

 

[Time2]

Seems like an ego stroke rather than a financial plan. I fail to see the value...

I see no financial use to it, but I think it is an interesting metric. That's why I started a similar thread on MMM a few years ago.

 

[target2019]

If invested $$$ is the numerator, and cumulative income or earnings (SS) is the denominator, I get the ratio below (53% in 2019).

 

[scrabbler1]

I have all the data in separate spreadsheets - a by-year summary of types of income and expenses, and portfolio summary by quarter or month, depending on the time frame.


The wage income is from W-2, so it has ben reduced by 401k contributions and other off-the-top deductions. I came close (within $100k) in 2007 to having my portfolio's value exceed my lifetime W-2 earnings. The market downturn of 2008 dropped the portfolio's value hard even though the W-2 earnings, which didn't grow much in my last years of working part-time, topped out at just over $1M by the time I stopped working in late 2008.


It wasn't until 2010 where the portfolio's value exceeded $1M by enough to exceed my lifetime W-2 earnings. If I add back the 401k contributions, that crossover date would be in 2011. I turned 47 in 2010, 48 in 2011.

 

[TOOLMAN]

I tracked gross pay vs NW for each of my 38 working years.
When I retired my NW was about equal to my lifetime after tax take home earnings.
Now 5 years into retirement my NW is a little more than my gross pay W2.
Started with $0 & no windfalls & made it to the top 1%.
One life goal achieved.

 

[Cobra9777]

Out of curiosity, I just downloaded SS earnings history for DW and myself. I used the "Taxed Medicare Earnings." The current value of our liquid investment portfolio is 58% of our combined lifetime gross earnings (no inflation adjustments). It's 94% if I add the FMV of our home and the NPV of our two small pensions.

But when I adjust earnings for inflation, those two figures drop to 43% and 70% respectively, which I think is more-or-less in-line with the Wealth Conversion Efficiency metric, except that I left out the NPV of SS.

With SS and inflation-adjusted earnings, I get 90%.

 

[pjigar]

I used SS earnings to calculate the numbers. Liquid networth is 64% of lifetime earnings and total networth is 77% of lifetime earnings. Nominal numbers. I am 45 so I think these are good numbers.

 

[street]

I been watching this thread and curiosity has gotten me. So, did the SS total earnings and my portfolio (not NW) is 2.6 times greater then my total life time earnings. There is no inflation calculations figured in just dollar for dollar life time to portfolio now.