Wes Moss: How do you define being rich?

Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.

I know it’s easy to get lost in all of the retirement planning numbers and rules of thumb — like “own your age in bonds” or “buy term insurance and invest the difference” and “save 15% a year.” Sorry, but I’ve got one more number for you, and it happens to be the simplest way in the world to think about where you stand in funding your post-work life.

Ready? The number is 1, and it’s the key to the “rich ratio.”

Any ratio above 1 is fantastic. A ratio less than 1 means you’ve got some work to do. Here’s how it works: Take the monthly income you will have coming in [Social Security + pension], including what your nest egg should produce, and divide it by what you expect you’ll need to spend each month to live the retirement you want: have ÷ need = rich ratio

Example 1: Charlie needs $10,000 per month to support his rock star lifestyle in retirement. Charlie has a small pension from the Screen Actors Guild  of $1,000/month plus Social Security at age 62 of $1,800/month. He has saved $1 million in his 401(k). Here’s his “have” part of the rich ratio equation: $1,000 + $1,800 + $4,100 [5% of his 401(k) on a monthly basis] = $6,900

But Charlie’s need is $10,000. So here’s how his rich ratio works out: $6,900 ÷ $10,000 = 0.69

Considering his rich ratio is below 1, I would not consider Charlie rich at all.

Example 2: Donald needs just $3,500 to live the good life because, in part, his house is paid off. Donald also has a small pension of $1,200/month, will receive Social Security of $1,800/month and has $400,000 in his 401(k). So here’s Donald’s “have” part of the rich ratio equation: $1,200 + $1,800 + $1,650 [5% of his 401(k) on a monthly basis] = $4,650

That’s a lot less than Charlie’s “have” total of $6,900. But remember, Donald’s “need” is just $3,500, giving him this rich ratio equation: $4,650 ÷ $3,500 = 1.32

That’s an awesome rich ratio. The definition of “rich” is “possessing great material wealth.” But in my example, though Charlie possesses great material wealth with $1 million in his 401(k), I would contend he is much less rich than Donald.

Maybe we need to re-write the definition of “rich.”

So, what’s your definition of being rich? And what’s your rich ratio?

– By Wes Moss, for Atlanta Bargain Hunter

– Follow Wes Moss on Twitter: @wesmosswsb. On Facebook: Wes Moss Money Matters. E-mail: moneymatters@wesmoss.com

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