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 Atlanta Bargain Hunter on Twitter: @atlbargains. On Facebook: AJC Atlanta Bargain Hunter. You also can e-mail Lauren Davidson, Atlanta’s Bargain Hunter.

BravesFan

March 21st, 2011
9:30 am

This is like the millionaire next door-type-stuff. It seems like everyone is so obsessed with having \$1 million when they retire, but my pension and other income is more than enough. I hate it when my friends compare their IRA levels to each other when it doesn’t even matter.

BravesFan

March 21st, 2011
9:31 am

OH, also, is it safe to say that you can earn 5% on investments going forward over the next 20 years to keep up with the withdrawal rate you suggest?

bmoney

March 21st, 2011
11:35 am

5% withdrawal rate seems high in both cases. Isn’t the recommendation to use a 3% rate?

Nothing but a Ponzi Scheme

March 21st, 2011
11:48 am

Being rich means realizing that Social Security is just a Ponzi scheme and that in order to be anywhere close to solvent, the government will need to raise the eligibility age and cut benefits. Being rich means being able to come up with a 1 without having to count on the government lies and deceipt that is has propogated for nearly 80 years with its Social Security lies.

Amen BravesFan

March 21st, 2011
12:00 pm

I have never discussed our financial details with anyone other than my spouse. I think it’s a little rude and in some cases pretentious. I don’t think about financial standings in terms or rich or not. We have no debt, retired early, own our home and have more than enough. We have small pensions, AND most important, health insurance provided by a former employer. If you can swing it, being debt free is one way to increase your chances of happiness, and perhaps being rich, whatever that means.

Jeff

March 21st, 2011
12:37 pm

Both cars are paid for, pay off the credit card in full every month, and am making double payments on the house every month so we can be debt free in 7 years. I love my job, my wife, my daughter, our dog, and even (secretly) our cats. My family hgas excellent health and we pool table in the basement. I am rich.

bacchus

March 21st, 2011
12:48 pm

“Rich” is a vague, misunderstood, and misleading term. To be “rich”, for me, means having a certain peace of mind now and in the foreseeable future about one’s financial affairs. And Social Security does not conjure up any thoughts of financial peace of mind.

I take pride in knowing some things I own may be boring or rubbish in the eyes of pretentious elitists, but it’s all paid for. I own it and a bank doesn’t. And you get there by saving at least 20-25% of what you make – forget 10-15%.

ajc family

March 21st, 2011
12:51 pm

If you HAVE to work to maintain your lifestyle, you’re officially working class.

BravesFan

March 21st, 2011
1:08 pm

I agree with the 20% savings number. I have done some online calculators that show if you can save 20% and compound it at 5% (should be reasonable return over a long time) this is enough to pull 100% of your final salary for a 30 year retirement period. I tell my kids this stat every time I see them. They think I am being a pain in the butt…..however, they always remember it and knowing that I am going to bring it up every time has cemented it in their minds…..my kids WILL NOT be dependent on anybody but themselves!!

BravesFan

March 21st, 2011
1:09 pm

PS….that is rich in real terms!

GIVE ME A BREAK

March 21st, 2011
1:10 pm

Rich can mean just being content.

Drew

March 21st, 2011
1:24 pm

It’s always funny to me that the more money or wealth a person has, the less they seem to care about money. There is a lot to be said for having nice posessions and living a life of luxury (just ask anyone who is poor). That being said, being “rich” has nothing to do with wealth or money or status, but rather the way we feel about our place in this world. Being rich is about living a life of purpose and waking up every day with a sense of fulfillment and happiness. The money only matters if you DON’T HAVE ANY. Once you have enough to quit worrying about it, your focus usually shifts to the things in life that really do matter. I know quite a few people with a lot of money that are miserable because they still haven’t figured this out, and even a few people of meager financial means who are very happy because they have. Why must we always keep score with our friends and neighbors?

underdawg

March 21st, 2011
2:20 pm

Drew – we keep score because that’s what we do in America. Competing with your neighbors keeps the competitive edge alive and well in each of us. Lose it, and we might as well just try socialism. I think rich is having \$5 million.