kellen2811
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| Measuring Stick |
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I have been looking for a measuring stick to see how I am doing in wealth building/ retirement.
Does anyone know of a formula or a general rule to measure that by? I know everyones situation is different but I just want a general guide to see how I am doing so far.
I got this from the millionare next door book:
“Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.”
So a person 27 making 120,000 a year should have a net worth of 324,000. I dont understand the calculation though. I understand that this is just another play on saving 10% a year of annual income, but with this type of formula we are assuming that someone is saving 12,000 a year from age 1-27 obviously not the case or possible. Does someone understand this better then me or have a better formula or measuring stick. This one made me disheartened when I used it as I would be behind the above results.
Kellen
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Wed Aug 08, 2012 3:40 pm |
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littleroc02us
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I've read that book a hundred times and it's never explained how the authors came up with the calculation, but what I personally believe you should take a way from it is that it's a good gauge to see how your doing for retirement. If I for example made 70k and I was 40 then my networth should be 280k, which in my opinion is conceivable. If I retire at 65 and I figure my retirement could be double at 140k then my networth should be 910k. Now he states that it represents that if that is your networth then you are considered an AAW (AVerage accumulator of wealth) if you have double of that they consider you to be a PAW (prodigous accumulator of wealth) and if you have less then half you are a UAW (Under achiever of wealth). If you look at those numbers they appear to be quite reasonable estimates. To me I think it's a guage more then an exact science. So to be a PAW having made 140k you would have a networth of 1.8 million. To most that would be quite adequate.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Wed Aug 08, 2012 3:58 pm |
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oldguy
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quote:
So a person 27 making 120,000 a year should have a net worth of 324,000.
Your NW could be almost anything - eg, maybe you have a $150k student loan and you've only been in the work force for 2 yrs.
The important metrics are that you have "time", about 33 years to accumulate. And exceptional "earning" power, ie, $127k/yr now and growing.
If you input $15k/yr to your longterm 33 years funds, and invest at 11%, you'll have $4.5M.
You can adjust your input based on your goal - ie, if your goal is $9M, increase the input to $30k/yr. Of if your goal is $2.25M, adjust the input to $7500/yr and spend the rest. Or you can adjust the risk level to meet your comfort level. If you cut the 11% return to 5.5%, you would have $1.4M.
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Wed Aug 08, 2012 6:49 pm |
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kellen2811
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I have a follow up question for the three of you. This has nothing to do with a measuring stick just general curiosity to the paths the three of you have taken to achieve your financial success.
What investments over the years have you made? In those investments have any been a more hands off project ie like a car wash? I realize no investment is hands off but I wonder more about investments that raise capital but do not take an inordinate amount of time to manage such as owning a bar would. I consider rental properties to be in this catagory although at times mine takes a good deal of time from me. Any suggestions for a young professional looking to branch out? Currently involved in real estate with rentals and contribute the max to 401k and have a seperate tax account that I am building. So no branching into those areas needed. What directions would you go?
Kellen
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Tue Aug 14, 2012 5:08 am |
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littleroc02us
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In my experience the boring and slow method to wealth has been my approach, meaning that my wife and I contribute to Roth IRA's each year the max of 5k into a diverse selection of Index funds that over the long haul have had a rate of return of at least 8%.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Wed Aug 15, 2012 1:15 pm |
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oldguy
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I agree with Coaster, the sotock portfolio looks like a good fit.
In my case, stocks and real estate ()the two apprecoating assets) gave me a good diversification and provided a solid 40 years of wealth-building.
Most of us are given 30 or 35 years of wealth building (25 to 60) followed by a transition to wealth preservation. Eg, if you stayed 100% in wealth building products past age 55 and then encountered a market crash and a RE bubble, your entire life's miilons would be lost - and you would not have the time to recover. So you need to take aggressive risks from 27 to 55, then back off slowly so that by age 65 you are in low-risk products. The law of investing - risk and return are directly proprotional - no free lunch.
Small businesses have an 85% failure rate - so the probability of success is low.
The stock market, averaged over 30-year blocks, nearly always exceeds 8%/yr, the average is 11%/yr. The key is patience, slow & steady, no trading, just buy the generic market and add to it incrementally.
Rental houses are usually a solid part of a port folio, averaged over a long period they have always appreciated. And you can easily adjust your risk to meet your needs. Eg, if you want to add risk, you add leverage. Instaed of having a $100k paid-for house, you would buy 4 houses with $25k down payments. You still have $100k invested, your equity is $100k in both cases, but with 4 houses you must manage 4 places, 4 renters, 4 rent checks, 4 mortgages - ie, more risk.
In my case, I did well buy using the equity of my 4 houses as seed money for stocks - as it turned out the houses did well, but the stocks did even better. So, in my case, I quit adding rentals and added more stocks instead.
Cinsider this - USA mortgage money is about the cheapest capital in the world. No other nation allows Joe Sixpac to sign up for fixed rate, low cost capital for 30 years. In the US, most of us can wander into a Bank, ask for $200k to buy a house, ask for 4% interest, ask for 30 years, ask that the rate be guaranteed for 30 yrs - and be given the loan. If you have good management skills, understand how to control (not avoid) risk, that borrowed capital is a great way to build wealth during the 30 years that are hopefully have available to you. (Way better than car wash) 
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Thu Aug 16, 2012 4:41 pm |
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Wino
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quote:
Originally posted by oldguy
In my case, I did well buy using the equity of my 4 houses as seed money for stocks - as it turned out the houses did well, but the stocks did even better. So, in my case, I quit adding rentals and added more stocks instead.
I was planning to discuss this with you, but now I see you are more in line with my thinking than I originally thought. I plan to keep two houses at retirement, one for me and one to rent. I was thinking about buying a third for rental, as well, but I am against most debt.
Of course, with money being so cheap nowadays, I am reconsidering and may take out a mortgage or two. Since rates are right around 3% for 15 years, I figure I really can't go wrong. Besides I fear a round of inflation is coming, and in that case "debt" is the best investment to have.
Wino
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Fri Aug 17, 2012 9:34 am |
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Wino
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quote:
Originally posted by coaster
I'd remind readers that this particular viewpoint should also have the caveat that the money borrowed is placed where the return exceeds the cost of borrowing...
I didn't say inflation was going to happen, but if my debt equals my savings, then my value between the two should stay constant in regards to inflation: As the value of my savings goes down, the value of the amount I owe also goes down. As long as my investment brings in more percentage increase than the amount I am paying for interest, then I am earning that difference as income.
The real "secret" is that my investments must earn at least as much as my debt is costing me. Hence my hedge that mortgage interest is very low right now. Borrowing merely to run up debt as a hedge against inflation is going to kill your finances in the long run.
Wino
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Fri Aug 17, 2012 3:26 pm |
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oldguy
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quote:
A novel viewpoint: debt as an investment. In my opinion, it's investors who are able to see things from novel viewpoints are the investors most likely to succeed. Oldguy has been preaching this approach as long as he's been here; I just don't think I've seen it quite so concisely stated.
During the Jimmy Carter years we had 4 houses and 6 mortgages. Strung pretty thin. Then hyperinflation hit, inflation was 12% or 14%, new loans were 14%. It turned out that the value of our houses doubled in just a few years, we hung on to our 7 1/2% loans (they were great compared to 14%), and our equity in the 4 houses went form almost zero to 50% ownership.
So yes, when you expect high inflation, load up on debt. "Long & low" collateralized debt, not revolving consumer debt.
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Fri Aug 17, 2012 4:20 pm |
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littleroc02us
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quote:
I was planning to discuss this with you, but now I see you are more in line with my thinking than I originally thought. I plan to keep two houses at retirement, one for me and one to rent. I was thinking about buying a third for rental, as well, but I am against most debt.
Of course, with money being so cheap nowadays, I am reconsidering and may take out a mortgage or two. Since rates are right around 3% for 15 years, I figure I really can't go wrong. Besides I fear a round of inflation is coming, and in that case "debt" is the best investment to have.
Wino
Personally I don't get why someone wants to go back into debt and take the risk of having a mortgage again, seems backwards and risky to me. I know Old guy does this but personally I don't like the risk it represents. All it takes in life is one event (sickness, job loss, disability) to really crumble the castle walls if you take on leverage. Personally I would rather have stability and less payments, with my millions from investments and compound interest. That is what I'm building towards on my wife and I are on a roll so far.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Fri Aug 17, 2012 4:59 pm |
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Wino
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quote:
Originally posted by littleroc02us
All it takes in life is one event (sickness, job loss, disability) to really crumble the castle walls if you take on leverage. Personally I would rather have stability and less payments, with my millions from investments and compound interest. That is what I'm building towards on my wife and I are on a roll so far.
Good points, all. Your method is sound, and there is nothing wrong with it.
The question becomes "How close to burying my gold in a jar in the backyard should my strategy be?"
You prefer to maintain your wealth and go with a tried-and-true method of increasing it, usually ahead of anything that is not hyperinflation. There is nothing wrong with this method, and it is very secure.
I was recently in your boat, too. But now that I have enough cushion to see that I'm not going to starve if social security collapses, I'm looking at both living well and leaving something to my kids.
Real estate has real value. It is better than gold, because no one can take shelter under gold. The only problem with real estate is over-priced houses. I look at the value of the house, not the direction of the market. As an example, five years ago, during the bubble expansion, I had a chance to purchase a $120K house for $160K, but houses were being flipped left and right in the neighborhood. Well, to make a long story short, I passed, and instead spent $140K for a house worth about the same.
My house is now worth about $250K. The other house is worth about $180K. Both have gone up during this time, but I took less risk and made more reward. This was from research, effort, and insight.
Now, assuming I continue to research properties and make good decisions, and that the government doesn't destroy our economy altogether, then I prefer real estate to make enough income to keep me living well without hitting my retirement funds too heavily.
There are advantages to both views, but I think the "Dave Ramsey" method is too extreme. Many folks need the discipline of Ramsey to prevent problems, but with discipline, intelligence, and thought, debt itself is not a problem. How you use it, how you finance it, and how you evaluate your purchases determines your outcome. Buying property solely to make money will eventually put you in the poor house. Buy property that will make you money as well as increase in value is a good investment.
The advice above is worth TWICE what you paid me for it.
Wino
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Fri Aug 17, 2012 5:18 pm |
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