Are you really on track?

Where do you stand?

In a recent post, I shared one view (not mine) on what it takes to be considered rich …

…it’s $5 million !

Now, here is an article by Bankrate that brings that number right down to the other end of the scale …

Check out this table showing the spread of annual income:

Source: Before-Tax Family Income, 2001 Federal Reserve Board Survey 

First, let’s see where you stand in relation to this table?

If you aren’t in the top brackets (although, many of our readers are), it might be comforting to note (according to the Bankrate article): “if you are bringing in $40,000 a year, you’re doing better than half the households in America. Or, as a Washington think tank recently pointed out: If you’re a teacher married to a policeman, your combined household income puts you in the top 25 percent of all households in the nation.”

What intersted me most, was the relatively low income that it takes to be at the absolute middle of the top 10% of all income earners in the USA … ‘only’ $170,000.

This amount seems to correlate with a New York Times survey that said the ‘rich’ were bringing in between $100,000 and $200,000 per year …

… and, if you are like most Americans - earning less than $40,000 – this sounds like a king’s ransom … but, it’s not.

You see, there’s a big difference between what you might bring in as income and what some people call sustainable retirement income .

Take a look at what the Bankrate article tells us how much these same people currently have as their Net Worth:

Source: Family Net Worth, 2001 Federal Reserve Board Survey 

Look at the top level, the same ‘rich’ people who earned $170,000 a year in the first table, only have a median net worth of $833,000 according to the second table.

Now, if you take this $833,000 and apply the ‘safe’ annual withdrawal rate of 4% as advocated by most misinformed financial advisors (for me, the safe withdrawal rate is more like 2.5% p.a.), it seems like these so-called ‘rich guys’ can only afford to spin off $33,000 a year.

Now, that’s less than the teacher and the fireman! So, what’s wrong?

Well, for a start there are actually very few really Rich people in this country - so few that there should be another category in BOTH of the above tables: the top 1% of the USA population by Net Worth and Annual Income. 

Secondly, the so-called ‘rich guys’ earning $170,000 are just like the rest of the working population working at a JOB … Just Over Broke.

When their job stops, they stop being ‘rich’ … period.

So, where do you stand?

Deal or No Deal

Who would have thought that you could learn so much just by watching television? Maybe, my kids are right? … In their dreams!

A few nights ago I watched NBC’s Deal or No Deal, the Howie Mandel tour de force. It basically works by having people select one suitcase out of 26 offered then accepting or (usually) rejecting larger and larger offers by a mysterious ‘banker’ (just some guy in the control booth punching out a simple computer algorithm) as they eliminate suitcases.

If the contestant stays right to the end, they get keep whatever is in ‘their’ suitcase … a 1-in-26 chance of being $1,000,000, but, much more likely an amount from$0.01 to $500,000.

 Ho hum …. usually …

But, the episode I was lucky enough to witness was a SPECIAL episode, because they put out TEN (10) suitcases containing $1,000,000 (with the other 13 suitcases having smaller amounts … the largest suitcase without $1,000,000 in it now held just $10,000. In other words it was a close to 1.3 : 1 chance of winning a million for the contestant, in theory.

Why was this so special … besides the obvious?

Well, it allowed two or three chances to really see

(a) How the ‘banker’ stiffs the contestants on the ‘offers’, and

(b) How the clueless contestants make their decisions.

 Usually, it is very hard to work out the correct ‘odds’ when the ‘banker’ makes his offer and Howie sells a hill of beans to our hapless hero (i.e. the contestant) … just try this online version of the game to see what I mean …

But, last night, because there were so many $1,000,000 suitcases left at the end, there was (all approximately) one 1-in-4 chance offer, one 1-in-3 offer, and TWO 50/50 offers that even Blind Freddy could see.

Here were the odds and the ‘banker’ offers on each (now, these are approximate because I didn’t write them down and I didn’t record the show):

Offer 1: $170,000 for an (approx.) 25% chance of $1,000,000 being the chosen suitcase

Offer 2: $240,000 for an (approx.) 33% chance of $1,000,000 being the chosen suitcase

Offer 3: $330,000 for an (approx.) 50% chance of $1,000,000 being the chosen suitcase

Offer 4: $380,000 for an (approx.) 50% chance of $1,000,000 being the chosen suitcase

Would you have accepted any of these offers?

To me, and my maths is probably off, but 33 cents in the dollar on a 50/50 chance sounds a bit light … and, I would not have accepted ANY of these offers.

Anybody who regularly chases 50% chances with only a potential 33% payout will VERY QUICKLY go broke!

What did the contestant do??? She ….

…. rejected the offers [big anticlimax here].

But, I think that she should have accepted ANY ONE of these offers … in fact, I was shocked when she didn’t accept offer 3. or 4. on my table above!

Why?

Because, we haven’t considered her investment and return. You see, she invested NOTHING (except some time) in the ‘deal’ yet was offered hugely large amounts to simply pick up and go home …

… life changing amounts … possibly more money that she is likely to save in her entire lifetime …definitely, 2, 3, or even 4 times the Net Worth of the typical American family!

What does all of this mean?

If you are investing relatively small amounts of your portfolio on investments, gambling, game shows - basically anything where you are chasing a commensurate return -  then pay close attention to the ‘odds’ (otherwise known as risk/reward).

But, if you are making the occasional BIG BETS – those all or nothing, bet the farm-type of gambles (such as changing careers, starting a business, etc.) – then you had better have a clear idea of how life changing the outcome will be.

… then, go for broke!

It’s NEVER going to be enough!

Pick a number: $1 million, $10 million, $50 million.

It’s NEVER going to be enough …

You see, when you get to whatever number you pick in advance as being THE NUMBER you will find that your expenses magically jump up to meet it … or worse, beat it …

Why?

Before you make the number, you are thinking like a [plug in your favorite means to scrape enough money to subsist on: employee, small business owner, plumber/electrician/doctor/lawyer/accountant].

This means that you are dragging in your [plug in your subsistence salary here: $30,000, $50,000, $100,000, $200,000] …

… which just happens to be barely enough to pay your current [plug in your vices here: food, mortgage, car payments, plasma TV payments].

So, getting to [plug in your "I'm really rich' number in here: $1 million, $10 million, $50 million] really would make a difference … in your mind!

You see, your current lifestyle isn’t your ‘dream lifestyle’, as soon as you improve your Net Worth your dreams also go up!

That means that your $120,000 apartment suddenly becomes $350,000 when you have $1,000,000, then it becomes $1,500,000 when you have $5,000,000 and so on …

Your $5,000 chevy at Just Over Broke becomes a $35,000 Cadillac CTS at $1,000,000, and a $120,000 Maserati Gransport Spyder (oh, yeah!) at $5,000,000.

A better way is to work backwards: decide how much you need to earn each year to finance the life of your dreams (more on this in a later post) and multiply by 20 and that is The Number for you.

The answer will probably scare you into action (it’s the reaction I’m hoping for!) or to death (bummer), but, always keep that Number in mind when deciding what ‘rich’ means to you …

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How much does it take to be rich?

My 10 y.o. daughter asked me exactly that question the other night … actually, she simply asked “are we rich”? I’ll tell you how I answered in a minute, because it is important that you understand how YOU would answer this question.

In the meantime, and by coincidence, I came across this blog just yesterday: http://www.millionairecorner.com/content/blogsection/4/110/

It’s written by Spectrum who did some research on what it takes to be rich …

 http://getrichstayrich.net/introduction/index.html

The problem is that they asked people who were already Rich!

 So, most said $5 million (what? net worth? in the bank? under the mattress?), but some said as much as $25 million. I would guess that this was related to how much money they made … the more they have, the more they spend, so the more they believe it takes to be ‘rich’.

Only 1 in 5 said $1 million, which is what many people just starting on the road to wealth would believe means ‘rich’ … when you get to $1M tell me if you’re ready to retire (I’ll bet the answer is NO!). 

I think the number is somewhere between $100 million and $1 billion …

… as one Billionaire said recently, after his company stocks grew five-fold in less than 12 months moving him from $1 Billion to $5 Billion net worth: “once you get past the first Billion the rest doesn’t matter.

So, how did I answer my daughter?

I said: “we are not ‘rich’ we are wealthy, because we can afford to live the same way that we are living now for the rest of our lives”. 

Now, we aren’t slouches (nice house in a great suburb, the ‘right’ cars, schools, vacations, etc.) but we have no helicopters or Lear Jets …

So, to determine when you are ‘rich’ you first need to determine your Number … that is the amount of money that you need to have ‘in the bank’ (actually in Passive Investments : bank accounts, investment properties, stock market … anything that makes YOU money even while you are asleep) to produce enough income for you to live your current (or desired) lifestyle for the rest of your life (which means, the amount has to be indexed for inflation).

I’ll show you how I worked through this in a future post!

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