What Is Your Rich Ratio?

Happy Retirees Have A Rich Ratio Over 1. What's Yours?

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For many years I’ve wondered exactly what makes retirees happy or unhappy.  When I conducted my study to get some real answers, there were a number of results that didn’t surprise me. But, there were a few that I found a little more interesting.  For example, my survey results found that BMWs are the top luxury car in unhappy retirees’ garages across America.  But BMW wasn’t the only car that got a bad rap.

  The other cars on that list include Chrysler, Dodge, Kia, and Mercury. On the other hand, it seems that those retirees who drive Lexus, Nissan, Hyundai, Subaru and Buick are pretty happy.  While this is not to say that every retiree that drives a BMW is unhappy or that every retiree that drive a Lexus is happy, the data definitely makes us think about what kind of car is our own garage right now.

Did you know that retirees who try their hand as a stock trader as their second career are generally unhappy?  Playing the market is not for the faint-hearted and adds a lot of undue stress to retirees’ lives.  Even if you watch CNBC every day and think you know what’s going on, remember that it’s best to leave stock picking to the real experts.  Unhappy retirees also think that the only purpose of having money in retirement is to have money in retirement.  This is counter to how happy retirees look at money, who know that it is merely the means for living a happy life, not the end goal.

  Your money needs to have a purpose!

Of all of the traits of unhappy retirees that I like to talk about, one that I believe carries a lot of weight and is easy to understand is the Rich Ratio.    

What Is The Rich Ratio?

The Rich Ratio is a ratio that I created for individuals and families to give them an easy way to understand their money.

 Simply put, the Rich Ratio is the amount of money you have in relation to the amount of money you need. 

For example, if you have the ability generate $10,000 a month and you need only $5,000, you’re rich!  By that same logic, if you have the ability to generate $1 billion a month, but you need $2 billion, you’re not rich.  Happy retirees honor the rich ratio.  Any ratio over 1 is fantastic.  Any ratio below that indicates that you probably have some work to do.

Here’s how to find your Rich Ratio:  Take the monthly income you will have coming in (social security +pension+ any other income streams), including what your nest egg should produce, and divide it by what you expect to spend each month to live the retirement you want:

Have/Need = Rich Ratio

Let’s look at a couple of examples and see how someone with less money saved can actually have a higher Rich Ratio and is probably living happier.

Example #1:

Karen has a passion for travel.  She loves to travel so much that she’ll need $10,000 per month to support this kind of lifestyle in retirement.  Karen has small pension from her days in the advertising business (1,000/month) plus social security at age 62 of $1,800/month.  She has saved $1,000,000 in her 401(k).

 

Karen’s Have= $1,000 (pension) + $1,800 (social security) + $4,100 [5% of her 401(k) on a monthly basis] = $6,900

Karen’s Need:  $10,000

Karen’s Rich Ratio= $6,900/$10,000 = .69

Considering her Rich Ratio is below 1, I would not consider Karen “rich” at all.

Example #2

Now let’s take a look at Tom.  He needs just $3,500 to live the good life, in part because his house is paid off.  Tom also has a small pension ($1,200/month).  He will receive social security of $1,800 and has $400,000 in his 401(k).

Tom’s Have = $1,200 (pension) + $1,800 (social security) + $1,650 [5% of his 401(k) on a monthly basis] = $4,650

Tom’s Need = $3,500

Tom’s Rich Ratio = $4,650/$3,500= 1.32

While Tom’s’ Have is a lot less than Karen’s, so is his Need.  Tom, with significantly less money saved that Karen, has a much better Rich Ratio at 1.32, compared to Karen’s at .69.

  So even though Tom has a smaller net worth (and less in retirement savings), he’s actually much richer than Karen is.  Based on these numbers, Tom’s got happiness in his future, and unfortunately Karen does not. 

If you haven’t already, take some time to figure out your Rich Ratio!  You can always make tweaks and adjustments to be sure that your Rich Ratio is above 1 so you’re setting yourself up to be a happy retiree.

If you are looking for some financial planning tools, here are a few great ones:

Retirement calculator, 401k, how do I stack up?money & happiness quiz

Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. 

Wes Moss is the Chief Investment Strategist at the financial planning firms Capital Investment Advisors and Wela. He is also the host of the Money Matters radio show on WSB Radio.  In 2014, Moss was named one of America’s top 1,200 financial advisors by Barron’s Magazine. He is the author of several books including his most recent, You Can Retire Sooner Than You Think  - The 5 Money Secrets of the Happiest Retirees, which has been one of Amazon’s best-selling retirement books in 2014.