I’m reading a book called “You Can Retire Sooner than You Think: The 5 Money Secrets of the Happiest Retirees.” I picked it up at the library because I’ve been trying to convince my husband that it’s ok to retire whenever he wants. (I doubt he’s interested yet.) This friendly short book has some interesting ideas, one of which is a new-to-me definition of what is “rich.” According to this book, someone with an income of just $2 000 per month could be rich.
What is Wes Moss’ definition of a Rich Ratio?
The author, who works with financial planning and in radio, wanted a simple way for people to decide if they were rich or poor, so he invented one. He came up with the following formula
Have = Rich Ratio
- What you Have is your after-tax income.
- What you Need is the amount of money you want to spend each month to live the lifestyle you want.
He further explains the idea with two examples:
- If you have an after-tax income of $4 000 a month, but you can meet your lifestyle desires with only $2 000 then you are rich.
You have a Rich Ratio of 2.00.
- If you have an income of $1 million a month, but you need $2 million, then you are poor.
You have a Rich Ratio of 0.500.
Are You Ready to Retire Happily?
His theory is that to retire happily you need a Rich Ratio of over 1.
Which makes sense: if you need more money a month to live the way you want than you are able to receive in income from your pension, social assistance, CPP, OAS, investments, rental income, and any other sources of money, then you are not going to be happy.
What Is Our Predicted Rich Ratio for Retirement?
I’m having a bit of trouble with this one. To figure out the ratio, I need to have a number for our retirement income. For that I have a reasonable estimate.
It’s harder for me to estimate our “Need” value for a happy retirement.
I know what we are spending now, including how much we like to have for a significant family vacation and to save for home repairs and new cars.
But that number is too large, I think, because it includes what we need for our entire family. When – if?—the children ever grow up and move on, will we need less? Or will we be in some way financially active in their lives and still need the same?
Also, I’m a bit uncertain about our hobbies budget. Our current number includes what we are spending now. But some of that spending I know for a fact is “comfort spending.” That’s the extra that gets spent as a “reward” for too much (unpaid) over-time and stress. So it’s quite possible our hobby spending will decline a bit in retirement. But maybe not!
Right now, our retirement Rich Ratio is about 0.95. So we could have a happy retirement provided we had a small additional source of income. If the children ever left home and were financially independent, the ratio would immediately jump over 1.00.
Since we’ve always expected to continue to generate small streams of work-related income in retirement, I know even if our spending doesn’t decrease as the children age, we still are good for a ratio of 1.00 or higher.
What Is Our Rich Ratio Now?
We currently have a Rich Ratio much higher than 1.00. Which is good because that is why we can save money for our retirement, our children’s education and other aspirations.
How did we get a ratio over 1.00?
Partly, we got there by getting a good education and continuing to upgrade our skills. Some luck, of course, is also involved any time one gets a job that pays well.
The other part of the ratio, though, is just as important. By keeping our Need number low, our Rich Ratio bounces well above 1.00.
We don’t have extravagant tastes and we do tend to conserve money on things that don’t matter to us so that we have it to splurge on the things that bring us joy.
For example, I don’t have marble or granite kitchen countertops. Instead I invested the money that could have been spent on that upgrade. From the income that I earn each month from that investment, I had the cash handy to invite our visiting relatives out for dim sum for lunch today. And we can treat others next month.
So I guess we’re rich! (but I already knew that.)
- Why I’ll Never Own an Expensive Luxury Vehicle
- Four Overlooked Benefits of Charitable Donations and the Charitable Tax Credit
What about you? Do you think your Rich Ratio is high enough to ensure a happy retirement? Is it high enough to feel rich right now? Please share your views with a comment.