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Is Someone with an Income of $2 000 a Month Rich? What’s My Rich Ratio?

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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
Need

  • 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.)

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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.

Book Review Count On Yourself: Take Charge of Your Money

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Browsing the stacks at our local branch, I found yet another book that looked interesting to me. As someone who only recently started consolidating, simplifying and hopefully improving our savings and investments, it looked like a worthwhile read. Here’s my review of Count on Yourself: Take Charge of Your Money by Alison Griffiths.

Tone

Very calm and self confident, with a conversational tone.

Ms. Griffiths is trying to ensure you stick with the tasks without getting frightened off by jargon or judgment. The book is full of short “case studies” which are really short descriptions of people and their finances.

To set you at your ease, she describes some of her own major money mistakes and often includes her family members as “case studies.”

Who Is Taking Charge of Your Money For?

The target audience appears to be 20-70 year olds. Because she is offering sensible hands-on step-by-step advice about how to set up a very simple but diversified and asset allocated portfolio, her advice fits most age groups.

I suspect the most appreciative audience will be 40-50 year olds who are starting to save money and who are uncertain about retirement and investment.

What’s Not Included in Taking Charge of Your Money?

Despite its name, this book is not about managing and re-paying debt. This book is about saving and investing for the future.

What I Learned from the Book

“Higher risk does not necessarily translate into higher return, especially over time.”

According to her work, a portfolio of 20% cash and 60% bonds plus 10% Canadian equities and 10% American equities has returned 8.7% per year over the past 20 years.

A portfolio of 5% cash, 15% bonds, 25% Canadian equity, 25% US equity, 20% Global equity, and 10% US small companies has returned 8.8%.

Portfolios between those two extremes returned 8.6% and 8.4%.

By cash, she generally is referring to GICs.

This was interesting and somewhat reassuring to me. Our portfolio is closest to the ultra-conservative one listed above, although we have had slightly more in GICs than in bonds.

This is similar to what David Trahair reported in Enough Bull: that GICs can form the backbone of a retirement portfolio.

Regrets

I wish the book had an index.

Would I Buy Count On Yourself?

I would buy this to give to someone who is just starting to straighten out their finances and their investing. It’s encouraging and practical.

Since I’ve already completed most of the steps in her book, I wouldn’t buy it for myself.

Topics In Count on Your Money include

Why We’re Not Talking About Our Finances

Many people are extremely reluctant to share information about their finances. This may be due to fear and frustration.

Getting Organized

  • You need to make a list of every type of financial account you have (include life insurance policies; home insurance policies; etc.) and try to eliminate any unnecessary extra ones
  • You need to make a list of all of the security information associated with each financial item (passwords; user ids; security questions and answers) and store it somewhere both physically and theft safe. If it’s in a safe deposit box can your spouse and one other person with financial authority get to it?
  • It’s a good idea to make another list of all your online access accounts from email groups to eBay accounts and their Userids, passwords and security questions. The passwords etc should differ from your financial passwords.
  • Within each type of financial account (e.g. a RRSP) you need to list everything you are invested in from savings accounts to ETFs

While listing all of these items you may find duplicates, things you can cancel, and cost savings.

Know Yourself

  • your time frame for retirement and major spending
  • your financial situation (do you have a defined benefit pension? will you get CPP or OAS? etc.)
  • your investment temperament (can you handle stress and risk?)

What Types of Ways Can I Save and Invest?

introductions to and explanations of

  • bank accounts
  • TFSAs
  • RESPs
  • RDSPs
  • RRSPs
  • RRIFs
  • non-registered investment accounts

Diversification

What kinds of asset classes there are and why you should usually have something in each.

Asset Allocation

She gives a detailed and important overview of what asset allocation is and how it may be the most important factor in your investment success. (She refers to it as “How many investment eggs in which baskets?”)

Fees

She explains how fees, particularly high MER and DSC mutual fund fees, can destroy savings. She points out clearly how high fees can make the suffering worse during a market crash and significantly lengthen the time it takes for an investor to recover from a market crash.

As someone who held a small amount in an index mutual fund through the 2000 crash, I can agree completely with that, even though it had a pretty low fee. (about 0.7%)

Easy Chair Investing

Her preferred method of investing dates back to a portfolio she tracked in a newspaper column called the Easy Chair.

Basically, she strongly recommends

  • investing in 3-4 low-fee ETFs
  • re-balancing your asset allocation every year

Somewhat surprisingly, she has numbers to show that the return on investment over the past 20 years (probably ending in 2011 since the book was published in 2012) was highest for a portfolio that included cash (as GICs), bonds (as a bond ladder or bond ladder ETF) and equities (only Canadian and US; mirroring the stock indices.)

ETFs

She actually names ETFs specifically and lists the best ones available at the time she wrote the book. (This is a bit unusual in personal finance books.)

She lists fewer than 10 for each of the three classes she recommends you invest in:

  • bonds
  • Canadian equities
  • US equities
  • Index Mutual Funds

She acknowledges that for some investors ETFs are not possible yet. She therefore names the best (at time of writing) available index mutual funds. No/low loads and low fees are a must.

Asset Allocation

She reviews sample allocations for different life plans and personalities.

Count on Yourself Portfolios

She walks you through the basic steps required to set up an ETF Easy Chair including short-listing which ETFs to choose to buy in each category.

She provides some advice for investors who feel they must also include REITs or dividends, etc.

She also walks through the basic steps for setting up an index mutual fund portfolio for those who can’t use ETFs.


At amazon.ca

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Have you read Count on Yourself? Did you like her Easy Chair approach to investing for the future? Please share your views with a comment.