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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.

I’m Rich; Are You?

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One thing I’ve discovered by asking is that most people define “rich” as someone one or two steps higher up the annual income ladder than themselves.

When I say we are rich and so are they, many of them disagree. Yet the people I mean are living in single family detached homes that are between half to entirely paid off. They live within walking distance of 4 grocery stores, 2 medical clinics, 3 dental clinics and a library. They all own at least one vehicle, most own two. [One owns two, but doesn’t count the red convertible because “it’s always breaking down.”] They all have some form of health and dental insurance. They all have some form of pension or RRSP savings. Their children are all enrolled in a sport or activity (like piano lessons) that costs money. At least one partner in each home is employed full time. To me, they and we are all rich. Our lifestyle is what most Canadians dream of and aspire to have. Personally, I feel grateful and thankful for being rich. And my family tries to give back both monetarily and with our time to help others because being rich comes with responsibilities.

While it’s easy to get agreement that Bill Gates and Warren Buffet are rich that’s about where the consensus ends.

How do you define rich?

Do you have to make over $100,000/year to be rich? $200,000? Are you rich now? Or has what is “rich” risen as you have moved up?

Other people have also wondered and discussed richness recently.

Jane at the Money Puzzle describes three millionaires she knows but seems doubtful whether the third one is really rich.

In Baby, You’re a Rich Man, The Wall Street Journal tried to decide how rich is rich with respect to changes in US personal taxes.

Adina at Timeless Finance “shares her scale from Destitute to Out of Sight.” I’d never really thought just how rich is RICH before reading her analysis.

Caroline McClatchey of BBC News Magazine examines “The rich: Exactly what does the terminology mean?” and introduced me to the concept of Banker Bashing.  Strangely enough MERs did not enter the definition.

Big Cajun Man offers a Simple Tip to becoming rich and explores a technological marvel from the late 1990s (animated GIFs).  Ah, I remember my first animated dolphin….

Mark at My Own Advisor is on his way to rich-dom if he’s not already there, as shown in his May 2013 Dividend Income Update.

Someone on Yahoo! Answers made the question even trickier by asking “Am I rich or just wealthy?”  I never even thought whether there’s a difference. Is there?

I’d say probably if you have to ask whether you are rich, the answer is Yes.

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Do you think you’re rich? Does money even factor into your definition of rich? Please share your views with a comment.