wealth, noun, [welth] “A great quantity or store of money, valuable possessions, property, other riches.” Dictionary.com
Does the above definition really tell us anything? Given the choice of $10,000 per month for the rest of your life or $1,000,000 cash right now, which would you choose? Assume for simplicity that there’s no “cost of living” increase on the income, nor can you earn anything on the $1,000,000, AND that $10,000 per month provides you with a lifestyle you’ve become accustomed to... I would argue (and probably win the argument on technical merits) that $10,000 per month is more valuable, but a scholar in human nature would tell us that many, if not most people would take the cash. Which would make you feel “wealthy”…. knowing you had income you couldn’t outlive or a million dollars in the bank…but no assurances about whether or not it would last a lifetime?
How do you define wealth? Is it a million dollars? Ten million? Have you given it any thought at all? There are as many definitions of wealth as there are individuals. How do you know your definition? Unless you’ve gone through a fairly extensive planning exercise identifying goals and determining what your lifestyle costs each year, it is very difficult to look at any amount of money and truly know if it’s enough, or if it represents “wealth.”
Instead of focusing on the return we achieved or what our account value was each year, what if we considered how much could be withdrawn each year for the rest of our lives… without running out of money? You’d have to make some assumptions about a reasonable withdrawal rate (consensus opinion suggests approximately 4% annually from a balanced portfolio may be reasonable), but looking at it this way would give you an instant assessment of how you’re doing, because if you know anything, it’s how much money you need each month to pay bills. If you were 65 today, would it be enough?
What’s really important to most of us, I suspect, is not planning for retirement, but rather planning to protect our lifestyle during retirement. We don’t want to give up any part of our lifestyle just because we’re retired. For most people, their lifestyle is function of their income. Since it is our income that provides that lifestyle, perhaps we should define “wealth” as the ability to maintain our lifestyle on the income our assets will generate.
Some retirement plan providers have started including on each person’s statement, a calculation of what the expected lifetime income might be based on their account balance at the time. This is one of the best ideas I’ve seen in a long time. Instead of looking at an account balance and wondering if you’re on track, you look at it expressed as income and you know if you’re on the right track… or not. The numbers might give some of us a jolt… but maybe it’s just the jolt we need.