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January 20, 2011


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I found this comment very interesting in light of the advice I have received from my financial advisor (and friend).

"By the time you reach your 40s, you should have enough investments to be earning about half of your annual spending each year." If you were invested in income-bearing assets, correct? I have enough net worth, but the assets don't churn off income since I don't need/want them too -- I want them invested for growth at this point."

I am 30, with about 130k in retirement savings and putting away a steady 15%+. My advisor friend has sold me on the idea of investing in solid (boring, steady) companies that have a long history of providing dividends at a high dividend yield. The strategy is to generate income, reinvest the dividends and grow value that way. At retirement age, have enough income generating assets to live off of that directly and not be concerned with the actual value of the assets.

This appears to be contradictory to your comment above and I'd appreciate if you would expand on your reasoning for focusing on growth vs income at this point in your life and your recommendations for me.

Kelly --

I'm focusing on growth more than income now because:

1. Growth investments (stocks) generally perform better than income-producing investments (like bonds). Perhaps you're getting both by investing in dividend-producing stocks, I'm not sure.

2. I don't need the income now.

3. Income is taxable, and taxes are an expense (which decreases return.) Yes, I have some investments in tax-deferred accounts, but also have a lot in normal, taxable accounts. I don't want 20% of my gains going to the government.

Glad I only have the first two columns! (No debt, paid cash for the new house a year after I retired @ age 47). Still a multim'aire :) As a former fin planner, I implore folks to NOT count "stuff". Jewelry, cars, etc., are very non-liquid and typically not worth any real monies when forced to sell. Real Estate (at assessed value is fine), and actual investment/bank accounts are good to document but, "spending on stuff" and counting it for net worth will make a very ugly retirement!

I'm in trouble.

I check my net worth almost daily. Its not hard to do since I have no debt, and I dont include my house or cars as part of my net worth. I'm looking for the money that will fund my retirement and I don't include my house because, I'll need that to live in. It won't go up for sale when I retire. If it did I would just have to spend money somewhere else on housing.

One of the wonders of technology is the ability that some financial institutions have to allow you to carry your entire portfolio on their online banking site and thereby be able to go in once per day or multiple times per day to check on your net worth at literally a glance. Mine is at Bank of America and Merrill Lynch (a sub. of BoA) has a twin of BOA's portfolio on their site.

Takes a little work and trust to get going but once you have entered the assets and liabilities accounts' access, this program automatically updates at least daily and more if you ask for an update. It's also a terrific way to glance at all of your credit card transactions in one place to make sure nothing shady has happened.

I love it, use it practically every single day and I get really ruffled when their system is down or they change something.

I do this but do it twice a year (January and July) using Dec and Jun as the close out months though I leave our house out of it (both as a liability and as an asset as we are not upsidedown). I also do not count my anticipated retirement annuity (I am in the military). I then chart my net worth out using Excel. It has helped with my wife by graphically showing her why we did not pull out of the markets after the tech crash or the housing bubble burst. The graph clearly shows that those same investments that tanked recovered almost as quickly. Our best return years were the years immedeately after these crashes. The general trend line has continued upward. It has really helped in our finicial discussions. I also caculate my return on invest, both for the year and as a running average. It really helps when we review our portfolio, where we are at, and where we want to go. It also helps us identify those funds we want to divest ourselve of and which we want to keep.
Additionally, I do not check my net worth daily or monthly and in fact suspended my charting for most of 2009-2010 to avoid panic. It helped and all our investments recovered, some better than others.

@Kelly: I would argue that high-dividend stocks are a growth investment, not income. They may be less aggressive growth investments than some of the flashier stocks, but they should aggregate more value than bonds (income investments) all the same.

You should also thank your friend. I follow much the same principle for half my portfolio. Those dividend-paying stocks will pay for themselves over a 20-year window.

@Arimack: I'm the complete opposite. I couldn't stand not tracking my net worth. I've been updating the numbers every two weeks since mid-2008, and even when they dip I still retain a feeling of control and the knowledge that I'm making good progress. It's also helpful to me to see when the numbers go down so I can figure out why. To each his own, of course. It goes to show that there is no one set answer to approaching personal finance.

I'm also a huge fan of Excel (or its OpenOffice equivalent Calc). A few simple additions and subtractions and voila, net worth.

I just had to sell $2,000 of a fund as I was relying on Quicken to upload my balances. They were $1,900 off. So if you do it daily via money program, it would be good to verify occasionally.

I used to calculate my net worth monthly too, but I've decided that once a year is better. Keeps you focused on what you can control (saving), not what you can't control (daily fluctuating stock prices).

"By the time you reach your 40s, you should have enough investments to be earning about half of your annual spending each year."
First of all, that should be 50s, not 40s. Second, he's referring to the hypothetical 4.36% return of your investments.

@Elisabeth: may be, but now is the best time to deal with it. The short pain instead of a drag with a sad ending. If I were you, I'd decide here and now how to decrease my spending and/or increase my income.

Concojones --

I think he said 40s...

I'm pretty sure that's a mistake. 40s is in contradiction with his time table, and why would you want to reach half of your target nest egg before you're even halfway your career, and before investment returns become significant...

Forgot to say this is a very neat article. It gives you a yardstick so you can see where you stand.

I created a spreadsheet that tracks the progress toward the goal of 20X.
It starts at age 20 but when changed (simple update to cell) it matches the numbers above exactly.
It's a matter of first knowing what your spending is. Let's face it, if you save 20% of your income, there's also the 7+% that goes to SS, so you only see 73%, and then taxes are withheld. So I'd focus to have enough to replace spending, whatever that is.

Concojones --

I understand. But I just wanted to be sure you realized that HE said 40s, not ME. ;-)

@FMF: Absolutely! This may not have been clear, but I was trying to correct the author, not you.

@Joe: your spreadsheet looks good, but you might want to consider the effect of inflation.

I'm fairly neurotic, so I calculate my net worth monthly. It prompts me to perform other personal finance tasks too when I force myself to think about the bottom line. However, I do not include any non-liquid assets, as I prefer my calculation to be "actionable" and oriented toward my number one goal, retirement. I have other spreadsheets for measuring progress toward other goals (paying down mortgage, daughter's college fund). I want my net worth to not only represent funds I can take action on and actually use toward retirement (can't do that with a house, or car), but also help me track monthly how I'm doing against my annual target (another spreadsheet) per my retirement plan. Based on the table in this article, I'm okay, but not great. About 8 years ahead of the table, but retiring earlier than 58 would be great.

FMF/Concojones - What he says makes sense to me. If I spend $40K/year I should have $200K in investments by 41 using the multiplier of 5. If I earn 10% on that money (pretty normal for a stock heavy porfolio) in a normal year, that would be $20K, or half of my annual spending.

I think you're trying to interpret his use of "earning" as something more complex like distributed earnings or reliably withdrawable amounts, or something, but I think he was making a simpler point (money makes money). If his investments on average are now making $20k/year in the example above, that money is having a much greater effect on his growing net worth than his savings at that point (given not many people have a 50% savings rate like FMF).

I earn as much on my investments as I spend annually (and I'm certain FMF does), but that doesnt mean I have a nest egg I can retire on (far from it, bad years and inflation would kill me).

Remember your house CAN be an investment and source of income as a reverse mortgae as example. So counting it at a conservative value (like a tax assessment) or 75% of low (realistic market) value (what you could get as a reverse mortgage less commissions, repairs, fees, moving costs etc.) is fair.

I calculate my after tax net worth. For instance having 1 million in a bank account (already taxed) versus a retirement account (subject to income tax) vs a taxable account (subject to capital gains tax) are not equal in value and can grossly skew your real numbers.


The biggest flaw with this kind of scheme is that if you follow it, you can stay "on track" ONLY if you are never unemployed for any length of time, change careers, take out a loan for education costs, or live through an economic depression.

When times are good to you, you should definitely deny or delay increasing your lifestyle and save the extra. Because no one's life runs as smoothly as this guy's assumptions.

Checking our net worth once a year can help us monitor the progress of our income and expenses. Liquidate our yearly revenue and dividends. This must be done in order to have an update of the money we earn and the money we are spending. As we all know, we should not spend more than what we earn.

Chynalemay - I would not use tax assessment as a conservative value for your home. Towns and cities are very reluctant to lower these numbers to market value due to the crash and hard times for city budgets. If they devalued all property values to match the market, the local budgets would be worse off than they are. The quickly adjust in good times, slowly adjust in bad times. Also they are normally on a cycle (my town is on a three year cycle) and until it hits your turn you can be wildly off on your value. I would look at comps vice tax assessment. Most local papers publish a weekly real estate sales update. Track em for a few weeks and get the value for comperable square footage i your area. Or for a really conservative estimate, simply take the lowest one sold during that period and use that value.


At a multiple of 26 you can retire 6 years earlier than age 65 or at 59. I thought you are still in your 40's so still a few years to go my young friend :-)

Our multiple is 67 if we include 401ks and the value of our fully paid residence. If we just look at cash and liquid investments the multiple reduces to 56. I guess that means I could retire 26 years before age 65 or at age 39.

Hmm, I like this calculator, age 39 is only 18 months away!

There goes the dream of moving to California and living by the beach, that will crash our multiple faster than the US hits the current debt ceiling!


Mike --

Darn. I knew it was too good to be true.

I agree with tracking your net worth once per year (I actually track it once per quarter but only do a deep-dive once per year).

Once per month seems like a bit much, though, and in fact, I would argue that it could drive you to make some short-sighted decisions in some situations.

You should put your attention on what you want to grow. As to net worth, what good is it? Can you eat it for breakfast? No.

Therefore, I believe people should unchain themselves from balance sheets (with one exception) and pay attention to what really counts -- income.

You should be investing to raise your portfolio income every year.

First, though, I'll mention the balance sheet item you should focus on -- debt. If you want to raise your net worth by paying down and then off what you owe, that's good.

In fact, when computing your portfolio income, you should substract your interest expense, because it is taking money right out of your pocket.

But let's say you're computing your net worth and you find that it went down because the stock market went down and, with it, the market value of your portfolio. Even though you were able to buy more shares during the previous year out of your paycheck and reinvesting dividends.

Is that a bad thing? Almost everybody else would say yes, but I say no.

So long as your income investments are still generating income, don't sell them. In that case, their market value is meaningless.

Chances are, many of them will have increased the income they're paying. (Not bonds, of course - but stocks.)

And because you added to the number of shares you own, that also will increase your income from investing.

And in fact, because the share prices are low, the next time you buy you can buy more shares, because they are cheaper -- and therefore reap a higher income from them next quarter.

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