Your lifetime wealth ratio (and how to calculate it)

While browsing money blogs yesterday, I came upon an old article from my pal Joe at Retire by 40. The post is from 2015, but it contains a cool concept that I think might be useful for readers of Get Rich Slowly.

Joe — who was inspired in turn by J. Money at Budgets Are Sexy — asks, “What's your lifestime wealth ratio?” According to Joe and J. Money, your lifetime wealth ratio is result of a simple equation:

Lifetime Wealth Ratio = Your Net Worth / Your Lifetime Income

In pain English, your lifetime wealth ratio (or LWR) compares how much you have today with how much you've earned during your time in the workforce. It's a way to look at the wealth you've created and gauge how well you've done at keeping that wealth.

Let's take a closer look at the lifetime wealth ratio and how it's calculated.

For this article, I'm going to be using my own numbers from 2014. Why 2014? Because that's the most recent year for which I (and the government) have info on my lifetime earnings.

Your Net Worth

Your net worth is easy to compute. Many money geeks have it handy in a spreadsheet or their favorite personal-finance software. Your net worth is simply the total of everything you own (your assets) minus the total of everything you owe (your liabilities).

According to my records in Quicken, my net worth at the end of 2014 was $1,658,333.58 — roughly the same as it is today. (While today's number is accurate because I'm actively using Quicken once again, the number from the end of 2014 is more of an estimate. I wasn't really tracking my money at that time.)

If you've never calculated your net worth, take a look at this free net worth calculator I created for Money Boss a couple of years. It's a Google spreadsheet. Simply copy it to your own Google Drive (or save it to your desktop and open it in Excel), and you can use it to determine your personal net worth.

Your Lifetime Earnings

Finding your lifetime earnings might seem more complicated — but it doesn't have to be. (At least not if you live in the United States.) You see, the U.S. government tracks this information for you.

If you head to the Social Security Administration website, you can login to (or create) your my Social Security account to view your current statement. That statement includes a summary of all the money you've earned in your life. (Well, all the money you've earned that's subject to Social Security withholding. For most folks, these are the exact same thing.)

Here, for example, is my complete record of earnings through 2014 (the last year for which the SSA has updated my records):

My Social Security Statement

I made a quick spreadsheet containing these numbers so that I could see how my total lifetime income increased from year to year. (I used “your taxed Medicare earnings” instead of “your taxed Social Security earnings” because the former has no limit and provides a more accurate overview.) By the end of 2014, I had earned a total of $1,279,797.

Your Lifetime Wealth Ratio

Putting these two numbers together, we can calculate that my lifetime wealth ratio is 1.30. My net worth at the end of 2014 was 130% of the total money I'd earned up until that point.

In his original article at Budgets Are Sexy, J. Money proposed the following scale for ranking your lifetime wealth ratio:

  • 0%-10% – Meh
  • 10%-25% – Now we’re cooking!
  • 25-50% – You’re on fire, baby! Give me your number!
  • 50-100% – Marry me.
  • 100%-1,000% – How do I get into your will?

Based on this, my 130% lifetime wealth ratio isn't too bad.

I haven't always been in this position. Out of curiosity, I calculated numbers for the end of 2005. At this point, I had begun my quest to get out of debt, but I hadn't yet founded Get Rich Slowly.

On 31 December 2005, my net worth was $113,355.75 — nearly all of which was home equity. I had lifetime earnings of $523,201. That means my lifetime wealth ratio in 2005 was only 0.22. My net worth at the end of 2005 was comparable to only 22% of the money I'd earned in my lifetime. Yikes!

No wonder I felt crushed. By 2005, at the age of 36, I had earned half a million dollars, yet I had little show for it. I was still deep in consumer debt, and my net worth was barely over $100,000.

The Bottom Line

Clearly, the lifetime wealth ratio isn't perfect. Like any such number, it's meant as an estimating tool, a way to measure your progress. But it doesn't take into account certain financial events — both good and bad — that might not show up in your earnings history.

In my case, I experienced a windfall when I sold Get Rich Slowly back in 2009. That sale wasn't ordinary income, and it doesn't show up in my Social Security statement, so it's not part of the lifetime wealth equation. If we were to measure how much money I've actually accumulated over the course of my life, my LWR would be much lower than 130%.

Like many such numbers, the lifetime wealth ratio isn't really meaningful for young folks just starting out in life. When you're young, your income is low and your expenses are high. It often takes a few years for the balance to shift in your favor. (All the same, you should do what you can to achieve a positive cash flow immediately, to grow your net worth, if possible.)

What about you? What's your lifetime wealth ratio? How do you feel about this number? Is it an accurate reflection of your current financial position — and how you got there? Is there a different number you prefer for measuring your financial progress?

Here's another similar exercise from the classic money manual, The Millionaire Next Door. The authors suggest that most people can use a simple formula to see how they're doing financially. Here's how it works.

Multiply your annual gross (pre-tax) income by your age. Divide by ten. Your net worth — less any inheritances or windfalls — should be equal to this number. So, if you're forty years old and earning $50,000 per year, your expected net worth would be $200,000.

If your net worth is close to the expected number, the authors consider you an “average accumulator of wealth”. If your net worth is less than half that expected number, you are an “under accumulator of wealth”. If you have twice the expected amount, however, you are a “prodigious accumulator of wealth”.

It's important to note that this formula doesn't work well for younger folks, and the authors know it. It's mean to be a gauge for people getting closer to retirement.

More about...Planning

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Fiby
Fiby
2 years ago

According to the my Social Security account, my lifetime wealth ratio is about 14x.

Of course, that’s because the vast majority of my net worth has been from my pay as a grad student (and then investing the savings), which is not subject to social security or medicare taxes!

According to my YNAB, which I’ve set up to track all income from all sources, my LWR is more like 0.63.

Personally I don’t think this number is all that useful, though it’s kinda cool.

Jeff A.
Jeff A.
2 years ago

Really enjoyed reading this post. Great way to take an alternative view on measuring financial progress.

On a side note: how old were you / what year did you buy your first home? Over $100k in home equity by age 36 is actually significantly better financial shape than I’d imagined you’d be in (and than I imagine most current 36 year olds are, what with the average age of first time homebuyers increasing)

J. Money
J. Money
2 years ago

Yeah man! Love to see my made up ratio going strong after all these years, haha…. Thanks for passing on the good word and getting people marinating on it 🙂 Really puts things in perspective, doesn’t it?

Steveark
Steveark
2 years ago

Interesting, counting my entire 38 corporate years my ratio was 0.88. Not too shabby! Since I (slightly) early retired a couple of years ago each incremental year is at a ratio of 2.0. I would guess this number will just keep going up!

Matthew
Matthew
2 years ago

This is a really neat way to compare the amount you’ve saved/earned through investments vs. your career. I can see a few situations/areas where it may not be terribly accurate/useful but it’s still really cool to consider.

I’m about 3.5 years into my career and my number is just over 63%. I’m expecting that to start trending upwards since my savings rate is a bit higher then that already 🙂

JB
JB
2 years ago

JD, is your original sale of GRS a few years ago not included in your SSA earnings record? Or was that not considered “earned income”? Thanks!

JB
JB
2 years ago
Reply to  J.D. Roth

Cool, thanks for the info!

Brad
Brad
2 years ago

Thanks JD. I always appreciate your willingness to share your own personal data. In my world it has always been taboo to talk about your income, etc., but the real life examples are very useful.

Accidental Fire
Accidental Fire
2 years ago

I like this idea, I’m at 112% so I guess I’m doing something right. As always thanks for posting your info to help us in our journeys.

Rick
Rick
2 years ago

Why include the house in the calculation? Like JD, we bought our house in 1994, and it would sell for more than $500,000 more than the $200,000 that we paid for it. Also, how should you account for a pension? I have paid a significant amount of money into the pension over the years, as has my employer. How would you value this money (both what I’ve contributed and what my employer has contributed)?

Steve
Steve
2 years ago
Reply to  Rick

Is your pension defined benefit or defined contribution? If it’s defined contribution, it should have some kind of balance you can include. If it’s defined benefit, I settled on this (overly) simple formula to estimate the current value of the future payments: estimated monthly benefit x 12 (months in a year) * 15 (estimate of number of years it will be collected). Unfortunately I don’t remember where the 15 comes from. It’s not the life expectancy of a 65 year old female, which is 20 according to https://www.ssa.gov/oact/STATS/table4c6.html. There is a time value of money, but, defined benefit pensions are… Read more »

Don
Don
2 years ago

You can’t know what you were never taught. We “woke up” in 2007 and used the HELOC shuffle to pay off our mortgage in just under five years. This was an expensive mistake all it’s own, but it did work. Since 2012 we’ve been following the FI crowd saving like our hair was on fire at a rate hovering between 50-70% Our ratio is only 22% after 46 years of income. But according to the millionaire next door formula we are now on track as average savers. We went from a negative net worth to on track in ten years.… Read more »

JoeHx
JoeHx
2 years ago

My lifetime wealth ratio right now is a paltry 20% if you don’t include debt, and 6.5% with debt (still positive, though!) It’s even less than that if you consider that there was some income I had in and around 2012 that wasn’t subject to social security withholding for some reason.

This number is on the rise, though!

Steve
Steve
2 years ago

My household’s net worth just passed the magic (arbitrary) 100% ratio.

Obviously, even if you saved 100% of your income, you’d still be behind the game from the first (taxable) dollar you earned. Of course most of us have some kind of living expenses we have to cover out of our income.

The two ways I can think of to overcome that are:
1) Have income that isn’t subject to social security taxes (lower the denominator)
2) Earn investment income / gains (raise the numerator).

This metric is even harder to beat than PAW!

Steve
Steve
1 year ago

I am trying to figure out how this works for retired people. I am 70 and will retire soon. My LWR is 111%.

My income from SS benefits taken at 70, RMD requirements on 401K and IRA’s plus interest on investments and savings will produce twice the income I ever made when working.

I think that is good, but now I will pay a lot of taxes. I should have done Roth IRA’s, who knew my tax bracket would be so high in retirement.

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