How are you doing?
We’ve written about wealth before, but it’s an important conceptual part of personal finance, so it might be worth another look 🙂
Today we’re going to look at levels of wealth. An opportunity for some introspection and goal setting perhaps?
Measuring Wealth
Obviously there are many ways to do this. Let’s keep it as simple as possible and define wealth in terms of how many years’ worth of living expenses you have socked away.
You can choose to include the value of your home if you own it, or choose not to. I can understand the reasoning either way: clearly your home has a value so you should include that value in your wealth total. On the other hand, if you sold your home you would still need to live somewhere so your living expenses would increase, so you can probably just not include the value of your home for simplicity’s sake. I don’t count the value of our manshon in our wealth figure.
So hopefully you have some idea of your annual living expenses, including all the things you would spend money on in a year. For us, I usually work with an estimated after-tax figure of 4 million yen. This would allow us to live a similar lifestyle to the one we currently enjoy.
The Wealth Scale
Once you have an estimate of your living expenses and an estimate of your current investments/savings/assets, you can calculate your WealthScoreTM by dividing your assets by your living expenses.
NEGATIVE (-): You don’t have any assets, or your debts are larger than your assets. This is a pretty serious situation, and you should take extreme measures to remedy it as soon as possible.
NONE (0): You have some assets, but they are less than one year of your living expenses. This is a risky place to be. You basically have no runway. If nothing happens you will probably be fine, but it would just take one unfortunate event to put you in debt or upend your life.
MINIMAL (1-5): You have some assets that are equivalent to 1-5 years of your living expenses. This will shield you from some of life’s ups and downs. It is not really enough to fund your retirement or give you flexibility in life, but it’s a good start and better than most people manage.
ADEQUATE (6-10): You have a pretty decent nest egg. With this level of wealth you can survive even pretty serious financial emergencies. As long as you have been paying into one or more pension systems you will be heading into retirement at the regular age with few worries.
COMFORTABLE (11-20): You have saved and invested well. Your investments likely generate some income that you can use to supplement your income or accelerate your savings. Retiring early is a realistic possibility.
CLOSE TO FINANCIAL INDEPENDENCE (21-30): Your wealth is almost enough to fund your lifestyle completely. Technically using the 4% withdrawal rule, having 25 times your annual expenses would be enough to fund a 30-year retirement in most situations, but I wouldn’t be confident enough to pull the trigger at this level. Regardless, you are in a situation most people can only dream of.
FINANCIAL INDEPENDENCE (31+): Your wealth is more than 30 times your annual expenses. Depending on how you have invested it, you may be in a position to live largely off dividends and interest, or you could withdraw 3% a year and fund your lifestyle indefinitely under most economic scenarios. Congratulations! You won the financial game. Now might be the right time to rebalance into more stable assets and find something better to do with your time.
So where are you on the scale? We’re comfortable at the moment, and if we continue working and saving the way we have so far, could end up moving up the scale over the next decade or two.
Moving up the Scale
As long as you are not compromising your happiness, there is no drawback to increasing your wealth. The more assets you have, the more security and flexibility you will enjoy.
And don’t forget, there are two factors involved in calculating your score: not just your wealth, but also your living expenses. If you can reduce your living expenses while maintaining your quality of life, you can sometimes jump whole categories on the scale.
What do you think? Is the WealthScaleTM a useful tool for thinking about money?
Presumably we can’t include iDeCo savings in the calculation because they are locked until age 60? Leaving those out, and our home, I’m just about “comfortable” too if I assume 4 million yen per year living expenses. Actually our expenses are higher than that at the moment due to semi-funding our children in university, so now would be a bad time for an emergency. But after that they should be somewhere between 3.5 and 4 million per year.
I include iDeCo. Before we get access to it we’ll use other savings/investments as needed, so I don’t feel a need to exclude it. Hoping not to touch anything for a good few years yet anyway 🙂
Yeah. If we can include iDeCo and other locked pension funds – based on their value being 15 times the annual pension income – AND our home, then we can just about scrape into the coveted “financial independence” category. Wahey!
But not very realistic at the moment. And we don’t want to sell our home either. Still, good to know. Thanks Ben 🙂
I think we’ve done okay, maybe somewhere between -1 and +42.
Or are we going to be drawing down at 4% or 3%?
Or maybe thinking that we’ll be comfortable with so many million per year?
Blah, blah, blah…
While that is worth considering, to some degree those comparisons are the thief of joy. I’d offer that the warmth and life that you share with your partner, kids, friends, and even people in general can outweigh a lot of that.
Sure, there are more important things in life. But we are a personal finance site, and some people find it useful to set goals and have a plan.
If your finances are a mess, everything else gets much harder.
Hi, commenting here because commenting on the Progress Report 2019 blog is closed. I wanted to learn more about your dividend investments. You posted a net earning of a little less than 300,000 yen annually from dividends, but I don’t see this reflected in the dividend chart. I am curious because 300,000 yen annually or thereabouts is what I calculate as net rental earnings I can make if I buy a small apartment so I am curious how much investment yields you that amount of dividends. Thanks!
It’s a good question, and I don’t have a great answer. Most of our portfolio is invested in index funds which don’t pay dividends. So the index yield on the portfolio as a whole is really low.
Looking at my dividend paying stocks and funds (we own a few, including VT) they mainly range between 2-5% yield before tax.
You could put together a collection of stocks yielding more than this, but most dividend growth investors seem to target 2-4% as more sustainable.
Not sure if that was very useful. I’m planning to put about half of my new investment money into dividend yielding stocks going forward.
The current dividend yield for the Vanguard VT total world market ETF is around 2.3%. For the Vanguard US total market the yield is now down to around 1.8%. It’s not too difficult to find stock on the Japanese exchanges with higher dividend yields. Telecoms like NTT (9432), Docomo (9437), KDDI (9433), or Softbank (9434) are from 3-5%. Trading companies like Itochu (8001), Mitsui (8031), Sumitomo (8053) or Mitsubishi (8058) are often 4-5%.