In a previous blog, I talked about 5 things that we can learn from happy retirees. One of these 5 was to honour something known as the ‘rich ratio’. I’ve had a couple of requests to dive a bit deeper with this so here goes:
The rich ratio is an easy way for people to understand their money.
It is simply the amount of income you have versus the amount of income you need.
For example, if you earn $10,000 a month and you need only $5,000, you are rich. By that same logic, if you earn $1 million a month, but you need $2 million, you’re not rich.
Here’s how to find your Rich Ratio:
Take the monthly income you will have coming in (social security +pension+ any other income streams), including what your nest egg should produce, and divide it by what you expect to spend each month to live the retirement you want:
Have/Need = Rich Ratio
1 or above is what you are aiming for.
Let’s look at a couple of examples and see how someone with less money saved can actually have a higher Rich Ratio and is probably living happier.
My mate Bill has a passion for expensive holidays and eating out a lot. He loves it so much that he’ll need $8,333 per month ($100,000 per annum) to support this kind of lifestyle in retirement. Bill has a pension from his days with the NT government, has about $500,000 in his super and a share portfolio of around $300,000 he inherited a few years ago.
Bill’s Haves = $3,000 (pension) + $1,666 (4% of super paid monthly) + $1,000 (4% of the share portfolio paid monthly) = $5,666
Bill’s Need: $8,333
Bill’s Rich Ratio = $5,666/8,333 = .68
Considering his Rich Ratio is below 1, I wonder if Bill feels “rich” at all.
Now let’s take a look at other friends, Jillian and Peter. They are both retired and need $3,500 per month to live “the good life”. They own their own home. They will receive social security of $2,377 per month and have $400,000 in a pension fund.
Jillian and Peter’s Haves = $2,377 social security + $1,333 (4% of the pension fund on a monthly basis) = $3,710
Jillian and Peter’s Need = $3,500
Jillian and Peter’s Rich Ratio = $3,710/$3,500= 1.06
While Jillian and Peter’s Haves are a lot less than Bill, so is their Need. As a result, they have have a much better Rich ratio at 1.06 versus Bill’s at 0.68. So even though Jillian and Peter have a smaller net worth (and less in retirement savings), under this measure, they are actually richer than Bill because they can meet their lifestyle aspiration from what they have.
And I can can tell you for a fact, they are loving life.
Based on this measure, Jillian and Peter get happiness in their future, and unfortunately Bill does not.
The simplest tools are often the most useful. That’s true of the Rich Ratio.
Think of it as a compass. Consult your Rich Ratio often (and honestly) and you will have a much better chance of staying on the path to a stress free retirement.
I’d love to know your thoughts.
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