Net worth as percent of lifetime income

dragoncar · Post by **dragoncar** » Tue Sep 18, 2012 4:58 am

Jacob recently stated "My net worth is now higher than all the money I've ever made."
Got me thinking about mine. I don't know how to standardize the results -- pre or post-tax? Accounting for NPV?
I ran my numbers post-tax, assuming a 4% interest rate, using the NPV calculator (quick and dirty inflation correction).
My NW is currently 50% of my post-tax income. My lifetime tax rate is 25% (federal+state+employment... basically everything but consumption taxes).
I'm guessing Jacob didn't use the NPV, or ignore taxes... in my case they actually even out (50% either way).

akratic · Post by **akratic** » Tue Sep 18, 2012 5:20 am

This is chapter one of The Millionaire Next Door. If your number is good enough you get to be a PAW: Prodigious Accumulator of Wealth.
It seems like too much trouble to figure out how much money I earned from my summer job as a teenager though, etc. Where'd you get all the information?

dragoncar · Post by **dragoncar** » Tue Sep 18, 2012 6:02 am

"Where'd you get all the information?"
Tax returns...

jennypenny · Post by **jennypenny** » Tue Sep 18, 2012 7:25 am

SSA.gov would give you that information.

George the original one · Tue Sep 18, 2012 3:49 pm

Like jennypenny, I used the social security statements. What is missed by both tax returns and social security statements are inheiritances and gifts you've received.
Last time I calculated this (couple years ago), it wasn't pretty. Something like 25% of pretax income.

JohnnyH · Post by **JohnnyH** » Tue Sep 18, 2012 4:04 pm

This is a fun and worthwhile exercise.
SSA always makes me disgusted, but SSA.gov gives total earnings since I was 14, which is neat... Makes me feel old seeing all those years.

Adding up the taxes paid from the returns I have, and then applying that rate for years I have no return records, I get:
*total post tax earnings / net worth = 1.183

*NPV 4% discount pre-tax earnings / net worth = 0.81

*NPV 4% discount post-tax earnings / net worth = 0.66

*NPV 2% discount post-tax earnings / net worth = 0.82
Another cool metric = net worth / hourly wage

pre-tax: 12,259 hours saved

post-tax: 15,117 hours saved

___

NPV calc: http://www.calkoo.com/?lang=3&page=21

dragoncar · Post by **dragoncar** » Tue Sep 18, 2012 6:16 pm

Financial math usually makes my head hurt, but your numbers look a little off, Johnny. Did you make the interest rate negative (i.e., past earnings are worth more today, not less)?

JohnnyH · Post by **JohnnyH** » Tue Sep 18, 2012 8:22 pm

@dragon: yeah, NPV is a new concept for me too... Basically, it calculates for inflation and assumes no return. IE: new money is worth less than old money.
I guess I could calculate for returns and inflation at the same time... Now it's making my head hurt too.
It will be cool when I crossover and can [inaccurately] say I still have every dollar I ever earned.

Seems logical the crossover happens within a few years of not having job income.

Dragline · Post by **Dragline** » Wed Sep 19, 2012 1:27 am

I'm sorry, this really seems like a backward-looking exercise that is of little value except for perhaps some form of bragging rights.

Post by **jacob** » Wed Sep 19, 2012 1:58 am

Yeah, I don't see the functional value either. I just summed a bunch of gross incomes together, fudged on my teenage income (<$10000), and compared to my present net worth.

arebelspy · Post by **arebelspy** » Wed Sep 19, 2012 2:07 am

@dragline : Absolutely agree, it's functionally useless. On the other hand, I'll probably spend 30 minutes or so trying to figure it out, because it sounds fun to know, and gives a good goal to shoot for.
Obviously my financial targets include cash flow numbers, FI amounts at different WRs, and even nice "round" numbers (like 500k, for example). The latter is totally useless as a number, but still fun to shoot for.
It sounds fun to me to be able to say that my NW is greater than my lifetime earned income. Useful in any way? Nope. But potentially a motivator anyways.

dragoncar · Post by **dragoncar** » Wed Sep 19, 2012 6:17 am

It's useful as motivation... you can see how much of your life-energy has evaporated and how much has been preserved as assets. I guess it's just bragging rights if you're comparing 2x to 3x. Do you not look at your past investment returns because it's "backwards looking"?

bigchrisb · Post by **bigchrisb** » Wed Sep 19, 2012 8:22 am

I worked this out a few years ago, based on pre tax, gross earnings, and current net worth. Given the thread, I updated it to today. I don't see much merit in it as a metric other than curiosity, so some of the early earnings numbers are guesstimates (might be a few thousand out)
Lifetime pre-tax earnings: $950,750

Net worth: $828,000
Net worth to lifetime gross earnings: 0.87

Net worth to current annual gross earnings: 4.18

Net worth to current annual consumption: 25.1
It would be nice psychologically to get the ratio to lifetime earnings above 1.0