What's Your Lifetime Wealth Ratio? - Retire by 40 (2024)

Have you checked your Social Security statement this year? I’m not counting on Social Security to fund my retirement, but it’s still nice to see the potential income. Of course, lots of things can change before I turn 67. That’s why I’m copying my father in law and designate my Social Security benefit as a donation fund. That way I won’t miss it. Anyway, it is a good idea to check your Social Security Statement at least once per year to make sure your earnings record is correct. If there is any mistake, then you need to correct the error within 3 years or else your Social Security benefits could be permanently affected. If you plan to retire early, check out this post – How Early Retirement Impacts Social Security Benefit.

Another nice thing about the Social Security statement is that you can go over your income history. Once you have the income history, then you can calculate your Lifetime Wealth Ratio. Let’s do that today to see how much money we have vs how much we’ve earned. It’s a very interesting number.

This post was originally written in 2015. I’m updating it every year to see how we’re doing. Hopefully, we’ll reach 100% at some point. Also, this was inspired by J. Money’s post at Budgets Are Sexy –Do You Know Your Lifetime Wealth Ratio?

My estimated Social Security Benefit:

Here is my latest Social Security statement

You have earned enough credits to qualify for retirement benefits. At your current earnings rate, your estimated payment would be:

At full retirement age (67):$2,510 a month

At age 70:$3,113 a month

At early retirement age (62):$1,763 a month

Alright! My benefit increased from $2,227/month to $2,510/month (since 2015.) That’s an increase of $283/month, almost 13%. In 2015, I predicted that my benefit estimate would stay pretty stable, but I didn’t factor in my blog income. Last year, I had $65,388 in revenue. That’s much higher than expected. However, it’s not going to last.

That’s the problem with the Social Security benefit estimator. They assume your income will be relatively stable until 67. This spike in blog income is throwing off my estimate. I think my monthly estimate probably will come down to $2,300/month once the blog income stabilized to a normal level.

Mrs. RB40’s estimated benefit:

At full retirement age (67):$2,546 a month

Mrs. RB40’s estimate increased from $2,222/month to $2,546/month. However, this isn’t going to be accurate if sheretires in 2020. Her income would drop and the estimate will decrease. I used theSocial Security Benefit online calculatorto see what her benefit would be if she stops working next year and it dropped to around $1,356/month. Wow, that’s a drastic decrease! Her AIME is about halfway to the second bend point so she really could benefit from working a few more years. Don’t worry if this is all Greek to you. We’ll see how Social Security Benefits are calculated next.

Social Security Benefit Estimate

Let’s dig into how social security benefits are calculated.

Social Security benefits are computed using “average indexed monthly earnings.” This average summarizes up to 35 years of a worker’s indexed earnings. We apply a formula to this average to compute the primary insurance amount (PIA). The PIA is the basis for the benefits that are paid to an individual.

That’s from Social Security’s website. Basically, they take your highest 35 earning years and average them. If you have some years with $0 earnings, then your benefit will be less. Let’s take a look at our earnings.

Wow, I made a lot of money as an engineer. My total lifetime earnings so far is$1,946,002.I used theMedicare earningscolumn because that one has no limit.

That’s a lot more income than I thought. Check out that big spike in 2012. I only worked full time for 6 months, but I sold a bunch of stock options that year. That inflated my earned 2012 income to $260,000. My earnings dropped drastically after I left full time work, butlife is much better since I retired 6 years ago. What can I say? *shrug* Money isn’t everything.

As for Mrs. RB40, she joined the Peace Corps for 3 years after college so she got a later start than I did. She also took another 2 years off from full time employment to get her Master degree and made very little income during those years. Her total earning is $963,856. Holy moly, together we earned over $3 million once we count 2018! Where did all that money go?

We’ll need these numbers for theLifetime Wealth Rationext.

Is the estimate accurate?

The Social Security Benefit is calculated with your highest 35 earning years. Currently, I have 24 earning years and 11 blank years. Social Security filled in those 11 blank years with my latest earnings to get their estimate. So they assume I’ll make about $65,000 for the next 11 years. I doubt that’s really going to happen because we plan totravel a lot more. My income is great this year, but it will most likely drop in the future.

However, the benefit should not drop that much even if my earned income decreased over the next 11 years. Thesocial security calculatorshows that my benefit would be about $2,100 even if I earned $10,000 per year for the next 11 years. Basically, I’m very close the second bend point and the benefit curve has flattened out for me. From now on, my benefit won’t change that much because I already put a lot into it.

Here is a graph of the AIME (average indexed monthly earnings) vs PIA (the Social Security Benefits.) The benefit grows at a different rate depending on your AIME. It doesn’t take much to reach the first bend point. You only need to average just $895/month over 35 years. Then it’s a long slog to the second bend point. After that, your Social Security Benefit won’t grow much even if you earn more.

Mrs. RB40 is about halfway between the first and second bend point right now. If she keeps working, her benefit would keep climbing at a steady rate. It looks like she needs to work full time about 8 more years to reach the second bend point. That’s the price for having several low earning years in her youth. We are not depending on Social Security so it’s not really a big deal. I prefer that she stop working full time earlier. She doesn’t need to maximize her Social Security Benefits because our passive income is in good shape.

Anyway, the extra $3,500 to $4,500 Social Security Benefit would definitely come in handy when we turn 67. This will be our donation account and we can support whatever charity we want. I think that will be a great way to give back.

Back to the Lifetime Wealth Ratio

Once you have your lifetime earning total, then you can figure out your Lifetime Wealth Ratio. Don’t forget that you need to use the Medicare earnings column in your statement. What’s the Lifetime Wealth Ratio? It’s basically how much wealth you have generated from the money you earned. The higher the ratio, the better you have been at saving, investing, and building wealth. You will need yournet worthfor this, too. The formula is very simple.

Lifetime Wealth Ratio (LWR) = Net worth / Total Income Earned

I’m going to look at this as a team because the numbers look better that way. Our LWR is 90% at the end of 2018. That’s really good.

Lifetime Wealth Ratio Score

• 0%-10%: Horrible! You’re on par with the average American household.
• 10%-25%: This is okay if you’re young, but it should be better.
• 25-50% – Now we’re cooking. Nice job!
• 50-100% – Excellent! You need to be here to FIRE.
• 100%-1,000% – Wow… Congratulations! You’re doing it right. Keep it up!

Our Lifetime Wealth Ratio is increasing

Our LWR is 90%. In 4 years, weimproved from 75% to 90%. I think that’s excellent. The stock market did very well over the last decade and our net worth outpaced our earnings most of those years.We still have a way to go before we reach 100%, though. 2019 doesn’t look too good. The stock market has been volatile lately and our net worth isn’t doing too well. We should reach 100% at some point, though. I’ll keep checking every year and see how it goes. My guesstimate is we’ll reach 100% by 2022.

Lastly, don’t be discouraged if your LWR is less than ours. We’ve been saving and investing for over 20 years. Just keep investing and your LWR should increase. See that dip in 2008? Our LWR dropped to 48% in 2008. It was scary, but we kept investing and did very well since then. You just have to keep saving and investing through the ups and downs.

Here is your homework this week – check your social security statement and calculate your Lifetime Wealth Ratio. How does it look? Can you beat the RB40 household (90%)?

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