wealth definition

Wealthy Retirement Through Income Investing

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Money saving and growth concept.

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Studies on wealth development, wealth generation, and the historical norms of being “wealthy” have always interested me. So have polls about individuals’ viewpoints on it.

What amazes me is how many struggle to define “being wealthy” and how many misunderstand how to achieve it.

Consider these data points from a 2010 Study:

  • 70% of respondents say it is harder to get rich in America today than it used to be.
  • 15% of respondents thought getting rich resulted from lottery winning or inheritance – aka being lucky.
  • Only 20% thought it was via opening your own business.
  • 33% defined Wealthy as: “having just enough money not to worry.”
  • 26% defined Wealthy as: “having enough money that you don’t need to work.”

A more modern study conducted by Schwab in 2021 shows more interesting data:

Data from a study conducted by Schwab in 2021 about being wealthy

Charles Schwab

This was prior to inflation becoming recognized as a major factor in individuals’ finances. It shows that the thresholds or perceived thresholds for financial success and “wealth” can shift based on outside economic impacts.

Today, I want to say you can be wealthy without having $1.9 million in net worth. You can also feel secure and happy financially as well. The key is understanding what “being wealthy” is composed of and changing your mindset and goalposts. You see many of us have errant goal posts tied to big “net worth” goals instead of being grounded in practical reality. I’m not surprised Charles Schwab asked the “net worth” questions. They’re perpetuating a common misunderstanding that helps enrich them. The larger your balance is, the more they make, regardless of its income generation.

Defining Wealth and “Being Wealthy”

Before we can set goals and frame our mindset, we need a working definition of “being wealthy.” What is wealth?

From our perspective, wealth is going to be composed of two aspects. They work hand in hand but are unique in their existence and operation. They are Static Wealth and Functional Wealth.

Static Wealth

Static wealth is the value of your assets minus your debts. This is often called your “Net Worth”. If you were a publicly-traded stock, we would call this your NAV (net asset value) or “book value.”

Your static wealth or SW can change daily. Your home’s value rises and falls, your investments may change in value as others buy and sell the same stocks, and your car depreciates with time.

Having a high SW is not the sole key to being wealthy. Why? Because if you have a big pool of money and no way to replenish it, you will live in fear of it running out. Have you ever heard stories about lottery winners who ended up broke? Perhaps you know someone, maybe even yourself, who came into a large sum of money in a lawsuit settlement or inheritance, and the money ran out. It doesn’t really matter how much SW you have, your expenses can drain it if you aren’t careful.

So many retirees like a scrimping and frugal lifestyle, not because they must, but simply because they fear their money pool will run out before they pass on. I would call someone with a high SW “rich” but not strictly “wealthy.”

So why do all the wealth studies focus on your SW alone? Well, they’re often conducted by wealth management firms or brokerages that benefit from high amounts of SW being deposited into their accounts, they charge fees and earn interest based on account size alone. Larger accounts boost their revenue. It’s a win for them but sadly it often leaves countless retirees panicked and feeling like retirement saving is a hopeless fruitless endeavor.

Functional Wealth

The second aspect of “being wealthy” is what we call functional wealth. Functional wealth is the income or cash flow produced by you personally – your greatest asset – and your assets. Functional wealth, or FW, is your cash flow. This cash flow pays your debts, bills, expenses and leaves you with fun money or excess income left over. That excess income when saved or invested grows your SW and if it earns income boosts your FW.

Do you own a rental property? The value of the property is its SW, the income it produces is your FW. The same is true for your investments. This is how these two concepts go hand in hand. Sadly, we often focus so strongly on SW that FW is missing from the equation. Yet if you think about it, what’s more valuable? A rental property that’s vacant, or an identical rental property with a reliable tenant who takes care of the property and pays rent on time? Obviously the latter. The two identical properties have the same SW, but the FW of the occupied property is higher.

We set goals like “have $1 million in my retirement account” but never consider how much that could or should earn us. This is partly due to the common trend of buying no-yield stocks and expecting to sell off a portion of your SW every year to pay for your recurring expenses and bills.

If you view all SW on a level platform, your investment portfolio’s value, your home’s value, and your car’s value are all on equal footing. Yet we blindly accept selling off our portfolios to pay our home insurance. That’s like taking off your front door to pay your power bill. It doesn’t make sense.

This is why so many retirees live in financial worry, even if they have what many would consider a large amount of SW. They worry about running out of money. When the market dips 10%, 20%, 30% – as it does and always will – they start to fear that their nest egg will dwindle. They don’t enjoy their retirement because they are trying to time their sales to get the best price and minimize how many shares they need to sell for their income. They’re being told to do so by people who profit from those actions. It is contradictory to everything they learned from life’s experiences.

How do you think they built up that retirement savings balance to begin with? They saved it from the FW their life produced. They made more income than their expenses and set it aside. So why do we suddenly have this idea that retirement should operate under an entirely new strategy?

Suddenly, we shouldn’t worry about keeping our income higher than expenses. Instead, we should sell off assets, cross our fingers, and hope that our declining asset base goes up in value faster than we spend it. It feels unnatural because it is.

If you’re one of those who worked and scraped your savings to have $500,000, a million, two million dollars, you have achieved something that many don’t. And you know how to manage your budget. You have a strategy that worked for you. If the strategy works, don’t change it!

Retirement shouldn’t be different. You have income, and you have expenses. The only difference is that instead of income coming from working, it comes from your investments. We need to maintain a perspective of having a high level of FW, so our SW can grow!

A happy, financially-free retired couple

Shutterstock

Investing For/During Retirement

Whether investing for retirement or in retirement, I suggest the same approach. Get your money working hard to generate excellent levels of income. Boost your FW as high as possible because SW will follow as a side effect. It’s interesting that in the survey at the top, the means to get wealthy was to open a business or win a lottery. One creates FW that can continue for decades, while one is a one-time infusion of SW.

We know that to be rich, one must have a high income level at some point in time. Yet we seem to forget that our SW can earn income on its own. Nothing makes money quite like money can. Take a look at the price returns of the S&P 500 vs. “total return,” which accounts for the dividends paid:

price returns of the S&P 500 vs. total return chart
Data by YCharts

The returns on SW alone are impressive over the life of the S&P 500 index, but dividends or FW make those returns even better. I recommend you invest in holdings that produce high levels of FW, so when that income exceeds your expenses, that excess can be reinvested to grow your SW.

Having $1.9 million in your savings account is nice. It’s even better when it earns you…

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