Work. Some people love it. Others are addicted. Still others find it amusing: They can watch it being done for hours. But here’s the big question: How much money would you really need to have a choice about working?
The answer: It depends.
This is why I created the Life of Riley Index, my annual attempt to nail down how much money one would need to live well without submitting to the inconvenience of work. Achieve this, and you will also receive a lifetime membership in the Big Lebowski Fan Club.
Note that we are not talking about being rich. While having $1 million was once a clear sign of being rich, millionaires are now so numerous that, well, it’s kind of common, if you know what I mean. In fact, those with only $1 million to $5 million are now identified as “entry-level millionaires.”
But who cares? If your interest in money is like mine, it’s a purely practical concern. You want to know how much money you’ll need to live with some comfort after you’ve told your boss the final destination for your job. Having the cash to own an Aston Martin, your own private island or a house with a wine cellar larger than a Walmart has never been on your radar screen.
That’s why the Life of Riley Index is based on income figures from the Internal Revenue Service. Every year the folks there study our tax returns. This allows them to see where the money is and how much it takes to be in the top 50 percent, top 25 percent, top 10 percent, top 1 percent and top 0.1 percent of all household incomes. (Yes, they were tracking the top 1 percent long before Occupy Wall Street existed.)
In 2009, the last year for which the data is available, you needed an adjusted gross income of at least $66,193 to be in the top 25 percent of households in America. What’s so special about the top 25 percent? It is a rough proxy for the amount of income you need to be happy.
Studies have shown that most of us judge our well-being relative to others. If our income is higher than most, we compare well and feel pretty good. The same studies have shown there is a limit to how much happiness you can buy with money. Once we’ve got food, clothing, transportation and shelter, improvements don’t do much to increase our happiness.
Yes, quite a few people didn’t get that memo. That’s why they are still out there, striving for more money, building bigger yachts and avoiding the indignity of airport security by having private jets. It’s also why publications like ForbesLife, Town & Country and the Robb Report regularly suggest that our life will be so much better if we have a (fill in the blank).
In fact, most of us truly don’t care. (Everyone in favor of a lifetime sabbatical from the Kardashians, please raise your hand.) That’s why I set the income threshold at being in the top 25 percent of households. Your personal number may be higher, or lower. Feel free to quibble.
From there, we examine the yield on common stocks and five-year Treasury securities. Then we use those figures to calculate how much money we’d need if we lived on dividends and interest, or a 4 percent annual withdrawal rate.
“The number” this year is a hefty $3,966,000. This assumes you are young and live on your dividends and interest only. The amount is so high because stocks are yielding only 2.35 percent. And the five-year Treasury, which was yielding 5.77 percent only 15 years ago, is now yielding a pathetic 0.76 percent. (Send a thank-you note to Chairman Ben at the Federal Reserve.)
Are you a bit older and willing to risk running out of money? Then you can bet on taking 4 percent a year from your money. That chops your number by more than half — to about $1,769,828. But it’s still a lot of money.
And what about retirees? If you are retired, you have Social Security benefits. According to the Social Security Trustees annual report, an above-average worker can expect Social Security to replace about 40 percent of his or her income. That means a Life of Riley retiree would need to have 40 percent less money. That takes the number down to $1,061,897.
Hey, call it a million.
SCOTT BURNS is a principal of the Plano-based investment firm AssetBuilder Inc. His website is www.scottburns.com.
— Universal Press Syndicate
ON THE WEB
- Scott Burns, “Mere Millionaires Need Not Apply” (7/8/11): assetbuilder.com/blogs/scott_burns/archive/2011/07/08/mere-millionaires-need-not-apply.aspx
- The Millionaire Lifestyle: lottery.co.uk/news/millionaire-lifestyle.asp