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Income ≠ Wealth

There’s a big difference between income and wealth. Income can be considered the amount of money an individual earns on a consistent basis. For most individuals, this is a paycheck. Wealth can be considered an individual’s net worth, or, more specifically, how much income their wealth generates and how long they can sustain a given lifestyle without having to receive a conventional paycheck.

Some individuals may confuse the two. Some may feel that a high income equates to wealth. They may also think that to be wealthy or to generate wealth, their income must be high. This isn’t the case. While a high income may help to build wealth faster, it is no guarantee that an individual is or will be wealthy.

Let’s look at an example of two couples, about the same age, nearing retirement and wondering if they have enough wealth to do so. These are based on actual client interactions, although some info will be generalized to maintain anonymity.

The first couple, Hank and Bess, has saved roughly $3 million in retirement accounts. They are both in their mid-50sand neither earned more than $50,000 annually throughout their careers. This couple is debt-free, while owning two vehicles, two homes, a business (purchased with cash just before retirement) and needs about $38,000 annually to meet their retirement expenses – half of which will be covered by their Social Security when they take it.

Conservatively, this couple needs to earn just over half of a percent (.00633) annually to cover the $19,000 needed for their expenses, from their $3 million portfolio, while leaving the principal untouched. This couple is very wealthy.

The second couple, Stan and Kat, currently still work and earn about $750,000 annually. They have a big house with a mortgage, no kids, and make payments on two luxury sedans. They make quite a bit of money annually and their lifestyle shows it. However, when considering retirement, this couple’s wealth – what they have currently saved to support their wanted retirement lifestyle, would last them between 10 to 13 years.

On the outside, it may look like Stan and Kat are very wealthy. However, compared to Hank and Bess, their wealth is quite low. Unless they change their lifestyle, or saving habits, Stan and Kat’s retirement outlook remains grim.

Income doesn’t not equate to wealth. As you can see from the examples above, it doesn’t take a huge income to build wealth. It takes discipline to save, avoiding unnecessary debt, and delaying gratification to have a comfortable retirement in the future.

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