Monday, January 3, 2011

what's a net worth

when i used to think about retirement, i used to think that i'd need to have a net worth of about 2 million bucks. i figured that with a 5% rate of return, that would net a cool hundred grand a year to live off of in retirement -- that a $100,000 a year would be sufficient to meet my standard of living. in reflecting on this, i realized that what i was concentrating on was income, which is something that we naturally think about. in our working lives, we try to make as much as we can. in thinking about retirement, though, i've been trying to shift my mentality. instead of thinking "i need 100k a year to retire", i've been trying to arrive at the amount that i would spend in retirement to live. if my income can cover my living expenses, that would allow me to retire. that income could come from any number of sources -- in my previous way of thinking, it was investment income of some sort off of a $2,000,000 nest egg. the realization to me here is that you don't necessarily have to have a hefty net worth to retire.

this realization has come relatively recently, even though it's quite obvious when you stop to think about it. through the years i've been pretty diligent about tracking our net worth every few months, and i'm not saying that knowing your net worth isn't a valuable thing, but it can be misleading. if you are not paying close attention to your cash flow, your net worth can quickly be eroded away. moreover, your net worth often includes real assets (like property) that can give you a sense of wealth that is imaginary, or at least very hard to tap into to cover expenses.

so, now i'm trying to concentrating on cash flow, and more specifically our monthly expenses. by tracking that and similarly tracking passive modes of income, we can see how close we are to a break even point. in my mind that break even point is the event horizon for retirement.

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