You're not greedy; you just want to get by in comfort without working. Here's how big that lottery check would have to be.
By Scott Burns
Each time I reach for the brass ring, it eludes me.
Your experience has probably been the same.
The problem is wealth inflation, a runaway increase in the amount of money we need to feel well-off. If you haven't heard of wealth inflation before, don't worry. Unlike the consumer price index, it's not reported on by the Department of Labor.
The best measuring tool is something I created many years ago. It's called the Life of Riley Index. Named for my inner Irishman, the Life of Riley Index attempts to measure how much money we need to be "independently middle class." This is quite different from being independently wealthy, the way characters in Jane Austen novels are.
Forgoing the indignity of work
You are independently middle class when your dividend and interest income pays your rent on time, pays for your car, and allows you to eat three meals a day, plus snacks. The same dividend and interest income allows you to keep up with the millions of Americans who don't spend their weekends pricing helicopters or puzzling over whether they should have one, or two, dozen chairs in their home theaters. You're independently middle class when you can live like most people -- without the indignity of work.
At a party, when someone asks, "What do you do?"
You answer: "In event of what?"
Just to give the Life of Riley Index a bit of an edge -- to avoid being smack in the middle of the hoi polloi -- I have keyed it to a slightly superior income. Specifically, this is household income at the 40th percentile, as measured by the Census Bureau. This means 60% of all households have lower incomes. And 40% have higher incomes.
The difference, of course, is that most people, regardless of income, are still reporting for work, something well beneath your dignity.
Brace yourself
So now that you have the concept, let's get on with the bad news. In 1980, with the 40th percentile household income at $24,800 and a simple Couch Potato-like portfolio yielding some 8.36%, you could be independently middle class with an investment account of only $296,828.
By 1993 the portfolio yield had been nearly cut in half -- to 4.33% -- but the required income had risen to $45,030. That took the index to a bit over $1 million for the first time.
The index hit $2 million in 2001, when many were starting to lose money in impressive quantities. The 50/50 portfolio yield had dipped below 3%, and the income threshold had risen to $62,500.
Reaching for the brass ring
Today, assuming income rose by 2.6% in 2002 and 2.2% in 2003 (government figures for average wage gains), you could live the Life of Riley with an income of $65,536. Unfortunately, portfolio yields have continued to decline. At 2.37% in 2003, you'd need a record $2,765,232.
As I said, the real problem in America isn't price inflation. It's wealth inflation. While consumer prices were rising at 2% to 4% during virtually any period from 1980 to the present, the Life of Riley Index was rising at 9% to11% a year.
Small wonder the brass ring continues to elude us.
The Life of Riley Index
Year S&P 500 yield 5-year Treasury yield 40th percentile Income Required Life of Riley Portfolio value 50/50 portfolio yield | | 1980 | 5.26% | 11.45% | $24,800 | $296,828 | 8.36% | | 1981 | 5.20% | 14.24% | $26,758 | $275,288 | 9.72% | | 1982 | 5.81% | 13.01% | $27,950 | $297,024 | 9.41% | | 1983 | 4.40% | 10.79% | $29,475 | $388,084 | 7.60% | | 1984 | 4.64% | 12.26% | $31,684 | $374,959 | 8.45% | | 1985 | 4.25% | 10.12% | $33,152 | $461,406 | 7.19% | | 1986 | 3.49% | 7.30% | $35,120 | $650,973 | 5.40% | | 1987 | 3.08% | 7.94% | $36,801 | $667,895 | 5.51% | | 1988 | 3.64% | 8.47% | $38,500 | $635,838 | 6.06% | | 1989 | 3.45% | 8.50% | $40,800 | $682,845 | 5.98% | | 1990 | 3.61% | 8.37% | $42,040 | $701,836 | 5.99% | | 1991 | 3.24% | 7.37% | $43,000 | $810,556 | 5.31% | | 1992 | 2.99% | 6.19% | $44,000 | $958,606 | 4.59% | | 1993 | 2.78% | 5.87% | $45,030 | $1,041,156 | 4.33% | | 1994 | 2.82% | 6.68% | $47,000 | $989,474 | 4.75% | | 1995 | 2.56% | 6.77% | $48,985 | $1,050,054 | 4.67% | | 1996 | 2.19% | 6.07% | $51,086 | $1,236,949 | 4.13% | | 1997 | 1.77% | 5.77% | $53,616 | $1,422,175 | 3.77% | | 1998 | 1.49% | 5.15% | $56,020 | $1,687,349 | 3.32% | | 1999 | 1.25% | 5.54% | $59,400 | $1,749,632 | 3.40% | | 2000 | 1.15% | 6.15% | $61,378 | $1,681,589 | 3.65% | | 2001 | 1.32% | 4.55% | $62,500 | $2,129,472 | 2.94% | | 2002 | 1.61% | 3.82% | $64,125 | $2,361,878 | 2.72% | | 2003 | 1.77% | 2.97% | $65,536 | $2,765,232 | 2.37% |
|
The Life of Riley portfolio value is calculated by dividing the 40th percentile income by the yield on a portfolio invested 50% in the S&P 500 index and 50% in five-year Treasury obligations.
Sources: Economic Indicators, Dallas Fed, Census Bureau
|
