Friday, October 03, 2008

Income from Earning or Financial Assets

Mind Over Money: How to Win the Retirement Game of Risk at Yahoo! Finance offers an interesting way to think about retirement saving. In the article, Professor Moshe A. Milevsky presents retirement saving as a process of efficiently converting earnings into financial assets that can support oneself as earning capability declines.

Here were some of the interesting points I found in Professor Milevsky's retirement savings approach:
  • There are two sources of income: earnings and financial assets. Earnings produce salary income and financial assets produce interest, dividend, rent or capital gains income. This confirms my belief that asset do not produce income, such as a home, vehicles and other personal property, should not be included in calculation for retirement readiness.

  • Earnings income and financial asset income are two ends of a spectrum. Earnings income are highly dependent on personal capability, while financial asset income are dependent other's capabilities. Early in adult life, earnings provide most of the income. In the later stages of adult life, financial assets are used to provide more income as earning capability declines.

  • Earnings can be spent or used acquire financial assets. Spending covers buying personal property (e.g. vehicles, home, furnishings, clothing, etc.) and financial assets cover stocks, bonds, CDs, investment property, some hard assets (e.g. gold, collectibles, etc.).

    I think a typical issue that exists is counting personal property as a financial asset. I know many people consider a home as part of their retirement savings.
  • The age of retirement is dependent on how efficiently earnings income can be converted to financial asset income. The more financial assets accumulated, the earlier one can retire.

    For more on Reaping the Rewards, check back every Friday for a new segment.

    This is not financial or retirement advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC

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