Monday, July 12, 2010

Wealth Builder Ratios - Q2 2010 Update

Here is our Q2 2010 Wealth Builder Ratio update. During the second quarter of 2010, the Dow, Nasdaq and S&P500 indices declined 10.0%,12.0% and 11.9% respectively. My company stock did better than the indices, only losing 5.2% during Q2. Also, we had reallocated our portfolio to 50% in cash and cash equivalents. As a result, our savings, including company stock options, are only down 2.7% this year.

For more details on the relevance of these ratios, please see this How Much Is Needed To Be Wealthy - The NUMBER.

Ratio and Target

Q1 2010

Q2 2010


Income to Salary

Target=0.8 2007=3.41 2008=-5.47 2009=-1.38


After a positive start in Q1, 2010 has turned negative. We have gone from a 0.77 gain to a 0.41 loss, due to losses in the stock market in Q2. Fortunately, we have a large cash position and my company stock decline at half the rate.

At this point, we continue to stay invested in the market for our tax advantage accounts, and are looking to make additional purchases with this market correction.

to Salary

2007=23 2008=16.7 2009=15.3


Only the first three quarters of 2009 had a lower savings ratio than 14.9, which is discouraging. This result is not looking good for my retirement sustainability.

During Q2, my company stock fell 5.2% and the Dow, Nasdaq and S&P 500 fell 10-12%. Our total savings are only down 2.7% for 2010, since our investments are 50% in cash and cash equivalents.

Currently, we need a significant advance of 33% in my company stock for us to reach the target of 20. Unfortunately, this is likely a low probability event. We will need to evaluate alternative strategies that will enable us to achieve the goal.

Debt to Salary

2007=1.51 2008=1.46 2009=0

We said bye-bye to our mortgage on May 20, 2009. Eliminating a mortgage payment has reduced our expenses by 24%.

My financial goals for 2010 are:

1. Continue to maintain an Investment Income to Salary ratio > 0.8. (off track)

2. Maintain a Savings to Salary ratio of 20. (off track)

3. Maintain Debt to Salary Ratio at 0. (met final goal of 0)

(For reference, Salary refers to gross salary just prior to early retirement in October, 2007.)

Both #1 and #2 were directly correlated with how well our stock, bond, and CD investments returns. With the decline of the market in Q2, our investments have also shown a decline.

It has been very challenging retiring at the beginning of a bear market. Our short term expenses (next 3-5 years) are invested in CDs, bonds and money markets. So we can wait for the stock market to resume an upward trend, hopefully in the next 1 to 2 years. At this point, I continue to be concerned about reducing our withdrawal rate, and have taken on five seasonal part time jobs throughout the year to earn about 20-30% of our living expenses .

I continue to have the same financial goals for 2010. Hopefully, the markets will rebound into 2011, and allow our retirement investments to further recover. Otherwise, it's back to permanent full time work I go :-)

For more on Strategies and Plans, check back every Monday for a new segment.

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

Copyright © 2010 Achievement Catalyst, LLC


Seamus said...

Do you adjust your income and savings target for inflation? Are your targets relative to the nominal salary you earned in October 2007 or to the real value of it in July 2010.

If the targets are not inflation adjusted, that should make them easier to reach in times of inflation but in reality you would be worse off.

I would love to have this problem as these targets are only pipe dreams for me.

Super Saver said...


Good point about inflation. I haven't adjusted for inflation. The comparisons are versus my nominal October, 2007 salary.

Since I'm within three years from the retirement date, 20 X is still likely a good target, given the CPI was negative in 2009. Also, my company had a pay freeze in 2009 and stopped giving raises. So 20 X not be that far off for now.

At 0-3% inflation, I may not need to make too much adjustment. Yes, 20 X may be 1/2 the value in real dollars after 30 years, but my remaining life expectancy will be much shorter. So it will probably balance out with low inflation. However, with high inflation, I agree that adjustments will be needed. Probably a calculation I will let my financial advisor do :-)