Wealth Creation- Part 2: 5 Stages of Wealth

In my column last week, I discussed how to get started investing with as little as $1 a month.  This week, let’s look at the five Stages of Wealth and determine how much you must accumulate to become financially independent.

In my upcoming book, “The Fundamentals of Wealth Creation” (publish date: 2017), I discuss the 5 Stages of Wealth.  Take a moment to determine which wealth stage category best represents your current financial situation.  If you are not yet at Wealth Stage one, review last week’s column (visit www.Welchgroup.com; click on ‘Resource Center’; then ‘Stewart’s Commentary’; then “Wealth Creation Part 1: How To Invest as Little as $100”) and be sure to read next week’s column which will cover the three basic things you must learn to create wealth.

Wealth Stage One:  You achieve Wealth Stage One when you are paying all of your bills (on time!) and saving a minimum of 10% of your gross income.  Generally, saving ten percent puts you on a glide-path to becoming financially independent but it often takes twenty to forty years to reach that ultimate goal.

Wealth Stage Two: Here, you are paying all of your bills and the ‘growth’ on your investments is approximately equal to or greater than the amount you’re investing annually.  For example, if you’re investing $10,000 per year, the earnings (interest, dividends and capital appreciation) are also growing, on average, $10,000 per year.  Clearly, this is a significant step up from Wealth Stage One and will take a lot of years or a more aggressive investment strategy.

Wealth Stage Three:  With Wealth Stage Three, your cash flow (interest, dividends and capital appreciation) from your investments is equal to or greater than your earnings from work.  Congratulations, you are financially independent!  You get to choose whether you go to work or not.  For a lot of people, this is their basic retirement goal and happens between ages sixty to seventy.

Wealth Stage Four:  At this stage, investment cash flow allows you to significantly raise your lifestyle.  You’re not just paying your bills, enjoying the occasional night out and a modest annual vacation.  I normally think of this as you having at least two times the cash flow needed for your basic lifestyle and it’s what I refer to as ‘wealthy’!

Wealth Stage Five:  Very few people get to this stage and if you do, you are considered ‘rich’.  At this level your investment cash flow equals a minimum of five times what’s needed to cover your basic lifestyle needs.  You are free to travel extensively, own multiple homes, or become a philanthropist. You’ll also likely need extensive estate and tax planning.

How much is enough?  Achieving Wealth Stage Three

Let’s begin with the end in mind.  What’s your number?  How big of a pot of money do you need in order to retire (Wealth Stage 3)?  Let’s do a simple two-step calculation.  Step 1: Estimate what it costs to pay all of your bills for twelve months.  Step 2: Add a ‘0’ to that number.  For example, if it takes $50,000 to pay all of your bills for one year, then by adding a ‘0’, your ‘number’ is $500,000.  This assumes that Social Security will cover at least one-half of your retirement income needs.  As a footnote, according to the Social Security Administration, approximately 75% of Social Security recipients depend on Social Security for at least one-half of their income.  And approximately 50% depend on Social Security for 90% or more of their income.

If you want a ‘richer’ retirement, you’ll need to accumulate more.  I’m assuming your number is a bit of a shock and may come with some doubts about your ability to accumulate that much money.  I assure you it is possible as I’ve counseled hundreds of families who have achieved this level of wealth.   In fact, next week I’ll discuss strategies for achieving higher levels of wealth.