Benjamin Beck, CFP®Lately, I’ve been asking myself, “What is the true definition of wealth?”
In my line of work, I see plenty of people one would call affluent. If you’re just looking at things on the surface and you see that a person has $15 million, you may assume that they’re wealthy. You look at what they drive, or where they live, you notice certain things about them — the make and model of the car, or the size or location of the house. You may think, “Oh, look, they’re wealthy.”
But the deeper question is, how do we define what wealth is? It’s not necessarily money. It could be health. I'm wealthy because I'm in good shape. Or I’m wealthy because I have a loving family. Those are true statements.
I’ll focus today on wealth in a financial context.
True Wealth Requires Sacrifice
Speaking from this perspective, I would say that wealth is a measurement not of your capital, but of the growth of your capital. Either your capital is growing at a pace greater than that which you are withdrawing from it, or it’s not. It’s as simple as that.
I work with a retired couple whom I consider quite wealthy. They're in their 70s, they have nothing to worry about financially, they spend a lot less than they could, and their capital is compounding and accumulating for the benefit of future generations. While they don't have all the money in the world, they are concerned about their legacy: to leave $5 million or $6 million for the next generation. I appreciate their desire to have an impact beyond their lifetime. I appreciate that they don’t spend everything they can so that they can leave something for their children and grandchildren.
They are making a sacrifice.
On a personal level, I get some fulfillment from sacrifice. Part of my morning routine, every single day before my kids wake up, is to do a minimum of 50 burpees. It’s hard and it doesn’t get easier. There isn’t a morning that I look forward to doing this exercise, just knowing how I’m going to feel physically, even if I do them at a slow pace.
First thing in the morning, I’m not warm, it’s not the perfect condition for doing these exercises, and it’s just not enjoyable in that moment. But I do love the feeling I get AFTER I’ve completed the exercise, knowing what I have accomplished before most people get out of bed in the morning. I know that this exercise is making me better. It’s clearing my mind; it’s giving me a sense of accomplishment even if I weren’t to do anything else that day.
True Wealth Requires Discipline
What does this have to do with the retired husband and wife I was telling you about earlier?
I asked them to tell me about their road to wealth. How did they get started? They didn’t come from wealth; everything they have was saved through hard work and sacrifice. They both worked for the same company for over three decades. They started in entry level positions, and I don’t think that at any point in their careers that either of the made more than $75,000 in salary.
Years ago, their manager told them that it was required they put aside a portion of their paycheck. (Which is absolutely not the case. No one can force you to save, but they believed him, anyway!) What money they could set aside they invested in company stock. That’s how they got started.
They didn’t particularly like having to save a portion of their pay, but because their boss told them they had to save some of their money, they did. Decades later, their company went through a merger. Eventually they retired, and the “compulsory savings program” resulted in the wealth they enjoy today.
As they shared with me, saving was very hard to do at first. They admitted they really needed that money; they weren’t making a lot to begin with, but they learned to spend less. They learned to sacrifice. They certainly could have used the extra money, like anybody could use extra money. But they continued their habit of saving throughout their working life while raising their children. Thirty years later, they retired with accounts that — as of the last market high — were around $6 million.
I tell this story because it’s amazing how a small act can have such a monumental impact. By making a sacrifice, this couple laid the foundation for the financial freedom they enjoy today.
Yes, they were fortunate to work for a publicly traded company, to participate in the productivity of the company through an employee stock purchase plan, and to benefit from that over a long period of time and to build true wealth over that time.
It’s easy to think that to build this kind of wealth you must be a highly compensated person and you have to make a lot of money. Yet, this story is an example of where that’s not at all what happened. These weren’t top-earning executives. Even at the pinnacle of their careers both husband and wife were relatively low- to mid-income earners.
True Wealth Requires Planning
It seems to me there’s two kinds of money: there's wealth and then there's money that runs out.
At least by my definition, true wealth is capital that retains its value over time. For this couple, their wealth continues to grow in retirement. (Of course that varies in the short-term depending on market conditions, but if you look at their capital over the course of their now 20-year retirement, it has continued to grow over the long term.)
Contrast that with a second example: a 60-year-old couple, with $10 million sitting in the bank, earning a “great” rate of interest of 4%. They are retired, and they are pulling out $350,000 a year after taxes to cover their expenses. These folks with $10 million in assets — are they wealthy? Given how much they are pulling from their portfolio on an annual basis, their rate of consumption is greater than what their portfolio can produce (factoring in that their money needs to be able to keep up with inflation). They will run out of money, completely, in about 25 years.
Now, suppose my wife and I have some capital invested in a diversified portfolio of mainly equities, and we're assuming an average annual return over a long period of time of about 10%. Let’s also assume a long-term average annual inflation rate of 3%. When we go to retire and take income from the portfolio, we do so at a rate of 4.5%. And then we increase that withdrawal by 3% every year to offset inflation — the inevitable increase in our cost of our living.
Also assume that we maintain 18 to 24 months of our living expenses in cash for the days when our equity portfolios decline temporarily but significantly enough that we decide to stop withdrawing from them in the interim. We will want a cash account for those times.
These assumptions are part of the Goals Planning Statement (GPS) that we prepare for our clients here at Beck Bode.
We lay this out for our clients in writing, paragraph by paragraph. Because when we look at our finances like this, we can plan for a future where we can foresee not only what we will need to retire comfortably, but also what we can potentially leave behind for our children or the causes that are important to us. By planning ahead, by making sacrifices, and by saving our money intentionally and with discipline, we get to leave behind a legacy for the people we love.
So, what does it take to accumulate wealth?
It’s less about how much money we have or earn, and much more about our commitment to our goals, the discipline we practice, and the sacrifices we make on our way to seeing our vision of the future come to life. Are we willing to put our capital to work, or will we chip away at it until it runs out of the ability to fuel our future? I would argue that true wealth — financial wealth — is capital that is positioned to grow well beyond our lifetime.
Ben Beck is Managing Partner and Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business, and life.