If you want to build lasting wealth and achieve financial success, you need to know your lifetime wealth ratio (LWR). This metric shows how much of your income you have turned into wealth. It can help you measure your financial health, compare yourself to others, and track your progress towards retirement.
In this comprehensive guide, you will learn how to calculate, understand, and improve your LWR. You will also learn how global wealth distribution affects LWR, what is a good LWR for your age or income level, and how Kubera can help you optimize your LWR.
What is Lifetime Wealth Ratio?
Lifetime Wealth Ratio (LWR) is a metric that measures an individual’s wealth accumulation relative to their lifetime earnings. It is calculated by dividing current net worth by total lifetime gross earnings or lifetime income.
Net worth is the total value of all your assets (such as savings, home, investments) minus all your liabilities (such as loans, credit card debt).
Lifetime gross earnings or total lifetime income is the sum of all the money you have earned in your life from various sources (such as wages, salaries, bonuses, commissions, tips, inheritances, social security benefits, etc.).
The formula for lifetime wealth ratio is:
Lifetime Wealth Ratio = Net Worth / Lifetime Gross Earnings
For example, if your current net worth is $500,000 and your lifetime gross earnings are $2 million, then your lifetime wealth ratio is:
Lifetime Wealth Ratio = 500,000 / 2,000,000 = 0.25
This means that you have accumulated 25% of the money you have earned in your life as wealth.
Understanding the Importance of LWR
Lifetime wealth ratio is a personal finance metric that shows how well someone is saving and investing their money. A higher LWR indicates more wealth accumulated relative to earnings. A lower LWR indicates less wealth accumulated or more money spent or lost.
Lifetime wealth ratio is important because it can help you:
- Evaluate your financial health. Lifetime wealth ratio can give you a snapshot of your financial situation and show you how much money you have saved or invested over time. It can also reveal how much money you have spent or wasted on things that do not contribute to your net worth.
- Benchmark yourself against others. Lifetime wealth ratio can help you compare yourself to others who have similar income levels or age groups. You can see how you rank among your peers and whether you are ahead or behind in terms of wealth accumulation.
- Track your progress towards retirement goals. Lifetime wealth ratio can help you measure how close you are to achieving your retirement savings goals. You can see how much money you need to save or invest to reach a certain LWR that will allow you to retire comfortably.
- Normalize your income. Lifetime wealth ratio can help you adjust for different income levels and avoid chasing unrealistic benchmarks. You can focus on how much money you keep rather than how much money you make. You can also avoid comparing yourself to people who earn much more or much less than you do.
Global Wealth Distribution and LWR
According to the Credit Suisse Global Wealth Report 2021, most adults worldwide have limited wealth. The report estimates that:
- Over 50% of adults have net worth under $10,000
- Only 11% of adults have net worth between $10,000 and $100,000
- Only 9% of adults have net worth between $100,000 and $1 million
- Only 1% of adults have net worth over $1 million
These statistics show that global wealth distribution is highly skewed and unequal. They also imply that potential LWRs vary widely across income strata.
Lower income earners likely have lower LWRs because they have less free cash flow to invest in things like real estate or the stock market. They may also face more financial challenges such as debt, inflation, unemployment, or emergencies that reduce their net worth.
High income earners can more readily save and invest their money to build wealth. They may also benefit from more financial opportunities such as tax breaks, compounding returns, or inheritance that increase their net worth.
However, income is not the only factor that affects LWR. Other factors such as spending habits, lifestyle choices, financial literacy, and luck also play a role. Some people may have high incomes but low LWRs because they spend more than they earn or make poor financial decisions. Some people may have low incomes but high LWRs because they live frugally and invest wisely.
Therefore, it is important to understand that LWR is not a measure of income, but a measure of wealth accumulation. It is not a fixed number, but a dynamic ratio that can change over time. It is not a goal, but a tool that can help you improve your financial situation.
Calculating Your Personal LWR
To calculate your personal LWR, you need two numbers: your current net worth and your lifetime gross earnings to date. Here is how to get them:
Current net worth
This is the total value of all your assets minus all your liabilities. You can use Kubera, a simple and secure tool that syncs all your accounts and assets and calculates your net worth automatically. You can link your bank accounts, investment accounts, physical and digital assets, and more to Kubera. It also supports DeFi assets along with all traditional investments.
Lifetime gross earnings to date
This is the sum of all the money you have earned in your life from various sources. You can estimate this number using one of these methods:
Annual income method
Multiply your annual income by the number of years you have been working. For example, if you have been working for 20 years and your average annual income is $50,000, then your estimated lifetime earnings are:
Lifetime Earnings = 50,000 x 20 = 1,000,000
This method is simple and easy, but it may not be very accurate if your income has changed a lot over time or if you have had gaps in employment.
Social security method
Access or create a social security account and get a social security statement that shows your earnings record. Your earnings record includes your taxed social security earnings and taxed Medicare earnings for each year since you started working. Add up these earnings to get your estimated lifetime earnings. For example, if your social security statement shows the following earnings record:
Then your estimated lifetime earnings are:
Lifetime Earnings = 30,000 + 32,000 + 35,000 + ... + 60,000 = 1,100,000
This method is more accurate and reliable than the annual income method because it reflects your actual earnings history as reported to the social security administration. However, it may not include some sources of income that are not subject to social security or Medicare taxes, such as inheritances or non-taxable wages.
Once you have your net worth and lifetime earnings, you can plug them into the formula to get your LWR:
Lifetime Wealth Ratio = Net Worth / Lifetime Gross Earnings
For example, if your net worth is $500,000 and your lifetime earnings are $1 million (using either method), then your LWR is:
Lifetime Wealth Ratio = 500,000 / 1,000,000 = 0.5
This means that you have accumulated 50% of the money you have earned in your life as wealth.
What’s a “Good” LWR?
There is no definitive answer to what is a good lifetime wealth ratio, because it depends on many factors such as age, income level, lifestyle preferences, retirement goals, etc. However, some personal finance experts have provided some general guidance on what ranges of LWRs indicate different levels of financial health.
For example, J. Money from Budgets Are Sexy suggested the following LWR ranges based on his personal experience and opinion:
- 0%-10% – Needs improvement: This means that you have little or no wealth accumulated relative to your earnings. You may be living paycheck to paycheck, spending more than you earn, or facing financial difficulties. You need to improve your saving and investing habits, reduce your debt, and increase your income.
- 10%-25% – Decent: This means that you have some wealth accumulated relative to your earnings. You may be saving and investing regularly, but not enough to achieve your financial goals. You need to increase your saving and investing rate, optimize your portfolio, and diversify your income sources.
- 25-50% – Strong: This means that you have a good amount of wealth accumulated relative to your earnings. You may be on track to achieve your financial goals, but still have room for improvement. You need to maintain your saving and investing rate, monitor your portfolio performance, and protect your income sources.
- 50-100% – Very strong: This means that you have a great amount of wealth accumulated relative to your earnings. You may have achieved or exceeded your financial goals, and have financial freedom and security. You need to enjoy your wealth, share it with others, and plan for the future.
- 100%-1,000% – Excellent: This means that you have an extraordinary amount of wealth accumulated relative to your earnings. You may have far surpassed your financial goals, and have financial abundance and independence. You need to use your wealth wisely, generously, and responsibly.
Keep in mind that these ranges are not absolute or universal. They are just a helpful benchmark that can give you a general idea of where you stand and what you can do to improve. Your LWR may vary depending on your personal circumstances and preferences. For example, if you are young and just starting out, you may have a low LWR because you have not earned much yet. If you are older and nearing retirement, you may have a high LWR because you have saved and invested for a long time.
Therefore, it is important to understand that LWR is not a ranking or a competition. It is a personal metric that can help you assess your own financial situation and progress. The goal is not to achieve a certain LWR, but to improve your LWR over time by increasing your net worth and optimizing your lifetime earnings.
How to Increase Your LWR?
To increase your LWR, you need to increase your net worth or decrease your lifetime earnings (or both). However, decreasing your lifetime earnings is not advisable because it means earning less money or working less time, which can negatively affect your quality of life and retirement prospects. Therefore, the best way to increase your LWR is to increase your net worth by improving the following factors:
Net worth factors
These are the factors that affect the value of your assets and liabilities, such as savings accounts, retirement accounts, investments, loans, credit card debt, etc. To increase your net worth, you need to:
- Save and invest more: The more money you save and invest, the more wealth you accumulate. You should aim to save at least 10% of your income for retirement, or more if possible. You should also max out any employer matching contributions or tax-advantaged accounts such as 401k, Roth IRA, etc. These accounts can help you save money for the future and take advantage of tax benefits and compounding returns.
- Choose the right asset allocation and investment strategy: The way you allocate your assets and invest your money can affect your net worth and LWR. You should diversify your portfolio across different asset classes such as stocks, bonds, real estate, etc., and rebalance it periodically to maintain the desired risk-reward ratio. You should also avoid paying high fees or commissions that can eat into your returns. You should choose an investment strategy that suits your risk tolerance and time horizon, and stick to it.
- Reduce or eliminate debt: Debt can reduce your net worth by increasing your liabilities and interest payments. You should pay off any high-interest debt such as credit card debt as soon as possible, and avoid taking on new debt unless necessary. You should also pay off any low-interest debt such as student loans or mortgages if it makes sense for your situation.
Earnings factors
These are the factors that affect the amount of money you earn in your life from various sources, such as wages, salaries, bonuses, commissions, tips, inheritances, social security benefits, etc. To optimize your lifetime earnings, you need to:
- Increase your income: This means finding ways to earn more money from your current or new sources of income. You can ask for a raise, negotiate a better salary, switch to a higher-paying job, start a side hustle, create a passive income stream, etc. You can also invest in yourself by acquiring new skills, education, or certifications that can increase your value and marketability. This is another form of wealth creation that can boost your lifetime earnings and LWR.
- Reduce your taxes: This means finding ways to pay less taxes on your income and investments. You can take advantage of tax deductions, credits, exemptions, or deferrals that can lower your taxable income or tax liability. You can also use tax-advantaged accounts such as 401k, Roth IRA, etc., that can reduce or eliminate taxes on your retirement savings or withdrawals. This is another form of wealth preservation that can protect your lifetime earnings and LWR from loss.
- Protect your income: This means finding ways to prevent or minimize the loss of income due to unforeseen events such as illness, injury, disability, death, unemployment, etc. You can buy insurance policies such as health insurance, disability insurance, life insurance, etc., that can provide you with financial protection and peace of mind. You can also build an emergency fund that can cover your living expenses for at least 3 to 6 months in case of an emergency. This is another form of wealth preservation that can protect your lifetime earnings and LWR from disruption.
By improving these factors, you can increase your net worth and optimize your lifetime earnings, which will result in a higher LWR. You also need to develop a wealth mindset that can help you make smart financial decisions and avoid common mistakes that can lower your LWR. A wealth mindset is a positive and proactive attitude towards money and investing that can help you achieve your financial goals.
Kubera for Tracking and Optimizing Your LWR
Kubera is a simple and secure tool that helps you track your net worth and manage your wealth. With Kubera, you can:
- Sync all your accounts and assets to get your net worth automatically. You can link your bank accounts, investment accounts, physical and digital assets, and more. Kubera also supports DeFi assets along with all traditional investments.
- Monitor the performance of your investments across different asset classes and platforms. You can see your portfolio distribution, compound annual growth rate (CAGR), return on investment (ROI), and more.
- Calculate your LWR by dividing your net worth by your lifetime earnings. You can enter your lifetime earnings manually or import them from your social security statement.
- Use the fast forward feature to see how real-life situations affect your net worth and LWR in the future. You can simulate scenarios such as retirement, inheritance, market crashes, inflation, etc., and see how they impact your portfolio value and income streams.
Starting with Kubera is quick and easy. You can sign up for a $1 trial and get access to all the features for 14 days. Just create an account, sync your accounts, enter or import your lifetime earnings, and enjoy Kubera.
Kubera is the ultimate tool for tracking and optimizing your LWR. It can help you achieve financial success and build lasting wealth. Don’t miss this opportunity to take control of your finances and secure your future. Sign up for Kubera $1 trial today and see the difference for yourself.
Conclusion
Lifetime wealth ratio is a powerful metric that can help you measure and improve your financial health. It shows how much of your income you have turned into wealth, and how you compare to others with similar income levels or age groups. It also helps you track your progress towards your retirement goals and adjust your financial plan accordingly.
To improve your LWR, you need to focus on three aspects of wealth management: wealth preservation, wealth mindset, and wealth creation.
You can use Kubera, a simple and secure tool that helps you track your net worth and manage your wealth. Kubera also helps you calculate your LWR, and use the fast forward feature to see how real-life situations affect your net worth and LWR in the future.
