Wealth Accumulation Rate

What is a Wealth Accumulation Rate?

This could also be called Savings Rate, which would refer to the % of my income that is going towards long term savings such as retirement, a house purchase, etc. I do not like this term as much because it could be misconstrued to include items such as saving for a depreciating asset such as a car or boat, or saving for a vacation, or something else that is not going to add to my financial wealth. For these reasons, I prefer to use the term Wealth Accumulation Rate. It means the same thing, what percentage of my income is going towards building wealth, I just feel like it is less ambiguous because the title is a reminder that I should only be including things that are actually building wealth.

What should my percentage be?

In his baby step #4, Dave Ramsey suggests investing 15% of your household income into Roth IRAs and pre-tax retirement accounts. But 15% is not what Dave Ramsey is suggesting should be my Wealth Accumulation Rate. In step #4, 15% is the minimum, suggesting I should invest more than 15% if possible. And then there are steps 5 and 6, which are also all about building wealth in the form of College Savings for my kids and paying off the home mortgage early. And finally step 7 is to continue building wealth and to focus on giving. So according to Dave Ramsey, my Wealth Accumulation Rate should be 15% at a minimum, but much higher that that if possible.

People in the FIRE movement (Financial Independence, Retire Early), are those who are aggressively working to build enough wealth to allow them the option of retiring early if they so desire. This would also allow them the option of changing jobs, working less, starting to enjoy mini-retirements, etc. Anyway, these folks might have a Wealth Accumulation Rate as high as 50-60%. They are making choices to put the majority of their income toward this goal.

For me, I am comfortable with a much lower Wealth Accumulation Rate than the FIRE folks. Because of my previous career choices, I will have the luxury of having two different pensions coming to me during retirement. One will begin at the age of 60 because of my Reserve Retirement through the US Army. My second pension will be from my GS job as a civilian employee. My age when this pension will start and how much it will be is yet to be determined, depending on how long I continue to work as a full time GS employee. Therefore, I will have two continuous streams of income during retirement. So the amount of money I need to take out of my other retirement savings, my Withdrawal Rate, is much smaller because of these other sources of retirement income.

What should be included in my Wealth Accumulation Rate?

Make a list of all my wealth building investments and debt payments.

  • Pre-tax Investments

    • HSA

    • Traditional IRA

    • Traditional TSP

    • 401(k) or 403(B) or 457(b)

    • SEP IRA

    • Other

  • Post-tax Investments

    • Roth IRA (backdoor if necessary)

    • Roth TSP

    • Taxable Investment Accounts

    • Extra Mortgage Payments

    • Other

  • Debt Repayment

  • College Savings

I obviously want as much money as possible in the first section. I need to take full advantage of any pre-tax investment opportunities. Then I move down the list investing as much as I can in each category.

Does paying down debt build wealth?

Should I include money I am using to eliminate debt as part of my Wealth Accumulation Rate. This is an interesting question. On one hand, any money I am using to pay down debt is increasing my wealth and my Net Worth, as detailed in my post about the Balance Sheet. On the other hand, does this mean I should count my monthly mortgage payment? Or just the principal portion of my mortgage payment? Although I can understand both sides, I think my Wealth Accumulation Rate should not include my normal mortgage payment, but it should include any extra principal payments I am paying towards my mortgage. I think a normal mortgage payment should not be included because it is similar to what I would be paying in rent if I did not purchase a house. It also gets tricky to try and separate the different components of my monthly mortgage payments including principal, interest, and escrow, which is slowly changing. I also would not want to view my monthly mortgage payment as wealth building, because it might encourage me to purchase more house than I should.

The other reason I consider debt repayment a part of wealth building is it inflates my Wealth Accumulation Rate, meaning I am using a smaller part of my gross income for normal living activities. The idea is to keep that Wealth Accumulation Rate at the same percentage after I finish paying off debt by taking that debt payment money and moving it into some investment account. This is a better option than allowing lifestyle creep to take over the previous debt payment money.

What about college savings?

I view this differently than saving for a new car or vacation, so I do include the money I am investing in my kid’s 529 accounts as part of my Wealth Accumulation Rate. But I understand this could be controversial. Similar to debt repayment, when I have met my savings goal for my kids college, my plan is to keep my WAR percentage the same by rolling that monthly expenditure into a different investment.

How do I calculate my Wealth Accumulation Rate?

Add all of these items together to get the numerator in the equation. The denominator is my gross income or I could also use my net income after taxes. It is just important to be consistent in the way I calculate it every year. For 2018, our Wealth Accumulation Rate was 17% using gross income and 24% using net income after taxes.

How often should I make this calculation?

I need to calculate my Wealth Accumulation Rate every year to compare how I did with past years and to see if I am meeting my goal. Am I satisfied or can I find ways to improve my percentage? And perhaps the most important question, is my Wealth Accumulation Rate going to allow me to retire when and how I want to?

Chris JohnsonComment