I recently came across a new metric, the Green Swan’s FIRE Prowess Score, to measure my progress in achieving financial independence / early retirement. It’s an interesting twist on a savings rate calculation. Like many savings rate metrics, it is tied to your gross income (pre-tax), but the amount that you save is your change in net worth.
It is calculated as:
|Annual Change in Net Worth ($)
|Annual Gross Income ($)
The thing I like about this formula is that is builds in a measure that combines your gross income with your net worth growth. The ratio takes into account growth in equities and retirement. For more specifics on the basic thoughts read TGS’s article about it.
Comparison of Savings Rates
To show the difference between this metric and a regular savings rate, I’ve created a couple rough scenarios and tables using a theoretical person who has these stats:
- Savings rate of 10%, 20%, 30%, or 40% every year for up to 40 years of working
- Annual equity growth on savings of 7%
- Annual income growth rate of 2.5%
I really like to benchmark how I’m doing versus a goal, which is why I made this. The assumptions are pretty crude, but I think for a general goal this is good.
Swan FIRE Score by Savings Rate and years of working.
As you can see in the graph over time, the person’s Swan score continues to scale even though their savings rate is steady. I think it really demonstrates compounding growth and the importance of earlier savings versus later savings. Here’s a link to the spreadsheet I used so that you can play around with some of the assumptions Swan FIRE Score by Savings Rate.
My Score vs the Standard Savings Rates
I’ve been working 6 years after college so far, and my usual results vary between 0.41 and has grown to 0.71 for my project year ending score. My lifetime rate has been 0.54. I’m using some data pieced together from the Social Security Administration on how much I earned each year, and then my net worth readings are from end of year. According to TGS, my score is good and will bring me on the track to FIRE eventually. I’ve decided that my target comparison rate is with the 40% savings rate scenario.
My Swan score vs the theoretical goals.
As you can see in the graph, my performance has been at or above that rate for the past 7 years. Full disclosure, my actual savings rate varies between 40% to 50%, but I like to sand bag my goals. In addition, the last 6 years looks great partially because of the booming stock market. But let’s say this was 2008, the metric would be depressingly negative. I think overall this is a good metric, because it definitely gives some standards to reach for. I’ll probably keep a log updated every now and then with this score.
Read Related Posts
A few other bloggers are also running related posts on topic, so we all got together to post at the same time. This way you can get a diverse perspective on it.
- Anchor: The Green Swan – The Swan’s FIRE Prowess Gauge 2016: the one who started it all. 132% Lifetime: 93%
- the Retirement Manifesto – Is Your Wealth Building On Track?. A big thanks to Retirement Manifesto for setting this up! 2016: 57% Lifetime: 44%
- OthalaFehu – My Swan FIRE Prowess Numbers Othalafehu has 10 years of personal data including the recession. 2016: 72% Lifetime: 61%
- Budget On A Stick – My FIRE Prowess Score 2016: 52% Lifetime: 55%
- DadsDollarsDebts: DDD’s FIRE Prowess Score 2016: 26% Lifetime 32%
- Debts To Riches – My FIRE Prowess Report Card 2016: 29% Lifetime 43%
- Adventure Rich – The Adventure Rich FIRE Prowess Score 2016: 45% Lifetime 47%
- Freedom Is Groovy – The Groovies FIRE Prowess Score 2016: 163% Lifetime 90%
- Working Optional – Calculate Your Progress To Financial Freedom 2016: 97% Lifetime 75%
- Life Zemplified – FIRE Prowess Score for Life Zemplified 2016: 78% Lifetime 76%
- Physician’s Wealth Services – Physician Wealth’s FIRE Prowess 2016: 43% Lifetime 46%
- Married And Harried – Married And Harried FIRE Prowess Score 2016: 32% Lifetime 14%
- Ms. Liz Money Matters – Introducing the FIRE Prowess Score 2016 279% Lifetime 72%
- Actuary On Fire: The Swan’s FIRE Prowess Gauge – My Results 2016 61% Lifetime 59%
- Budgets Are Sexy – My Total Lifetime Wealth Ratio: 2016: 135% Lifetime 60%
- Trail to FI: FIRE Prowess Score, Trail to FI Edition 2016: 34% Lifetime: 53%
- Maximum Cents: Maximum Cents’ FIRE Prowess Score 2016: 94% Lifetime: 70%
- Retiring On My Terms: ROMT’s FIRE Prowess 2016: 119% Lifetime: 57%
- Minafi: The Minafi FIRE Prowess Score 2016: 74% Lifetime: 94%
- Military Dollar: FIRE Prowess Scores & How to Correct for Military Paychecks 2016 81% Lifetime 83%
- Finance Yo Self: FIRE Prowess Score for Finance Yo Self 2016: 44% Lifetime: 44%
- The 7 Circles: FIRE Prowess Gauge 2016: 246% Lifetime: 219%
- Money Metagame: The Good, Bad & Ugly of the FIRE Prowess Gauge 2016: 108% Lifetime 68%
Here is a cautionary tale of why you should be careful when trying to out fox the stock market. Last week, many people risked their life savings betting everything that Rite-Aid’s stock would shoot up from $3.50 all the way up to the $6.50 / share that Walgreens was offering. If the merger were to happen Walgreens would pay the $6.50 for every share of Rite-Aid stock–nearly a 100% gain. People were betting that the Republican-led FTC would approve the merger, and allow the 2 companies to create the nation’s largest drugstore chain. Don’t let your greed blind you though. There was a reason that Rite-Aid’s stock was so far below the offer price–the deal was unlikely to pass the regulators.
Turns out Walgreens decided to pull out of the deal last Thursday, and Rite-Aid stock has since dropped to $2.50. Here are 2 Wall street better’s who went all in.
This gentleman is a part-time pharmacist at Rite Aid. The internal emails that he received gave him confidence to make a bet on the merger going thru. This probably was not a great decision, since any information disclosed to the front-line workers on the merger were probably also released to the general public via the FTC, SEC or their investor relations website. The stock market reacted to all that information by valuing Rite-Aid far far below the offer price.
He made a nearly $200,000 bet on this. From his original purchase price of $3.20 he has lost nearly 22% in the past week.
Thankfully, he’s a pharmacist so he’ll probably survive despite this bad move.
The $125k YOLO
He bet $125,000 on a hunch at $3.83 / share. With the current share price of $2.50, he has lost over one third of his investment. That equals $42,000, more than the annual incomes of many Americans.
Both of these investors made posts regretting their decisions. I think that it’s important to remember that if something seems too good to be true, it’s probably going to screw you over so be careful. These 2 investors purchased shares with no options to buffer their potential losses. If you’re going to make a life changing decision like betting hundreds of thousands of dollars on a single stock trade, you should probably try to cover your self with some kind of downside protection like a professional investor would.
One recurring request for the net worth percentile calculator on this website to show a break down of what makes up that net worth value. Here it is for a typical middle class household!
Here are the results of that request for a typical middle class household with comparisons for the past 20 years. The overall trend for the shows that net worth has increased slightly, but assets and debts have also increased at almost the same rate.
Housing is by far the largest contributor to middle class wealth with investments contributing a far lower amount. In 2013, real estate contributed 54% of net worth ($110k in real estate assets – $64k in real estate related loans).
Net worth peaked in 2007 prior to the recession, and as of 2013 has not recovered yet. The 2016 data should be available over the summer in a few months, so we’ll see if the downward trend continues.
Net Worth Component Definitions
- Real Estate : House(s) and other real estate
- Investments : Retirement funds, stocks, mutual funds, stock options
- Low Risk Investments : Cash, bonds, CD’s, and cash value of life insurance
- Other Assets : Cars and other assets
- Real Estate Debt : Mortgages and other real estate related loans
- Student Loans and Auto Loans : These were already combined in the source data as installment loans.
- Credit Cards and Other Debt : Credit cards and other debt
The data is sourced from the Federal Reserve and all values are adjusted for inflation to 2013 dollars. The 2016 data will be published over the summer and I am planning to update the calculators and this chart to show additional trends.
We used the data for the 40-60th percentiles to create a weighted average net worth of what makes up the wealth of an average household, and to represent the middle class. Because it is a weighted average (mean), the net worth values are skewed slightly higher than a median based calculation.
Summary Table of Net Worth for the Middle Class
Note: these values are adjusted for inflation into 2013 dollars.
||Median Net Worth
If the graph doesn’t load here is an image:
There are a lot of personal finance related calculators out there, but there are only a handful that I would recommend using on a regular basis. Here are a few of my favorite tools that have easy to use options and clear results.
This rent vs buy calculator balances all the costs you could thing of related to buying a home versus the monthly rental costs. One of this calculator’s great features is that it accounts for the opportunity cost of the mortgage down payment. The opportunity cost is the cost of what you could have earned from that money if you hadn’t bought the house. The calculator also builds in costs to account for rising rent prices, home appreciation, and inflation. Also, the controls are easy to adjust how long you plan on staying and your home price budget. I know it sounds like a lot of options, but if you aren’t sure about one of them just leave it at the default value.
This is my go to retirement calculator. I use it as a simple and quick check to make sure that my savings rates are high enough to meet my retirement goals. The calculator is completely free and doesn’t require registration or anything like that. It automatically does not include Social Security, so you have to manually key in a number for that. In general, I like to pretend that Social Security will be tiny by the time I retire. I just put in $1,000 a month at most ($2,000 if you’re married) for a very conservative estimate of how much SS would actually pay out.
This calculator has pretty similar results to the previous Vanguard one, but it’s tilted more for figuring out how quickly you can retire. I really like the chart on this one, and that it emphasizes controlling spending in order to retire more quickly.
This is a great spreadsheet to help you understand that components of your savings rate in order to calculate it. It’s not as spiffy as some of the other tools, but it’s pretty straightforward and has a very detailed breakdown of how to tally up your income and savings.
If the top 1% of the nation put all of their money into land they would own 40 states. In contrast the bottom 80% of the nation could only afford to own all the real estate in 3 states. All the real estate in the contiguous US is estimated to be worth nearly $23 trillion. The top 1% of US households is estimated to be worth $19.2 trillion. This means that only 1% of the US population could literally afford to buy almost the entire country if it were for sale.
These numbers are based on the top 1% by net worth, instead of income. Sources and tables are at the bottom of the page. If you’re curious how close you are to the top 1%, try out the net worth percentile calculator or the income percentile calculator. They are based on a different data set, but the general trends are the same.
I filled in the maps starting in the west coast and moved east. I removed states that the 1% couldn’t afford in their $19.2 trillion budget starting with Florida. The 8 states in the contiguous US that weren’t selected are Tennessee, West Virginia, Virginia, North Carolina, South Carolina, Georgia, Alabama, and Florida.
The bottom 80% had a combined wealth of $5.1 trillion, which could pay for California, Oregon, and Washington. I wanted to stay consistent and start from the west coast, so California just based on it’s size and wealth is driving down the number of states.