There is no doubt that there are many different opinions about what constitutes wealthy. Some consider investable assets ($500,000, $1,000,000, more?), some think in terms of income ($100,000, $150,000 or $400,000 per year?), while others might consider some combination of investable assets and income, while also mixing in consideration of a home’s value when forming their definition.
Is it having your own home spa? Is it having lots of cash? Is it having the ability to buy the car of your dreams? While there is not necessarily a right or wrong definition, none of those strike me as providing deep insight into how a given figure translates into providing a quality of life, or lifestyle, in retirement for an individual or their family.
What is Wealth?
The definition I settled on years ago, shaped in part by the Edward Gibbon quote, “I am indeed rich, since my income is superior to my expense, and my expense is equal to my wishes,” is that I am wealthy when my family and I can live our chosen lifestyle on portfolio and passive income; and no longer require earned income.
Types of Income
Earned Income as defined by the IRS is all the taxable income and wages you get from working or from certain disability payments. For most people it is simply the money earned at a job while working for someone else. This is the type of income most are familiar with and the only source of income for many families. It is generally considered the least desirable type of income for that very reason. You are largely dependent on someone else for your livelihood and have less control. Also referred to as labor income.
Portfolio Income is the interest, dividends, and any other forms of payment received on the investments within your portfolio. Additionally, portfolio income also includes capital gains, realized from trading instruments such as ETFs, stocks, bonds, mutual funds, currencies, commodities, etc. For most people, investing in the stock market is the most common form of building wealth and portfolio income.
Passive Income Also known as residual income, this is income that continues to be generated after the initial effort has been expended. It is the money you get from activities you performed in the past but are no longer required to do for an income (e.g. a pension from a previous job); the creation and selling of intellectual property (e.g. books, patents, or music); or assets that you have purchased (e.g. rental property, assuming the amount collected in rent exceeds the mortgage payment) from which you receive income.
What is your definition of wealth? Are you wealthy now or are you currently on track to meet your definition of wealth?