Early Retirement

Introducing Retire Worth

In thinking about how to make my Net Worth updates more meaningful for myself and for you, the reader, I have been able to take a step back and analyze the reasons behind my desire to track my net worth in the first place. What I discovered is that I am not really concerned with my net worth per se, but am instead interested in the financial freedom that living off interest, dividend payments, and other forms of passive income affords. Having a sufficiently high net worth is simply the side effect of pursuing this goal.

Traditional net worth updates where I tell all about how well my wife, son, and I are saving are simply not that useful in communicating to myself how close I am to being able to live off interest payments, dividends, stock sales, and other “passive” income streams (like making money online or real estate). Traditional net worth updates have become boring.

In light of this realization, I have put together something that may or may not be useful in communicating how close I am to focusing less on earning money for food and more on accomplishing the things I want to accomplish. It is a synthesis of my family’s current ratio (an idea that Jacob from Early Retirement Extreme turned me on to), the more traditional net worth update, and a “passive” income statement. I call this synthesis … Retire Worth … muhaha, it’s alive!

I will probably be working out the kinks on my equation and assumptions as I go along, so any input would be greatly appreciated.

What Is Retire Worth?

I’m by no means a numbers wizard so I am really flying by the seat of my pants on this one. I have come up with about  4 5 different ideas that I summarily shot down because they were lame or didn’t mean anything until I landed with this one (and it might not even be that good under the scrutiny of those that know more than I).

Retire Worth relies heavily on the principles of the current ratio, a financial ratio that helps determine how secure a company is in the short term by taking the current assets of a company and dividing them by the liabilities that a company must pay over the next 12 months. The current ratio looks like this.

Current Ratio

My Retire Worth Equation looks something like this:

Without getting too much into the details, here is a brief definition of what the different categories mean:

  • Total Assets – The total amount of my assets minus any assets that produce income
  • MExpenses - This is how much my wife and I need to survive
  • MIncome - The amount of money that we earn on a monthly basis through “passive” means

Once I plug in my values, I compare the number generated by the equation to my predetermined Retire Worth early retirement number (calculated by taking 110, subtracting your current age, and then multiplying by 12).  If the number generated by the equation is equal to or greater than my early retirement number – which is 1008 – than I am officially financially free and capable of early retirement (i.e. not working to eat food)!

I’ll definitely explain this equation in more detail later, but I would love to hear if anyone has any questions or comments on it before I get too far into it.  Go ahead, fire away, I’m listening.