The Non-Linear Approach To Income: A Better Way To View Your Net Worth

If you ask about retirement goal setting, most finance professionals immediately show you a lifetime income chart. It’s the linear, smooth, glide path that charts the growth of income throughout life, going from very small to very large by the time you retire. You’ve likely seen something similar to this chart below.

Traditional lifetime income model

What this chart really shows is how taking savings, investing them, collecting compounding returns and then divesting them in retirement works. We at WLTH don’t subscribe to this notion of wealth building, not because it isn’t part of people’s income plan, but because it’s only one part.

As any entrepreneur knows, this chart is far too simplistic. In its simplicity, it misses three key things.

First, it assumes that people maintain one career with predictable salary growth, timed with inflation, throughout life. That may have been the case fifty, sixty years ago when we took one job for the rest of our career. But that’s not indicative of how we work today.

Second, it assumes market conditions are linear over time meaning that the economy is always extremely stable. As the fallout over reigning in COVID-19 has shown, that’s not the case. There will be deep dives in the market, ones we can prepare for but not predict.

Third, it does not allow for any change. This can be a career change, taking a reduced salary to make the move or opening a new business or even the expenses associated with kids or other life milestones.

Instead, the chart depicts how that money grows within a bank or in the hand of money managers and suppresses the idea of change.

A Different Way Of Viewing Income

At WLTH, we developed a far more flexible net worth expectations, which we call the Basic Lifetime Income Model. It shows someone going through four distinct stages of life.

  • The Struggle Stage: This is when someone enters the workforce, takes training for a new job, has lower wages and increased costs
  • The Settle Stage: After paying down some debt and increasing salary, the person now has enough money to cover their bills and begins a savings plan
  • The Growth Stage: When salary increases, debts are paid or dramatically reduced, and investments are generating income as well
  • The Sell Stage: This comes in retirement, as you divest in a way that’s tax efficient and takes into consideration how your money transfers upon death

Here’s what such a chart looks like.

Basic lifetime income model

This chart provides a much more accurate portrayal of how someone earns money over a lifetime, when accounting for a single career or business.

Building More Complexity Into Net Worth

Of course, most people don’t have one single career, or business or goal their entire life. How, then, does that impact net worth growth?

That’s why we also utilize the WLTH Advanced Lifetime Income Model shown here:

Advanced lifetime income model

For most people the cycle of Struggle, Settle, Growth, Sell will occur several times in a life span. Going to university or trade school usually launches the first cycle. A career change or moving cities can start the next. Starting your own business or expanding it can launch another cycle.

You make financial moves to try and get ahead. These decisions set you back, in the short term. You reach a point where you’re comfortable and can take a breath. Then you’re rewarded during a growth cycle and need to use what you have to make the most of it. Finally, you sell or move onto the next goal, which eventually leads to starting the cycle over again.

This model provides for the ups and downs in life, by capturing:

  1. Reductions in your net worth in the short term to take long term opportunities
  2. Moments of calm, when you spend on wants, like a car or other luxury item
  3. Growth stages, which must be included if you’re going to reach your highest net worth possible
  4. Selling stages, which also requires looking forward to the start of the next struggle phase and the implications of the sale

The path to building wealth is complicated. It takes time and dedication. It takes risks and produces rewards. With these complications, we need awareness. You will take steps forward, as well as backwards, in this journey. Not only should you expect it, it can also be a sign of future success. We’ve designed our model to create a more realistic portrait of our clients’ lives. It’s also a way to remove the guilt associated with setbacks that are present in the traditional model.

You’ll notice, though, that the WLTH Advanced Lifetime Income Model does not set stages of life based on age or net worth, but instead recognizes individual circumstances. These circumstances have commonalities, but people have different needs during different cycles. During a struggle phase, savings goals may go while you increase your need for protection. A settle phase, debt repayment becomes the priority, which then transitions into savings. After that, the growth phase focuses on increasing the assets you own. Finally, the sell phase prioritizes the protection of assets as you create liquidity.

We focus on not trying to force you into an overly simplistic model that is designed to promote compounding interest above everything else. We don’t want our clients feeling guilty for not building assets fast enough to match the traditional model. Nor do we want our clients feeling guilty for making decisions that reduce net worth at different points in their lives, even when it’s the optimal choice. We want our clients making informed decisions that allow them to live in a complex and ever-changing world.

Their success depends on it.

By Timm McLean, MBA |

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