January 5, 2023

JF3045: Rich vs. Wealthy | Passive Investor Tips ft. Travis Watts

Passive Investor Tips is a weekly series hosted by full-time passive investor and Best Ever Show host, Travis Watts. In each bite-sized episode, Travis breaks down passive investor topics, simplifying the philosophy and mindset while providing tactical, valuable information on how to be a passive investor.

In this episode, Travis shares his perspective on what it means to be rich versus wealthy, an admittedly subjective topic. He explains why being rich is often associated with active income while being wealthy is associated with passive income, and encourages listeners to ask themselves what wealth looks like for them.

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Travis Watts: Welcome back, Best Ever listeners. I'm your host, Travis Watts. You're listening to Passive Investor Tips right here on Best Ever. Disclaimers as always, never financial advice; not telling you or anyone else what to do. This is for educational and informational purposes only.

In today's episode. We're talking about rich versus wealthy; we're going to define these two, I'm going to share my perspective, my opinion on this. This is a very subjective topic. If you go and research this on your own, you're going to find a lot of very opinionated people, lots of different perspectives... So keeping in mind what the Roman Emperor Marcus Aurelius once said over 2000 years ago, he said "Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth." So with that in mind, let's go ahead and dive into today's topic.

So starting out with the word "rich" - to me, this pertains to active income. So let's consider, for example, a celebrity, a professional athlete, perhaps a lottery winner, these individuals may find themselves in the rich category. And according to a survey conducted by the US News and World Report earlier this year, they defined the various income levels in the United States as follows. Poor being $32,000 or less annualized USD income; middle lower class $32,000 to $53,000, middle class being $53,000 to $106,000, upper middle class being $106,000 to $374,000, and then basically rich being $375,000 and above. So in essence, anybody making 375k annualized income would be considered rich, at least based off of these metrics, and this particular survey.

Now, I never went out and set the goal in my lifetime to be rich. That's something I never aspired to be, and I'll tell you why. There's endless examples, as you know, of lottery winners, celebrities, highly paid individuals going flat broke, right? So a professional athletes usually is because their career span is very short, so when they're getting paid, they're elevating up their lifestyle. When the money dries up, they go broke, and they can't afford the lifestyle anymore. Celebrities may have hit a big blockbuster film, or some kind of breakthrough series that they were on. If they're not recast in something that's going to pay on the same or higher, and keep working all the time, then their career could run dry on the income. And statistically, lottery winners actually go broke within five years of receiving their windfall. On that note, professional athletes, statistically speaking, go broke about 78% of the time about three years after their retirement.

So there's obviously many reasons as to why people go broke and lose money and can't sustain the levels of wealth required to be in the rich category over the long haul. A lot of folks that find themselves in these categories might have a short career span, lasting 10, 20, 30 years, but may not be able to keep that up through their 50s, 60s, 70s and even 80s and beyond. It's really at the end of the day not a repeatable, consistent strategy for most.

So now let's switch gears and talk about the term "wealthy". And to me, my perspective, my opinion, wealthy has everything to do with passive income and assets. Having enough assets and or passive income to completely cover your lifestyle expenses.

So let's consider an individual who has lifestyle expenses annually of $70,000, and they have $1 million invested in numerous assets that produce passive income, and their average yield, annualized on those investments is 10%, for example purposes. That means they're bringing in $100,000 per year in passive income, without them having to work actively, and they're living on $70,000. So there's a bit of a margin there for taxes, volatility, unexpected expenses etc. In my definition, that person is wealthy. That's what I have always strived to have in my life.

Break: [00:05:56.25]

Travis Watts: Being wealthy, simply put, is the ability to sustain your lifestyle indefinitely. Contrary to what many believe about the term wealthy and what exactly that means, I have a friend who retired in his 30s with only $750,000 invested. He's a very humble, down to earth guy; he doesn't have a need for luxuries. He just lives a very simple and humble existence, and he's happy.

On the flip side, I've spoken to numerous investors who claim they need hundreds of thousands of dollars per year to sustain their particular lifestyle. So on one hand, you may have an individual that needs less than a million dollars to be deemed wealthy in their own mind, and over here, you've got an investor that may need several millions of dollars invested to sustain their lifestyle to where they would deem themselves wealthy.

So we all have our wants, and we all have our needs, and that's going to require various amounts of capital, depending on the person that you're talking to. Now, this segment of the show, passive investor tips, is primarily dedicated to the passive investors out there, people seeking passive income. So if that's you, I encourage you to think about three things for yourself. Number one, how much passive income would be enough to sustain the lifestyle that you want to have, whether that's your current lifestyle, or an inflated lifestyle down the road, that ideally you would like to have? Number two, what's a realistic annualized return or cashflow yield that you could expect through your own investments? And number three, how much capital would be required at that particular annualized yield to net you the type of passive income needed to sustain that particular lifestyle?

Something else to consider is if you're living on passive income full-time, and you're not living paycheck to paycheck, meaning that you can live below your means and have a bit of a margin in there, you can use that saved capital every year to reinvest and essentially give yourself a raise so that you have infinite wealth. In other words, your passive income continues to grow higher and higher every year, at least theoretically, of course; there's always risks involved, and no guarantees... But even though you're retired and living on your passive income in a traditional sense.

Now consider this strategy that we've been talking about and compare and contrast that to the standard American strategy that most people use, which is working a job through their 60s to 70s, saving money, dumping it all into 401k's and IRAs, and then retiring and hoping that they don't live too long to outlive their money source. Most of the traditional retirement vehicles that we have here in the United States, like a traditional IRA or a 401-K are designed, number one, for a person to not retire until basically a minimum age of 59 and a half without getting heavily penalized... But the other thing to consider is in the best scenario that that vehicle would be suited for, is when you're in your highest-earning years in your working career, you're getting a tax deduction for putting money into the vehicle. And the ideal outcome is that you retire on less income than what you made previously, so therefore you're in a lower tax bracket when you pull the money out. But my question to you would be, who wants to live on less and less income the older you get? Shouldn't the goal be to make more and more income as long as you live? So that's a good question, and something to consider this week.

I want to thank you guys for tuning in to Passive Investor Tips, I'm Travis Watts. These are tips, tricks, strategies, philosophy, mindset for you, the passive investor. If we haven't connected on social media, let's do it. Travis Watts, or @passiveinvestortips on Instagram and Facebook. Have a best ever week, everyone. I truly appreciate you being here, and we'll see you on the next episode.

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