The Burger Quotient
Do You Know Your BQ? (Burger Quotient)
NET WORTH is not the most meaningful measurement of financial health since it doesn't include future assets. That career you clawed and scratched to attain is every bit an asset as the retirement capital you (may) have accumulated. That future plan to downsize your home, that expected inheritance... these are assets also.
Now that the IQ has been joined by the trendy new EQ (emotional quotient), why not introduce another personal measurement index... the BQ. What is the BQ? Simple. BQ stands for your Burger Quotient and it is the ultimate measure of your financial health.
The Burger Quotient is a measure of lifestyle. Here is the way it is constituted.....
First of all, your assets must be identified in their entirety. They must include, not only your current capital (registered, non-registered and equity), but they must include all of your expected future assets as well. If not yet retired, these will include paycheques as they will come to you over time (i.e. your career and it's pension is an asset), any future cash event such as downsizing your home, selling your business, or an expected inheritance. Your entitlement (CPP/OAS) status, and of course any loans or tax liabilities will have to be included in the BQ calculation as well.
Just as completing an IQ test will allow you to measure your intelligence, taking your "BQ test" allows you to determine your financial health. Here is how it works:
First of all, since the BQ has to be a single number, we must lay out the rules as to how it is generated. This is easy to define, but without a computer, very hard to calculate...
Your "BQ"- a Definition
Your BQ represents that annual maximum lifestyle which, if followed, will be sustainable to a set age. In other words, you want a smooth, predictable income (after tax/inflation) over your entire lifespan such that on your 95th birthday you will walk into the bank and deplete/exhaust your retirement savings to the dollar.
It is a lifestyle annuity......another way of saying 'I want to maximize my burger intake (lifestyle) and just die broke'.
The problem in computing this number lies in the complex nature of our income tax environment. This is a calculation which would be impossible to do without the advent of today's high speed computer. Not only is income tax complex (indexed brackets, clawbacks, etc...), we have the fact that tax interacts differently with RRSP, non-registered, and equity capital as they come in and out of play over time. The rules governing RRSPs, RRIFs/LIFs/LRIFs/RESPs, CPP/OAS/GIS, as well as those old favorites -compound interest and inflation- make the problem truly daunting.
The BQ needs a further refinement to make it a 'standard' reference. Namely, there are three uncertainties in the equation.... future interest rates, inflation and lifespan. In order to make the BQ a true benchmark then, it really should be qualified as the BQ/6/2/95. In other words, it is calculated by assuming a 6% rate of growth, 2% inflation and a maximum lifespan of 95 years.
Let's use an example. Say you were a financial planner and your 56 year old client (who had a twin) asked you the following question....
"I am retired. I have $400,000 in my RRSP and expect a $100K inheritance in 10 years. My twin brother has only $100,000 in his RRSP but plans to keep working ($65K ) for 10 more years. (he was the 'evil twin') All things being equal, who has the higher BQ?"
'All things being equal' means that they assume the same lifespan, investment growth rate, inflation, and CPP entitlement.
I don't know how you feel, but there is not a lot of data here, it should be an easy compute.
It is! (thanks to Intel) The answer.... the first twin has a BQ6/2/95 of 25040, the second 26151.
Why is it important to know your BQ? Remember, the BQ is a measurement of lifestyle. Once you know your BQ, then you will be able to determine how your existing lifestyle compares with it. If your lifestyle is higher than your BQ, then you know you will have to adjust your current lifestyle downwards (save more money) and furthermore, the longer you delay in downscaling your current lifestyle, the skinnier your retirement lifestyle will be.
Or, you may have a retirement goal/budget in mind and want to know how you should be managing your near-term lifestyle/investments in order to attain that goal.
If, on the other hand, your current lifestyle is well below your BQ, then you can relax and join those privileged few.... the 'estate-obsessed'. Instead of having zero estate at age 95, you can specify an estate value. The calculation is the same.... "what must I do (lifestyle/investments/insurance...) in order to ensure my estate nets exactly 300K?"
You can quickly increase your BQ by moving your retirement age ahead, changing your risk aversion (upping the rate/tweaking your asset allocation), planning to sell your summer home in ten years, making the choice between two pension alternatives or payouts... this is the essence of the planning process, however you must be able to make these changes interactively ......in seconds.... in front of the client.
Financial Planning shouldn't be a "come back next week" experience.... it needs instant 'what-if' scenarios to be done in real time.
Mortgage/annuity calculations, stock charting, spreadsheeting, tax (T1 preparation), accounting..... all these activities existed before the advent of the computer. These are not computer applications, they are computer assisted applications. The calculation of the BQ is an example of a new type of financial application, one in which the full power of the computer is brought to bear.
Knowing your BQ is perhaps the most important aspect of your financial well-being, especially for those in mid-life and beyond. Investment planning addresses the what? part of the planning process, the BQ/lifestyle annuity model solves the how much? and when?.
Is there anyone out there who doesn't think every financial advisor should spend the few minutes it takes to calculate his clients' BQ? (all clients, not just the high net worth-ers)
BTW the BQ can easily be Montecarlo'ed. Rather than a single number, the BQMC would be expressed as an average/hi/lo/stdev. Or, for the truly anal, substituting a rate sequence over time instead of a single rate. (the BQS&P1980 would be your plan calculated using a representative rate sequence derived from the S&P 500 starting at 1980)