The cost of being financially independent reached a record high $2.1 million last year. I am referring to The Life of Riley Index, a measure of how much money you need to be Independently Middle Class.

That $2.1 million is a lot more than most middle class people had in 1999, let alone 2001, so we must face an ugly fact: the same unimaginative idleness that could have been sustained with an investment portfolio of only $1.7 million a few years ago now costs nearly 25 percent more.

First introduced in 1989, then revisited in 1995 and 1998, the Life of Riley Index is my effort to provide a reliable measure of the financial assets required to be independently middle class. Not independently wealthy, mind you, independently middle class.

We make the index quite simply. First, we find the dividend yield on common stocks and the interest yield on five-year Treasury notes. Then we average the two numbers to reflect the yield of a 50/50 Couch Potato portfolio. Finally, we divide the resulting yield into a middling income and ...

Voila!

The Life of Riley Index, the investment money you need to be a young, middle-income coupon clipper.

In past years, we've used the median income of families with two earners. As you might expect, this is higher than most household incomes. It's a lot higher than the income of a single earner. This year we're using another--- the upper edge of the middle quintile.

In other words, we're measuring a middling income that is larger than about 60 percent of all household incomes--- but smaller than 40 percent of all household incomes.   How you will feel about it--- and how far it will go--- depends very much on where you choose to live.

According to http://www.bestplaces.net/, for instance, $62,053 a year in Dallas will require $83,633 in Santa Barbara, California but slightly less, $61,312 a year, in Tucson, Arizona. While you'd feel like a pretty small fish in most urban areas, you can live like a Fat Cat if you could bring yourself to live in a town that didn't have a Starbucks.          

  
The Life of Riley Index Hits a New High
Year S&P500 Yield 5Yr Treasury Yield Median Income* 50/50 Rentier

1980

5.26%

11.45%

$24,800

$296,828

1981

5.20%

14.24%

$26,758

$275,288

1982

5.81%

13.01%

$27,950

$297,024

1983

4.40%

10.79%

$29,475

$388,084

1984

4.64%

12.26%

$31,684

$374,959

1985

4.25%

10.12%

$33,152

$461,406

1986

3.49%

7.30%

$35,120

$650,973

1987

3.08%

7.94%

$36,801

$667,895

1988

3.64%

8.47%

$38,500

$635,838

1989

3.45%

8.50%

$40,800

$682,845

1990

3.61%

8.37%

$42,040

$701,836

1991

3.24%

7.37%

$43,000

$810,556

1992

2.99%

6.19%

$44,000

$958,606

1993

2.78%

5.87%

$45,030

$1,041,156

1994

2.82%

6.68%

$47,000

$989,474

1995

2.56%

6.77%

$48,985

$1,050,054

1996

2.19%

6.07%

$51,086

$1,236,949

1997

1.77%

5.77%

$53,616

$1,422,175

1998

1.49%

5.15%

$56,020

$1,687,349

1999

1.25%

5.54%

$59,400

$1,749,632

2000

1.15%

6.15%

$61,378

$1,681,589

2001*

1.32%

4.55%

$62,053

$2,114,242

Sources: Economic Indicators, Federal Reserve Bank of Dallas, Census Department (*estimated)
  

Did I hear you say that being independently middle class won't do?

Well, you can go higher on the scale. All you need is more money.

Unfortunately, that's another area of bad news. In 1980 you could vault from the top 40 percent of all incomes to the top 5 percent if you did a bit more than double your income. The 121 percent increase in 1980, however, has turned into a 161 percent increase in 2001. This means you'll need $5.5 million to live in financial independence among the top 5 percent of households.

That's getting close to serious money.

What does this mean for those who don't happen to have $5.5 million or even $2.1 million?

Just this: a good wage is a pretty rich thing. It's also a lot more easily found and held that large sums of capital.

Tuesday: The Life of Riley Index, Retiree Version