This is rapidly appearing to become a blog about your Number … of course, that’s not the case: it’s a blog about money, specifically about how to make $7 million in 7 years, but you can pretty quickly see that having a real financial goal in mind is a powerful focusing tool.
It’s also a ‘comparator’ – a tool to use whenever you are presented with two financial alternatives … for example, Scott who is deciding how many clinics to open: 1, 2, or 3+ [Hint: only one of these is the right answer, and it’s not the obvious one!] … it was ONLY by having a clear understanding of his Number / Date that he came to this conclusion.
Without that understanding, Scott could have made a terrible (OK, far better than terrible … more, non-optimum) decision that would have had the opposite effect to that intended: it would have committed him to working for 10 to 20 more years.
So, now that I have provided the hint, let’s look at today’s conundrum, posed by Money Magazine in March 2008: how much money should you have saved by now?
Well, given the current market the chances are that what you have saved has halved, but what you should have saved hasn’t … bummer 🙂
But, here’s what Money Magazine advises; to see how much you should have saved by now:
If you are age 45 multiply your current salary by 4.1
If you are age 50 multiply your current salary by 6.1
If you are age 55 multiply your current salary by 8.5
If you are age 60 multiply your current salary by 11.4
So, if I said my current salary was $250k (well, that’s what I most recently paid myself before I retired), then I should have saved $1.525 million by now …
Can you see the obvious problem?
Well, it assumes that I am going to want to keep working for another 15+ years!
Why? Simple: $1.525m can only support a ‘safe’ 5% annual withdrawal rate of $76,250 (before tax) … so, unless I want to take a HUGE pay-cut, I’m going to have to keep working until I’ve saved at least $5 million … lucky that’s exactly what I did 😉
So, here’s how you should calculate how much you should have saved by now:
1. Calculate your Number,
2. Decide your Date,
3. Subtract your Current Net Worth from 1.
4. Subtract today’s date from the Date
5. Divide 4. into 3.
That’s how much you need to have saved each year between now and your Date, if you want to reach your Number.
Now, you can get fancy and use an online compounding calculator to do the year-upon-year calculations, but this is a good place to start.