How much should you have saved by now?

Posted on July 15, 2009 by Adrian

dates 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.

When is a partner not a partner?

Posted on July 13, 2009 by Adrian

taxi police Last week I called out that I had an over-supply of business ideas, simply because I don’t need them [AJC: I am meant to be retired, you know?!] …

… much like taxis and police who are never there when you need them, but seem to pop up everywhere when you don’t 😛

Brandon proposed a possible solution:

I think I remember you saying you don’t like partnerships but you could buy it with your friend and have him run it day-to-day. If he can still assure you of those numbers when he has skin in the game then it’s a smart in my opinion.

Sure, it’s a potential Making Money 301 solution for somebody who is not quite ready to fully let go of their business – or wants to dabble as a ‘hobby’ (as in my case) – without needing to be fully hands-on i.e. become a ‘silent partner’.

I have a friend who started off as a competitor (I have a whole string of competitors-turned-friends, but that’s a whole other story) and ‘retired’ when I did, but unless his Number was miniscule (in terms of the annual lifestyle income that he can draw off it), he can’t really retire whereas I can (he made $3 mill; put $1.8 mill. into a house; bought a couple of cars and so on, which leaves him about $800k to ‘live’ off … not possible for someody who lives in a $1.8 mill. house!) he needs to work again.

So, he’s looking to buy a business and have me invest 50% ‘silently’ … except that I’m not investing in any businesses as a MM301 ‘passive investment activity’ as I don’t believe that there’s any such thing as a ‘passive business’ – and, very few truly ‘passive investments’.

Now, that brings me back to my ‘retirement businesses’:

They aren’t part of my MM301 portfolio … they are the ‘travelling … mentally’ part of my Life’s Purpose; in other words, I wouldn’t like to LOSE money on them, and I’d really be happy if I actually MADE money on them, but their real purpose is to exercise my mind: an expensive form of Sudoku 🙂

So, my strategy is to do a LOT of them and invest only a LITTLE (financially, emotionally, and physically) in each …

… which brings me back to Brandon’s idea to invest with my friend who is already the CFO of the business that I mentioned in that post:

– One of the reasons why I am considering the business is that it has an excellent management team (once the owner/founder is removed) whom I feel would perform well with minimal supervision, but a lot of strategic direction,

– I don’t want to have partners – even my friend – for a lot of reasons, the most pragmatic being the power afforded to minority shareholders (i.e they may only own a small % of the shares, but that can be enough to make them a real pain in the butt if things go awry),

– Yet, I want to incent them to profitably grow the business.

So, the solution may be Simulated Equity [AJC: a term that I just made up 🙂 ] … here’s how it works:

There are two financial benefits of stock ownership for employees:

1. A distribution of profits, and

2. A growing asset, redeemable upon sale of the enterprise or their stock, whichever comes first.

The first one is easy: having, say, 5% of the stock in the company affords you 5% of the DISTRIBUTED profits; that means the Board of Directors (and, as a minority shareholder, you may or may not get a vote here) decides what % of profits made that year should be distributed to the shareholders and what % should be kept to help grow the business.

The problem with the second is that the employee may receive the stock, but can then sell it whenever they wish (after any exercise and / or vesting periods) … where’s their incentive to stay and grow the business once they’ve sold their stock?!

My solution – ‘simulated equity’ – is simple:

I will offer each key employee (e.g. my friend):

a) A profit share – this means that the employee might get 5% of all of the profits earned EVEN if the Board of Directors decides not to distribute all profits that year (in other words, the employee gets their FULL 5% share), and

b) A bonus on sale – I might offer a, say, bonus equal to their profit-share percentage of any sale price of the business. This way the employee gets an incentive to stay on and help with the eventual EXIT PLAN for the business … good for me, great for him!

In other words, the employee gets the financial benefits of ‘partnership’ … in return, I get a committed employee who benefits in proportion to my benefits … and, I don’t lose any control!

What do you think?

Are these people aiming high enough?

Posted on July 12, 2009 by Adrian

On Monday I wrote a post about ING’s Retirement Number Calculator … then I found this YouTube video showing their sponsored Georgia Marathon participants carrying their ‘Numbers’, presumably as a marketing ploy …

… I noticed something really interesting when I watched it. I wonder if you did, too?

What I noticed was that the Number for most people, was around $1,000,000 (and, the largest that I noticed was $1.8 million) … would this be enough for you?

Diversification [does NOT equal] Bankroll Management!

Posted on July 9, 2009 by Adrian

Even though guys like Tom Dwan (a.k.a. Durrrr) can run up a $200 starting bankroll to over $10 million in 3 or 4 years playing poker online, I don’t recommend this as a serious ‘investment’ strategy!

Nor, do I recommend simply dumping your entire portfolio (401k included) into just one stock pick, as Josh has done ….

… even though both Tom and Josh are both ‘big winners’ … so far 😉

That’s why I recommended – for those amongst my readers who insist on traversing the high-wire of their financial life (there ARE rich prizes at the other side, IF they make it, so who am I to say “don’t!”???) – a simple three-part strategy to protecting their finances, by taking:

1/3 of any ‘windfall gains’ for spending (presuming that the speculation activity is their primary source of income);

1/3 of any ‘windfall gains’ to fuel a parallel ‘passive income’ investment strategy; and,

1/3 of any ‘windfall gains’ for their trading activity (this could be trading stocks/options; developing or flipping real-estate with little money down; etc.; etc).

If the person has another (reliable) source of income, then any ‘windfall gains’ can simply be split 50/50 between ‘speculation’ and ‘passive investments’.

Of course, this will slow down growth, which is why Josh still wants to:

Go 100% 401k and 200% brokerage … [because] sometimes the opportunity is so obvious and risk so low

Spoken like a true Most Probably Will Go Broke Someday Trader!

This strategy is just there to protect the Josh’s of this world in the unlikely event that they should miscalculate ever so slightly 😉

Look, I’m not going to attempt to teach anybody anything about trading, but it’s always good to remember: it takes just ONE bad piece of news on a ‘volatile stock’ (bad ceo, drug that doesn’t get FDA approval or shows unexpected adverse side-effects, law suit) to override the fundamentals.

It’s the equivalent to a ‘bad beat‘ in poker (a.k.a. ‘variance’) … they are inevitable in poker – and, I would argue, also in trading – and you survive them by good bankroll management …

… after all, there are still Enrons out there that people are trading up every day 🙂

On the other hand, Jeff throws a curve ball:

Looks like you have changed your stance a little on diversification. [http://7million7years.com/2008/12/19/the-allure-of-diversification/, where you don’t recommend diversification due loss specialized knowledge and consigning yourself to average returns]

I’m interested why you made the shift…

As I said to Jeff, this may appear to be a shift, but it’s not …

Diversification ≠Bankroll Management!

… for example:

– if Josh said that he was going to invest 100% in buy/hold cashflow-positive real-estate, I would say “go for it”

– if Josh said that he was going to invest 100% in an existing profitable business, I would say “go for it”

– if Josh said he was going to invest 100% in 4 or 5 stocks that he felt were undervalued and was prepared to hold for the long-term, I would say “go for it”

… but, I would say that if the future income stream is in any doubt (e.g. if it is a royalty, or speculation, or short-term investment) to divert some of the cashflow produced from profits (capital gains and/or operating profits i.e. one of the ‘thirds’ that I mention above) and use those to start creating your own Perpetual Money Machine: that’s VERY different from the standard type of diversification that most financial advisers talk about.

When you need a taxi …

Posted on July 8, 2009 by Adrian

It’s interesting, one of the major obstacles apparently standing between many people that I talk to and a few million dollars is the want of a ‘killer business idea’ … or, even ANY reasonable business idea.

But, that problem magically disappears when you wake up one day to find a spare few million in your bank account … people-with-ideas seem to just spring out of the woodwork.

You know how you can never seem to find a cab when you need one? 😉

Well, it’s been nearly a year since I’ve found myself with both a lot of spare change and nothing of substance to occupy me during the daylight hours …

… a little less than one year and I have:

– Three blogs,

– Three Web 2.0 internet businesses under various stages of development

– A Fourth one under negotiation to buy into

– And, just yesterday a new business opportunity was presented to me.

This last one is interesting because it is a ‘bricks and mortar’ business (with an internet sales site as an adjunct):

It’s interesting because a friend of mine is the finance director and has spent the last two years of our time together complaining about the excesses of his boss, the entrepreneur/owner/founder …

… without giving away too much, the guy developed a business around an innovative niche product with a strong brand name that was even featured on Oprah (as one of her ‘favorite products’), resulting in a business generating $2 million to $3 million profit per year in the USA and overseas.

Yet, through excess (taking all the profits out of the business), divorce, and mismanagement this company is now barely breaking even in the face of declining sales. From what I can see, even though the product is no longer unique, the reason for the sales drop is the management of the company rather than product or market issues.

So, I have an indication that the owner of the business will sell for:

– $400k up front cash, plus

– $350k to pay off a personal loan, plus

– $150k to $200k per year for the next four year (sort of a ‘deferred payment’).

By my reckoning, this is $1.55 million …

Now, here is where it gets interesting:

– The business has an excess of money owed to it (accounts receivable) LESS amount owed by it (accounts payable) of about $200k, and

– Inventory worth $800k+

Provided that the receivables can be collected (my friend, the CFO assures me that it can) and that the inventory can be sold close to book value (he assures me it can), I am essentially buying the ‘goodwill’ of the brand-name + suppliers in place + distribution network in place + staff in place for a globally recognized niche brand for a little over $500,000.00

So, there’s two ways to look at this:

– A brand in decline, so the owner is selling out while he can still salvage some value, or

– A ‘vulture’ opportunity to buy a no-worse-than-break-even business + established international brand (endorsed by Oprah, no less!) for only $500k.

What to do? What to do? Hmmmmm ….

I’d love to hear your ideas!

How to excite a millionaire …

Posted on July 6, 2009 by Adrian

It really doesn’t take much to excite me, as evidenced by this commercial that I just came across …

… given my obvious passion on the subject of Numbers (as opposed to mere ‘numbers’) you won’t be surprised to hear that I jumped straight onto ING’s web-site to see what their take on this whole ‘Number-thing’ was:

It’s a neat calculator that – in 4 or 5 simple ‘plug-in-the-numbers’ – gives you Your Number … or, does it?

You be the judge:

…. now, I might just be a touch pedantic, but isn’t the $7 million dollar question: “how much income do you need in retirement?”.

In other words, isn’t the whole point of such a tool to help you come up with this number, rather than asking you to pluck it out of ‘thin air’ [AJC: like I just did with the $250k figure that I randomly plugged in]?!

And, without it, isn’t this just some sort of glorified calculator? 🙂

BTW: According to ING, my Number is:

ING Your Number - 3

… guess I’m $2 Million short; can anyone lend me some 😛

Work backwards to move forwards …

Posted on July 3, 2009 by Adrian

work backwards In Monday’s post, I took a look how Scott – a young family man and doctor – could use his Number/Date to help him evaluate whether to buy his business partner out now or simply wait 30 months, when his partner retires from their medical practice.

Without the ‘filter’ of his Number/Date, this would be a very difficult decision, with so many risk/reward variables …

… but, it’s actually a very simple decision:

Which is the most comfortable (i.e. lowest risk, ‘feel right’) alternative that seems most likely to ‘guarantee’ that your Number/Date – this most critical of life goals – can be achieved?

This is such an important concept that I want to share another example, this time from Trey and Juliana a young couple just starting out on their financial journey together:

Two nights ago I got Trey to work on a life’s purpose. Last night we brainstormed money making ideas: Trey really wants to open a thrift store and we know a perfect location right near the college. Kind of like a Buffalo Exchange, that offers cool music, buying and selling jeans and ultra cool clothing items, shoes , hats and such as well as art and records.

Then we thought of our life purpose and though about making it a Non Profit and helping abused children in some way.

The thought occurred that perhaps as a nonprofit it might be possible to get lower rent, tax breaks, donations and other benefits while helping children. Perhaps we could choose a local children’s or battered woman’s shelter to benefit from our thrift store. There is a lot of research and we will need cash up front.

[Trey is also an artist and has developed] a whole line of B**** B*** Gang which he came up with, (Little cartoon boys) … I think he should license them and sell them. He though of making a comic strip online or illustrating kids books.

I think this would be a better idea than the thrift store because a store ties one down to one spot. However, Trey is really into the thrift store idea.

Another idea is blogging for cash. Perhaps starting 3 separate blogs about separate things such as economical recipes, the battle of the bulge ( weight loss) and one about saving money. I know it would take a while to get subscribers however it does not tie one down the way a store does. I know that this will be time consuming and I will need to do much research as to how one gets paid.

Trey might open a thrift store and I might start a blog or three. It is all about multiple streams of income. I bet I could write children’s books. What if I wrote books and a portion of the proceeds went to fund parenting classes.

For some people, the well of ideas runs dry, but for other – like Juliana [AJC: and me !] – the ideas flow so thick and fast it’s hard to decide where to start …

… so, we often put the shutters up and don’t start at all!

If this is you, I want to share a novel concept: It’s always a good idea to work BACKWARDS …

… here are the steps, as they might apply to Trey and Juliana:

Step 1. Find your Life’s Purpose – They’ve already done this. Check!

Step 2. Choose your Lifestyle – I showed Trey and Julian where to find some great ‘sample lifestyles’ here (click on the links inside that post to see some sample lifestyles at different $$$$ levels).

The idea here is to choose the type of lifestyle that they hope their business/es to fund one day … this will help them immensely (as we’ll see shortly) in choosing the right business!

Step 3. Account for Inflation – This is actually quite easy! Simply double your chosen ‘lifestyle’ amount for every 20 years before you intend to ‘retire’ (i.e. to start living it). If you only intend to wait 10 years, then just add 50% to your annual lifestyle amount.

Step 4. Find your Number – Multiply your final ‘inflated’ lifestyle number by 20: THAT’S your Number!

I left Trey and Juliana some further guidelines on their Life’s Purpose post at the Share Your Number community site.

Step 5. Work Backwards – Now’s the time to decide which opportunities can be sold by their Date for at least the amount of their Number.

Let’s assume their Number is large (right now, it’s $50 Million, but my suspicion is that they will revise this well-downward once they complete the above steps against the filter of their Life’s Purpose).

If it remains a large Number, a blog is unlikely – on its own – to get them there, unless their name is John Chow whose blogs generate about $1,000,000 a year (then again, he does own Technorati.com!).

So, I would advise Trey and Juliana to look at ideas that can expand exponentially, with relatively low capital requirements … here’s a couple of ideas:

Trey’s idea of licensing a cartoon series might have great potential: he could generate interest by starting online (here’s where Juliana’a blog idea CAN help), then hope to get picked up by one of the traditional avenues (e.g. syndication in the news and/or become the next ‘South Park’ cartoon series) supported by product sales and licensing … and, a LOT of luck!

Alternatively, as Debbie suggested, if they can:

a) Successfully create their first Thrift Store and operate it profitably, and

b) Find a unique angle, so that it stands out from similar businesses (not just in this location), and

c) Document all of their operating procedures, such that any ‘dummy’ could run the business just as successfully as they can

… then, they may just have a business that can be franchised.

By working backwards, Trey and Juliana – with a little help of a pencil/paper/calculator or spreadsheet – can decide which of these opportunities is really worth pursuing!

After all, if it can’t help you to reach your Number/Date, why bother? 😉

Can you eat a car?

Posted on July 1, 2009 by Adrian

I’m rapidly becoming the ‘Dear Amy’ of personal finance blogs (don’t let this stop you, I actually love receiving these types of e-mails!); Tam asks:

I am working to pay off my expensive debt which should be paid off in the next six to eight months. However, my dilemma is I LOVE cars. I want to finance (w/ a sizable down payment) a new car after my debt is paid off. I’m trying to talk myself out of it because I know I should be putting that money toward my financial goals but I just keep saying that if I can get this car, then I won’t want anything else and will be satisfied. Deep down, I know this is not true because three years later, they’ll be another new car that I will want. What can I do to stop myself from buying this new car (Nissan 370Z Roadster)?

Man, what can I say?!

I could point Tam to the post that said not to buy a new car, or to the one that said not to finance, or even to the one that said not to spend more than 5% of your net worth on ‘stuff’ (including your car).

I’m guessing that any one of these would be reason enough not to buy the car … instead, I just offered Tam the following advice:

Don’t!

Can you eat a car? 😉

Your Craig’s List Ad …

Posted on June 29, 2009 by Adrian

Scott has placed an ad on Craigs List:

WANTED: A very successfully run healthcare practice, specializing in spinal rehabilitation, exercise, massage therapy as well as other holistic services such as nutritional advice and expertise. Professionally run to the highest of clinical standards with a well-trained, goal-oriented staff, necessary equipment and supplies. Low monthly overhead, time-proven practice and business design system already in place, extremely high cash-flow and yearly profit margins, ongoing community marketing programs in place, all in a state and local community that harbors terrific heath insurance coverage for these services. Totally turn-key, fully developed business design, everything from new employee training techniques, to patient marketing, to patient scheduling, to treatment programs and proven care systems are all in place and can be duplicated, expanded upon and repeated in additional clinic ventures and startups time and again. The commercial property that the clinic resides in may also be purchased in addition to the business at reasonably assessed property value and additional rents may be collected by adjoining business that resides in the same building, once building is purchased.

Now, this isn’t a real ad, and Scott didn’t really place it, you see he has a dilemma and is trying to solve it right here.

Let me bring you up to date … … Scott is a doctor – living on a beautiful country estate with his young family (and, a couple of horses!); his savings ethic is an inspiration (Scott saves around 50% of his reasonably high salary).

Now, Scott is a partner in his small medical practice (one that specializes in non-traditional forms of healing, even though Scott and his partner are qualified medical doctors) and he has wonderful altruistic dreams of one day being able to spend the bulk of his time helping the underprivileged in the US and overseas to receive the highest quality medical care that he can offer.

For Scott, this means eventually putting his practice on ‘autopilot’ so that he can:

(a) bring in more ‘pro bono’ patients (as many as he can handle without the practice going broke!), and

(b) take extended periods off to travel to 3rd world countries dispensing his unique brand of medical assistance.

Scott’s worked out that he needs around $4,000,000 in 8 to 10 years, and then he should be able to implement his plan.

The good news is that Scott’s partner is set to hand him 100% of the medical practice in 30 months time (Scott’s only ‘investment’ is the work that he puts in between now and then) …

… this, along with Scott’s aggressive savings-and-frugality-strategy should put Scott smack on target in 8.5 years! Scott’s dilemma is:

1. Should he just stay the course, and trust everything to work out … worst case: work for another few years, if some of his assumptions should prove incorrect?

2. Should Scott buy his partner out now (he’s guessing that it would cost him $200k), which would free him up to open up a second (or even third and fourth) practice now?

Should Scott take the ‘safe road’ to his Number and maybe make it, or should he high-gear onto the aggressive path to his Number and scoot right on past it?

We won’t solve Scott’s problem here, that’s the purpose of the Spotlight post that I have just placed on the 7 Millionaires … In Training! site, and I encourage you to read that post and follow (better yet, contribute to) the comments …

… but, I want to demonstrate yet another use for your Number, here:

[AJC: Buy your New Improved Number here! You can wash dishes with it, ride horses with it, tune your car’s engine with it … but, wait! There’s more … if you buy your Number today, we’ll even throw in an aggressive Date and a FREE set of steak knives! Yes, your Number is the chamois for all occasions 😛 ]

You see, the usual filter for business and investment decisions is:

1. Risk – what is the risk profile of the various investment alternatives in front of you? What is your ‘appetite’ for risk? And,

2. Reward – what is the expected return of the various investment alternatives in front of you?

Choose the investment alternative that provides the greatest return, yet meets your risk profile.

But, I want to throw up an alternative filter:

a) Which of the various investment alternatives available will guarantee that you meet your investment goals; in the case, the ultimate test is its ability to achieve your Number by your Date?

b) Then find the lowest risk alternative that AT LEAST gets you there.

So, that is the message that I delivered to Scott:

If your current strategy (i.e. wait 30 months for the practice to be given to you, free and clear) can get you to your Number even after you run some ‘likely case’ and ‘worst’ case scenarios around the various investment returns (Scott also requires some RE and stock investments to achieve his Number) then why would you do anything else?

But, if it’s reasonably possible that you’ll fall short – unless EVERYTHING goes right, and, if delaying your Date is not an acceptable alternative – then, in my opinion, Scott has no choice:

He has to run the numbers around buying out his partner, and see where that takes him!

I’m keen to find out what happens, how about you?

Nasty Mr Inflation – Part II

Posted on June 26, 2009 by Adrian

Last time, we looked at dealing with inflation before we retire (a.k.a. Life After Work), to see that $40k a year of current needs means that you need to be able to generate somewhere between $100k and $125k per year, IF you want to retire in 30 years.

Even if we manage to build up the $2.8 million nest egg that Pinyo talks about (or the $1.8 million one that the following reader talks about), we have a problem, illustrated by the comment by Elaine on Pinyo’s post:

I don’t see interest included in the calculations here. Even at 4%, *just the annual interest* on 1.8 million will cover your annual needs. Not that that’s a bad thing, you’ll still have 1.8 mil left when you die. If you plan to use up all your money in retirement the necessary amount would be quite a bit lower.

Elaine has ‘forgotten’ about inflation; this doesn’t stop just because you retire!

You earn 4% on your money and before you get to spend any of it, Mr Inflation ’spends’ 3.5% for you … I asked Elaine if she can live off just 0.5% of $1.8 Million?

When you retire, if you have your money just sitting in the bank, inflation will simply kill you, financially-speaking.

On the other hand, if Elaine buys a $1.8 mill. rental property (paying 100% cash, forgetting closing costs) the property will increase in value WITH inflation, as will the rents … an inflation-proof retirement (or, she can buy TIPS, inflation-protected government bonds … etc., etc.)

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How to make 7 million in 7 years …

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