Last week, my column offering a six-point Money Quiz created a bit of controversy, particularly surrounding my formula for determining if you are “on track,” net-worth-wise, to becoming financially free by retirement. Here’s what I said under point number six in the quiz:
“Is your net worth on track? In order to become financially independent by retirement, you’ll need to build your investment net worth over time. Investment net worth includes only assets you can use to produce cash flow during retirement, so it typically wouldn’t include assets such as your home. Here’s your target investment net worth guideline:
20 times annual income at retirement.
15 times annual income if you are five years away from retirement.
10 times annual income if you are 10 years away from retirement.
Five times annual income if you are 20 years away from retirement.
One time annual income if you are 30 years away from retirement.
Half your annual income if you are 35 years away from retirement.
For example, if your current income is
Here’s a range of reader’s comments.
I have read your article with respect to being “on track financially.”
It matters not to me that you have authored or co-authored books with other individuals; so have many. What matters to me is the content of the article, which I find incredibly subjective.
I have recently retired from the
Of interest to me is not so much your so-called quiz with its self-serving calculations but the premise of each category within the context of each point.
Fear becomes the number one component of your article; coincidentally, your profession.
It would be of interest to me for you to objectively share with the reading public the data from which you draw your conclusion that “your target investment net worth guideline” (without home) be “20 times annual income at retirement.” Since that is your premise and initial point within point No. 6, share with all of us the objective data that shows how many Americans who “at retirement” have anywhere near 20 times their annual income. You’re not even close; not even remotely close. Goals are fine if attainable, but they must be realistic — yours are not. Most initial retirees can only wish to be in those circumstances. …
Using the typical fear tactic, you demean those who have saved and doom them with the stroke of your pen. … Shame on you. Understand that your elite attitude is disproportionate to the whole.
First, thank you for reading my column and for writing me. I have been working with families for more than 30 years and have seen hundreds of them achieve results equal to or exceeding my “target” investment net worth. I have also witnessed far too many cases where families fall way short of these results. It has been my observation that the difference between the two groups boils down to one word — decision.
Those who create this level of success decide that they will do whatever it takes to become financially independent. They set up automatic investment programs through their employer’s 401(k). They supplement it with personal investment programs. They study and learn about investing, and they seek the help of professionals in the areas of investing, taxes and financial and retirement planning.
It is true that most Americans don’t do this, resulting in the horrifying statistic that 97 percent of Americans never achieve financial independence. In fact, a recent study by the
If you believe that achieving the level of net worth that I describe is impossible, then you are correct. Alternatively, if you believe it can be done, you are also correct. If you examine the results of the formula, you’ll find that “20 times annual income at retirement” allows you to maintain, on an inflation-adjusted basis, about the same relative income during your retirement years as your ending work income based on a 5 percent annual withdrawal rate. The methodology that I used to get those results was simply investing 10 percent of gross income from every paycheck (beginning with your first paycheck) with earnings of 7 percent annually. As a reference point, the stock market during the past 60 years has earned an average of 10.7 percent.
The strategy for achieving financial independence is simple, but not necessarily easy, and it requires preparing for retirement every day.
Yes, you are correct. However, most people pretty much spend their entire net paycheck, so it’s easier to explain the concept using gross income rather than spending needs (plus income taxes).
Stewart, congratulations on the best formula I have seen for evaluating at any point in your career the adequacy of your accumulated retirement savings relative to current income to reasonably ensure an adequate retirement. It seems to dovetail into a simplistic post-retirement formula I have used for years for computing how much of your retirement “nest egg,” if invested in a generally balanced allocation program, you can spend after retirement and be reasonably comfortable that your retirement funds won’t run out before you die: “Don’t spend more than 5 percent of the current market value calculated at the beginning of the calendar year.”
|Copyright:||(c) 2013 The Huntsville Times. All Rights Reserved.|
|Source:||Advance Publications, Inc.|