Author Romeo Clayton of How We Prevent Wealth is hosting a challenge for all of us to figure out how much do we exactly need for retirement. He calls it “The Wealth Number Challenge” where we input our current age, savings, rate of return, current tax rate, annual contribution, years during retirement and more to figure out how much we actually need.
I’m not sure if it’s media schadenfreude, but apparently only 24% of Americans have enough savings to last six months. Meanwhile, another 24% of Americans don’t have ANY savings. I find this very, very hard to believe. At least 52% of Americans have more than six months of savings though right? Furthermore, I know none of you reading this site could be living that close to the edge.
As we learned from the latest triennial report by the Federal Reserve’s Triennial Survey of Consumer Finance, the median US family net worth in 2010 plunged to just $77,300 from a high of $126,400 in 2007. What’s more shocking is that property accounts for $75,000 of the $77,300!!! In other words, the average American based on this survey only has a $2,300 buffer! $2,300 will buy you one month’s rent for an average one bedroom here in San Francisco with no parking!
Do know that if you only have $2,300 in savings and you’re the median age of 35, you are screwed. I don’t want to be an alarmist or anything, but you will be working for the rest of your life if you keep up your poor savings / poor spending habits! You’ve got to figure out whether you are spending too much or saving too little. Fix one, then fix the other ASAP if you don’t want to work until death.
When you have such little saved you are going to curse at every little unexpected expense. I’m going through the process of tightening my expenses myself because I plan not to have a steady income shortly, and man, do the unexpected expenses hurt! I got a $98 parking ticket last week because I parked in a white zone that said, “Free parking except for during work hours.” Shit, who knew some city help center was open at 4pm on a Sunday! Now I know and I’m happy I didn’t get towed. A water main pipe burst from the street to my house last month which cost $1,400 to fix. Painful! If I didn’t have savings I would be in a foul, foul mood and extremely depressed.
Please save. If you’ve only got a couple thousand bucks, you’re just one step away from financial disaster. The Expense Gods will conspire against you at some point. When they do, you need to be ready to fight them off with your hard saved money! If not, off to government assistance you go.
My Wealth Number is admittedly somewhat arbitrary because of my various income producing streams already in place. The number also depends on when I plan on retiring, which could very well be this month! I’d like for my stable assets to generate roughly $5,000 a month in after tax income for 45 years in five years. With a conservative 4% annual return on investment after retirement, a 20% effective tax rate, and a 2.5% inflation rate, my Wealth Number comes out to $1,800,000.
Now that I know what my Wealth Number is, all I’ve got to do is subtract $1,800,000 from how much liquid and semi-liquid assets I have now, and divide by five to figure out how much I need to save a year to get there! It’s going to be a challenge if I don’t sell any real estate or stocks so I’ve got to figure out how to make more money, save more money, or create a business that will provide me $5,000 a month in perpetual income for life so I don’t need $1.8 mil!
I’m excluding my rental and online income from my Wealth Number because my goal is to build stand alone income streams that can support my life. In other words, by the time I retire, I’m aiming for my rental income, online income, and Wealth Number income to each generate $5,000 in after tax income to total $15,000 a month. It’s more of a challenge and it helps me from getting lazy. Even if I don’t get there by the time I retire, I know I will have gone farther than if I just focused on one source.
If you have not calculated your retirement number in the past several months, I highly recommend you head on over to The Wealth Number Challenge to figure out what your number is. Inputting your figures in the calculator only estimates what you will have upon retirement. You need to adjust the numbers to make the monthly annual after tax income work for you!
When you have a number, you then have a specific goal to work towards. Without an end goal in mind, you don’t really know whether you are saving enough, too much, or too little.
After you’ve figured out your number, write it down, blog about it, and tell your closest friend. You need to be held accountable so that you increase your chance of reaching retirement bliss!
Update 2021: My retirement wealth number in 2012 was $3 million because that’s what I decided to leave corporate America with. In 2021, my retirement wealth number is at least $15 million because I now have two kids and a wife to provide for!