Last week my column titled, The 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 5 years away from retirement
· 10 times Annual Income if you are 10 years away from retirement
· 5 times Annual Income if you are 20 years away from retirement
· 1 times Annual Income if you are 30 years away from retirement
· .5 times Annual Income if you are 35 years away from retirement
For example, if your current income is $100,000 and you are twenty years away from retiring, to be on track, your investment net worth needs to be approximately $500,000. These numbers are exclusive of Social Security.
Here’s a range of reader’s comments:
Comments from R.J.: Occasionally, I respond to the written word with a comment.
Today, 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 New Jersey / New York City area and certainly have had an opportunity to both read and discuss retirement planning both with individuals on Wall Street, financial advisors, as well as other potential retirees for a considerable amount of time.
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 #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 is not. Most initial retirees can only wish to be in those circumstances. You can set and communicate any personal standard and wish list that does not set you apart from reality; why not say 30 or 40 times; figures lie and liars figure. Using the typical fear tactic, you demean those who have saved and doom them with the stroke of your pen. Fortunately, I exceed your babble but for those less fortunate you pinion them as a whole. As part of the retirees, I resent that to others less fortunate in the category, they must now sit down and admit defeat. Shame on you…understand that your elite attitude is disportionate to the whole. If you take advice, which I seriously doubt, then you should consider distancing yourself from the subjunctive.
My response: First, thank you for reading my column and for writing me. I have been working with families for over thirty 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 that 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 401k. 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 American’s don’t do this resulting in the horrifying statistic that ninety-seven percent of American’s never achieve financial independence. In fact, a recent study by the Employee Benefits Research Institute indicated that fifty-seven percent of Americans arrive at retirement with less than $25,000 in savings and investments. 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% annual withdrawal rate. The methodology that I used to get those results was simply investing 10% of gross income from every paycheck (beginning with your first paycheck!) with earnings of 7% annually. As a reference point, the stock market over the past sixty years has earned an average of 10.7%. The strategy for achieving financial independence is simple, but not necessarily easy and it requires preparing for retirement every day.
Comments from J. M.: Mr. Welch, shouldn’t the amount needed for retirement be based on spending rather than income? Some people live well on a fraction of their income.
My response: 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).
These comments come from a highly respected retired trust officer: 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 insure 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% of the current market value calculated at the beginning of calendar year.”
My response: Thank you!
If you missed last week’s column and would like to take The Money Quiz, CLICK HERE or visit the Resource Center at www.WelchGroup.com; click on Links; then Stewart’s Column.