Enough

“Some people are so poor all they have is money.” – Bob Marley (or Abe Lincoln, the internet will never know)

I was having lunch with some colleagues at work today. Of 6 people, 2 had done PhD work and the rest held Bachelor’s degrees, engineers and computer science folks. A few were talking about how they were in the wrong business and they wanted to get into something where they made more money. They decided that $300,000 a year was a place they could feel comfortable at. I almost fell out of my seat!

I am a mechanical engineer in the midwest I keep my expenses relatively low and I have a pretty good paying job, although nowhere near $300,000 a year.

I started the year with 3 concrete goals.

  1. Save $100,000 in my retirements accounts (cumulative, not this year alone!)
  2. Get a mentor
  3. Do 100 push ups a day

There are more but I haven’t structured them well enough to be shared yet.

Of the above I am already thinking about if the first one, have $100,000 in retirement account by the end of the year is a useful one or not.
I am 26 years old.

Having already saved between my 401K (pre tax), ROTH IRA (post tax, limit $5500/year) and HSA (Health Savings account) $75,000 as of Jan 1, 2015 I would have to save $25,000 to reach $100,000 by the end of the year. Now that is do-able but I am starting to question if that is a good goal or not.

If you have looked at anything I have done in the past you will see that I like to project forward. Here is how to “Retire A Millionaire, The Easy Way”.

Using the various numbers I already calculated from there (7% growth a year, 3% inflation) and the $75,000 I already have invested, that puts me at $1,049,612 at 65 years old (39 years from now), yielding $72,420 a year (at 7%) which is equivalent to $22,866 a year in 2015 dollars. Now if I was getting $23,000 a year for free what would I be doing? Probably anything I wanted! (This is before social security, assuming it’s still around).

You would calculate a future value using the below equation.

FV = PV*(1+r)^t

FV = future value of lump sum  

PV = future value of lump sum ($75,000)

r = interest rate per period  (7% = .07)

t = number of compounding periods (39 years)

FV = 75,000*(1+.07)^39 = $1,049,612

I’m a millionaire! time to start living like it!
Of course this equation is making plenty of assumptions based on the numbers I put in. Last year certainly did not return 7%, but again, referring to the previous article, there is good reason to assume 7% average over the long term.

This makes me question why I would even put any more in my retirement account? It already seems that I have enough! Now I will continue putting money in retirement accounts as long as I can not think of any other ways to invest it, certainly don’t take this as me telling YOU to stop investing in your retirement!

The next question is why do people live the way they do?
Do people really understand the simple math I laid out above and in my other article about how to calculate future and present worth?
Do people understand how to calculate a return?
Do people understand inflation?

Now I certainly don’t live like a king. I have monthly expenses of about $1200 and drive a used (2007) Prius. It’s reliable. Having taken the time to learn about finances from The Crazy Man In The Pink Wig and understanding the answers to the questions I asked above, I am very confident. I’d suggest you read one of his books, preferable “What Color Is The Sky?” I’d even purchase and mail it to you as I have done for many others, if you like. (Drop an email at hooglandaxel@gmail.com, or comment below!)

That all being said, back to the thought of enough. What does that mean? I guess each person has to figure that out for themselves, but it’s certainly something we should perhaps put a bit more thought into than we often do!

What is your “enough” number?
If you want to talk to me about what is enough, comment or drop me an email.

Retire A Millionaire, The Easy Way

How to become a Millionaire in 40 easy steps. Invest $5500 a year for 40 years. Get a decent rate of return (7%). Boom. Insta-millionaire. Read below for more information!

I am not a certified financial planner. Any investments are inherently risky (although some less than others). Invest at your own risk. I just like playing with numbers and wanted to share how easy it is below.

I’ve been digging into money, specifically for retirement, for about the last 10 months. Luckily money is easy, it’s just numbers and simple math. People really make it out to be much harder than it needs to be. Let me lay out one very easy way to retire a millionaire.

While companies often have retirement accounts available weather it be a 401K for many private companies, a 403B for government or public jobs or some other type of retirement account, there is also a personal option, a Roth Saving account. This is post-tax money that you can save with the benefit that it grows tax free and you can withdraw it tax free when you retire!

For this experiment we will consider only saving in a Roth IRA as that should be available to the average American.

For 2015 the Roth IRA max contribution is $5,500. Lets assume you start investing in your Roth when you are 25. This should have given you a bit of time to pay off at least some of your college loans, your first car and maybe saved a little up for a house. It will also give you 40 years to retirement, which is a nice number to work with.

If you invest $5500 for 40 years that’s equal to $220,000! Which is a decent amount of money, but perhaps not enough to live off of. Luckily for you with compounding (at 7%/yearly, which I will justify below) with no fees, it will have grown to $1,174,853 over 40 years! You’re a millionaire! Now unfortunately there are going to be some fees. Likely you are not managing your money 100% by yourself, but you can come close using www.Vanguard.com Using this you should be able to easily obtain an expense ratio of .2% or less. An expense ratio is a simple thing that really can end up causing confusion because of how it’s reported. What an expense ratio is is a percent of money invested paid to the company managing your money. A .2% expense ratio means they will take .2% of your money a year. .2% of $100 is only $0.20 that’s why it’s much more useful to convert expense ratios to a dollar value for every $1000 invested. So a .2% expense ratio is $2 per year for each $1000 invested. Once you are a millionaire you are paying $2,000 a year just for someone to hold your money! That is why a low expense ratio is favorable. It is ok to pay this though because many places will charge you much more to manage your money! Up to 1%! That’d be $10 per $1000! So off that side track, if we assume the .2% expense ratio per year this still will leave you with $1,109,739! You’re still a millionaire! That was sure easy wasn’t it?

Now that you’re retired, you’d like to start taking that money out. This calculation is pretty easy also. You simply need to understand what the annual rate of return is, which represents how much your money is growing each year. If you want to make withdrawals to eternity you can withdraw as much as your money makes a year. You should plan to withdraw just a little less than your yearly increase, to take into account down years in the cycle, of which there will be some. Since I assumed a growth of 7% we can calculate 7% of $1,109,739 which gives $77,681. Now this seems like a LOT of money (at least to me!) but remember this is all 40 years from now money.

Of course a million dollars today is not what it was 40 years ago and a million dollars in 40 years certainly won’t be what it is today. For that we will have to do a net present value (NPV) calculation. This is a very simple calculation using the assumed inflation rate and a simple equation.

NPV = R/(1+i)^t

R = future value

i = yearly average interest rate

t = number of years

How you use this equation is simple. For our situation you are trying to find the NPV of R = $1,174,853. We are assuming i = 3.22% (justified below) and a time (t) = 40 years. Inputting these numbers yields $330,696. That’s a pretty good chunk of change in 2015 dollars. If we do the same to our yearly withdrawal we will get $77,681 (40 years from now) equal to $21,865 in 2015 dollars.

Now you might think, man that’s not a lot of money, I can’t live of $21,000 a year. But I’d argue that once you are 65 you will hopefully have paid off your house, cars, etc. Of course you will also have other expenses like medical expenses, travel or perhaps helping out a grandchild or neighbor in need. Luckily you will likely have other forms of income such as Social Security in the USA, some income from a part time job or perhaps a pension from a former job.

This was not meaning to be a comprehensive end all retirement plan! When talking about investments and a 7% return and .2 expense ratio, of course you will need to do a bit of research and work to obtain those. But it’s not hard! A great resource I’ve been utilizing is The Crazy Man In The Pink Wig. His website is a wealth of financial knowledge, given freely!

To make the intro shorter and get you quickly excited about being a millionaire I made a lot of assumptions on returns, interest and the like. I will share the resources below simply so you don’t argue with me too much on these assumptions.

One important note I left out is that the maximum yearly contribution will likely increase as time goes on. This is good for you, the investor, as it means that you will likely be able to retire with even more!

The average annual inflation rate is 3.22% obtained here.

The average S&P 500 return data from 1975 to 2014 was found here and the average was found to be 10.18% average return. I also used the average bond return rate which can be between 4%-6% found here. Using that data I assumed a rate of return of 7%.

How is your retirement looking?Millionaire