Updated: Jul 7, 2018
Knowing your financial planning number is the first step to any successful financial plan.
We all heard the saying that a problem well defined is half-solved. It is even truer with personal financial planning.
Putting together a personal financial plan without knowing 'your number' is like boarding a plane not knowing where it is going. You may enjoy the ride, but you may not necessarily enjoy the final destination.
Your Economic Freedom Number
Your financial planning number is often defined as an economic freedom number, i.e. the amount of money you need in order not to work anymore. It is the number required for you to leave the active life and completely retire while maintaining your desired purchasing power.
To better understand, let's consider the following example:
- You want to retire at 60.
- You want to maintain a $50,000 / year lifestyle (for reference, the U.S. Census Bureau reported that the real median household income was $59,039 in 2016).
- Let's further assume that you will live until 90.
Under these conditions, the amount of saving you will need at 60 will be $50,000*30 years, or $1.5M. We can make this analysis more sophisticated by introducing factors such as your expected social security income (let's say $15K per year or $450K), the potential capital gain you could make on your saving (not so much these days - the old 4% interest rule hardly applies), the increased cost of medical care, the depreciation of the currency in the next 30 years (it may halve)... That will still leave you with an estimated number in the $1.5M to $2M range.
To maintain a lifestyle of $50,000 per year for 30 years, you need about $1.5M to $2M in saving.
And of course, you should not include the value of your home as an asset unless you plan to downsize significantly your housing arrangements.
Ignore your number at your own peril
Reaching this number can be quite daunting for middle aged empty-nesters who have not yet accumulated enough savings,. This is the case for most people: the Economic Policy Institute reports that the median retirement saving for Americans between 50 and 61 years old is below $17,000. Obviously the huge gap between actual and required saving will create much social upheaval in the years ahead. It would not be surprising to see the emergence of a new group of older homeless citizens.
You might be tempted to ignore your situation arguing that, in the past, old people have always managed to survive even without this kind of money.
The older population can only rely on itself.
But we are living at a time when two major factors have significantly changed the historical pattern:
1.The middle aged population will live longer. Before, you only had to save for 20-25 years, while nowadays you need to secure enough savings for 35-45 years...
2. Historically, elders have relied on their family for economic support. The weakening of family ties and the geographical separation of families have changed the situation to the point that many old people can only count on themselves.
So ignoring your Number is probably not the safer approach. Face with any situation, clearly identifying the problem may be harsh, sometimes overwhelming, but it provides a higher chance for resolution.
What you can do about it
The number as defined earlier assumes you will stop working at 60. This is a safe assumption given the current job market for people over 50. But it does not mean that you cannot start an activity outside of the classical job market (i.e. not working for someone else). The advent of internet has lowered the entry barriers to many autonomous business ideas. So in fact, you do not need your full Number at 60, but you have the possibility to earn it over the years if you can find a solution to generate some extra income at 60, 70, 80...
You may think yourself out of date with the new world, lacking knowledge or not feeling ready for a personal venture, but the reality is that, at 60, you probably still have plenty of energy and have the capability to learn anything. It is amazing what you can learn in two years... if you are motivated to do it. That is the catch! You must know your Number and then decide to act on a plan in a committed manner to reach it. There are no guarantees that you will get what you need, but you will certainly be closer than if you just worry thinking about the fate awaiting you.
Once you are truly ready to act, you may still not know which path to pursue. This is when you start studying, talking to successful people (no point talking about this to people in the same situation), reading great blogs like this one 😀, testing ideas... You do have the luxury of some time to succeed. So there is no problem if an idea takes two or three years to take off. The key is to start working on it right away.
Whatever you do, just act with your own unique situation in mind. Listen to people, evaluate their ideas but do not believe anyone. Reach your own conclusions, go for it and be ready to assume the consequences.
So the magic formula is the following:
- Calculate your Number - Know your problem.
- Breath deeply - There are solutions.
- Decide the path you want to start today in order to achieve your target.
FrancklySpeaking was created to highlight the potential situation faced by middle-agers, provide some ideas to readers and generate healthy discussions.
To start the process, I will share my own situation with you:
Given my current asset base, the lifestyle I wish to maintain, my desire to live another 50 years and my concern for the rising cost of medical care, my Number is $10M. I plan to achieve it by developing a few recurrent synergistic ideas based on social networks (my expertise) and multi-level marketing (the best business model in my mind for people without capital and committed to success). I am giving myself a couple of years to put the foundation of this plan. If I don´t succeed in two years, I will give myself another couple of years or more, until I achieve it! The only alternative would be to lower my expectations (which I may have to do during the foundation phase anyways) or die younger...
Please do share you Number with us and the strategy you are using to secure it. The more information, the better. Always in a constructive, respectful manner. Thank you!