How much is rich?

I never considered myself rich.  Rich people can afford fancy cars, go on long vacations, live in big houses and so on.  I have always lived a fairly simple life, though one that is better than many.  Whenever I see books about how to get rich, whether quick or slow, I wonder.  How do I know when I am rich?  Do I have to be Bill Gates rich or just one of those folks living in one of those big houses I used to go to for trick-or-treating on Halloween?  Were they rich or just in a lot of debt?

 

I have done taxes off and on for people for the last five years and so I have seen how much money each of them earns.  Surprisingly, often the ones with the smallest incomes were the most generous with their donations, especially to church, and far happier.  Those in the six figure income were often concerned about taxes and debt.  Whereas the families making just enough to not be on welfare were often more comfortable.  They had no illusions of driving a BMW or living in a six bedroom house.  They were happy to know they could put food on the table and have a roof over their head.  Once I retire, I would be happy to be in the latter group, though I might be a bit more demanding on the food and roof.

 

 What I need is to know I can leave my job someday and know that I have an income I can depend on.  Perhaps I can have some left over that I can invest to see if I can make it grow more.  And then I might want to be able to travel a bit more, eat out occasionally, and know I have a car that runs.  Is that too much to ask?  To get there I have to plan and save. 

 

To plan, I start with finding places I can put my money where it can grow.  But how much does it need to grow and how much to I have to add to it each month to reach my goal?  Money grows by either giving it to a bank to pay me savings interest or buying some sort of investment that increases in value over time.  What about taxes?

 

We hear about putting our money into something with tax-free growth, or at least tax-deferred growth. These come in the form of 401k's, Roth IRA, and other investment vehicles.  I could put my money into CDs or savings accounts, but those grow without tax protection.  So what?  So think about this.

 

If you were to take one dollar and have it double tax free every year for 20 years, at the end, you would have over $1 million.  Hard to believe?  Get out your calculators and figure 2 to the 19th power.  Cool, huh?  But if you were to tax that growth every year as your savings account would be taxed, your total at the end of 20 years would be about $27,000.  Which do you prefer?

 

Money growth is measured by how often it doubles.  Years ago, Albert Einstein used to talk about the power of compound interest, the money you get when you receive interest and then more interest on your earnings.  He talked about the Rule of 72.  That says that if you take the interest rate you are getting and divide it into 72, you will get the number of years it will take to double.  For instance, if you were getting 10 percent interest, you know it will take 7.2 years for your money to double.  Banks right now are paying about 1% if you can get it.  How long would that take to double your money?  72 years.  I know, then, that I need to find something that doubles my money quickly and protects the growth from taxes. 

 

 I had some savings in my 401k.  After I left the job I had it grow, I rolled it over to an IRA to get even more control over it. And then the market crashed.  I lost almost half my value in just a few months.  Granted, much of that value has returned, but the overall growth over ten years was, at best, 1%.  What does that tell you? 

 

And this is where my friend came to my assistance.

How much do I need to save?

Isn't that always the question?  If I need to save for the future, how much do I need to save?  If you keep up with such things, advice is often to save 5% of your earnings, or 10% or even more.  How much?  5% of my net or my gross?  If I haven't started saving now, how much do I need to catch up?  And when will I know I have enough?  Frankly, the real question is how much do you want to have when you aren't working someday.  How do you figure that out? 


To start you need to look at where you are now, where you are going and how you are getting there.  When you are young, fresh out of school, whether high school, college or grad school, you start out with a lot of responsibility and very little cash.  Perhaps if you parents were planners, they might have already saved some money for you.  Or maybe you had jobs while working through college and you always set aside something.  If you did, you are on the right path.  For the rest of us, though, we need to hoe our own row.


From the time we are born until we die, we need a stream of money to keep us alive.  Some people are born with money while others struggle.  When we are young, we depend on our parents to feed us, clothe us and provide us with a home.  Someday, you get a job and that creates your own wealth stream.  When you start out your wealth is low and your responsibilities are high.  As you grow older, you will hopefully have the opposite, with wealth to live on and fewer people needing your help.


What is wealth?  That is what your money is worth over time plus any earnings you get from it.  Then deduct inflation and taxes.  What is left is your wealth.  It is also a state of mind.  One person might think earning $50k a year is wealthy while someone making four times that might be struggling.


That gets me back to the question of how much.  Once you retire, you may or may not be out of debt.  If you are still paying a mortgage, you will still need to do that, or you will have to sell your home.  Assume for now that whatever you are making now, you will want to get that when you aren't working.  When you start taking money out of savings, the standard amount is 5% of the total.  That lets the remainder continue to grow.  At least it assumes it will grow.


If you are making $50k a year, you will need a million dollars in savings to maintain that lifestyle.  If you were lucky, you might have been able to pick up a pension or two along the way, as I did.  Also, you will be able to get some of your expenses covered with Social Security.  Yes, it will still be around but it probably won't be the plan we know today. 


You have many options to save and I will discuss each one of them.  To get that kind of savings you first need to know how money grows.  Each investment has its risks, as well.  You have to consider market risks, taxes and inflation.  That gets me back to the original question.  How much do I need to save?


If you are grossing $50,000 a year now, that means you are grossing about $4,166 a month.  Then you are also having taxes, Social Security, your 401k, and benefits deducted.  Using this handy website I found,  The Salary Calculator, I come up with a take home pay of $3,276.  To get a gross of $50,000 a year, you do need a million dollars in savings.  From here I will talk about the different options you have and how you need to incorporate them into your financial plan.  Oh no!  He's talking numbers!  Yes, you need to understand some math to get where you want to be.  I will do my best to keep it simple.


I want anyone who reads this to be able to have a plan whether they are 25 or 55 or older.

How much is too little?

Each year, I am seeing my retirement come closer.  I think about how much I will need and how much I have and whether or not I will ever be able to retire.  Just how much money do I need, anyway?  I go to places like CNN website (Retirement Calculator).  There is shows how much I need to save to make my current income when I retire.  For me it came up around $2 million.  Hmmm.  At my age of 56, it isn't likely I am going to come up any where near that much cash.  And, frankly, it seems unlikely that I could if I were 20 years younger.

I wanted to look at that number and see what it really means.  Typically, you want to figure you will take just 5% of your savings each year to allow your remaining money to grow.  There are a few assumptions there.  First, why 5%?  And what kind of return will I be getting on my remainder?  Do I have any protections against sudden drops in the market?  What if I get sick?  What if I run out of money?  What about debt?

The purpose of this blog is to talk about my journey toward retirement in the next ten or so years, what I have done so far, what I am doing now and what I hope to have in the future.  So many people, including myself, see a bleak future ahead and I hope to share some of the good things I have done.  Perhaps you can share your stories, as well, and we can get on with a happy life.