Mon 20 Aug 2007
Posted by admin under Planning
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I cannot/do not desire to work until the day I die.
I should not count on social security for help in retirement.
I should not depend on financial assistance from others during retirement.
Regular savings will contribute towards these goals and provide me with a foundation upon which I will be self sufficient.
Is there relative truth in these statements? I guess that depends on your age, nature of existence, and if you believe in your ability to manifest your destiny.
Fact: A single $100 contribution today will grow to ~$6,500 in 40 years if it compounds at 11% each year. If you were to then place this $6,500 in a savings account earning 5%, you would recieve $325/yr in interest or $0.89/day.
How much money per day would you require to cover your ideal life? I’m talking the ability to attend every wedding, high school graduation, college graduation, child birth within your family or if you’re not family oriented, 365 days a year of cruises, vacations, fancy cars/dining/parties and anything else you can imagine. How about we pick a nice round number…$1,000/day to cover your expenses without taking money away from the principal you have in the bank.
In order to generate $365,000/yr from a security paying 5% interest, you would need $7.3 million in the bank. Wow…seven million dollars just seems like a sum that one could never reach without a massive inheritance or a job earning $100,000+/yr…The average person could never hope to achieve these figures…could they?
Well, for a one time contribution of $110,000, you could reach this goal in 40 years if you earned 11%/yr…but $110,000 isn’t something most people have laying around. I did, but then I bet it all on black…Vegas always wins. So, we don’t have $110,000…where do we start?
If you were earning $45,000/yr by the time you were 25 at a company that generously provided you with a 6% company match to your 401K…could you still accomplish the $7.3 million goal? If you contributed 10% of your salary and received a 6% company match, you’d be shooting in $7,200/yr into your 401K. Keep this trend and even if you NEVER receive a raise, you’ll have $6.8 million by age 65 if you managed to earn 12% returns. Contribute 10% of your salary with a 6% match and you’ll earn almost $1,000/day in interest by the time you retire at 65.
Retire at 65? Come on, I want to retire early. It would be great to have a stack of 10 benjis every day to blow but I don’t want to wait to start the party when I’m eligible for Medicare.
First, if you’re waiting to start the party when you retire, you’re an idiot. Yesterday was a party, today is a party, tomorrow is a party, and exactly 745 days from now, it will be a party. Life is a party, I’m just talking about when you get to party 24/7/365 without having to go through that whole ritual of going to work every day.
Since our test subject is earning $45,000/yr, this translates to $123/day. (45,000/365)
Would you be happy earning the same amount today from the banks that you are today from your job? I’ll assume a yes.
In order to earn $123/day in interest at 5%, you’ll need $897,900 in the bank. If our guy saved $7,200/yr (that’s 10%+6% company match), s/he’d have ~$885,000 in the bank after 22.5 years if the account earned 12%/yr. That means that if you start saving $7,200/yr at age 25, you could retire at 47, keep your cash in a simple money market fund earning 5% and you’d never have to work another day in your life.
Quitting at 47 not good enough? Fine. Grind away 20% of your salary (plus 6% match) at $45,000/yr and you’re socking away $11,700/yr. Earn 12% and keep the momentum and you can quit your job at 43 and earn $112/day in interest.
Are we starting to get the point? Save EARLY and invest wisely and compound interest will do the work.