$10! as a target net worth
You may know $10! is the same as $3.6 million. If not, this will explain. Before arriving at this rather odd target, I started backwards… from income. As a family, we want $100,000 in annual inflation-adjusted passive income to pursue the 10 factors. Note I said we want, not what we need. We can easily live on half that figure ($50K/year) but when you tie your financial future to the capital markets, we need cushion, lots of it. It’s not just for the market volatility that we have to endure for decades, but also for the risks in the income strategy I am pursuing, considering likely errors in judgement I will make along the way, chasing fantasy growth or dreamy dividend yields that tempt me periodically. The cushion is also needed for any stealth inflation in our spending beyond budget (lifestyle creep, as some call it).
To generate this income from financial assets, we need to rely on the concept of safe withdrawal rate (SWR). SWR has been a long-debated subject in many blogs and early retirement message boards, not to mention the magic wand of the financial advisory community. The SWR ranges from a low of 2% to a high of 6%, depending on age, number of years to fund retirement, risk tolerance and other factors. By a commonly used definition of financial independence as retirement assets being 25 times annual expenses, we are already there. But this is not the sole criterion for leaving your job. Someday, I will write about my views on SWR, but for now, there’s plenty of research data and opinions to chew on. Based on a number of studies and my own comfort factor, I chose 3.5% to be conservative.
Using a 3.5% SWR, the retirement asset base required to support the above income is $2.85 million ($100,000/0.035). Are you wondering why another $750K is still needed to get to the target of $3.6 Million? A family man with obligations and penchant for retaining some social life (not to mention, stay married) needs many other things to be covered. We are watchful of our spending, but don’t want to be too frugal just to show that we can be. These additional funds are for TFR Jr.’s college ($200K budget for a private 4-year college), decent house to live after entering retirement ($350K) and finally, $200K reserve fund for other expenses (major medical out-of-pocket, leaky roof, new appliance etc.). There is no separate emergency fund, it is part of reserve. I believe budgeting for your children’s college is better than paying for it – this topic deserves a post in itself, watch for it! Also, I will cover in a future post on why we rent and plan to do so till retirement (added later: that post is here).
Some of you may feel this target is too high, and some might even say, too little. At least one blogger feels $3 million isn’t much, it’s the new $1 million. But a budget is personal (some think even sexy), and must be tailored to you. Importantly, it must be sustainable for your family. I realize that this kind of net worth would put a household in the top 5% of U.S. but hey, unless you aim high, the journey is not challenging enough! There are some who would say that retiring on $50K income (instead of $100K) would drastically reduce our retirement fund size, by half, that is, $1.4 million (and thus, bring the net worth target to $2.2 million). This is correct but retiring sooner should be weighed against retiring well and especially, if your objective is to have a financial stress-free retirement. The very idea of having to go back to work after leaving a hard-fought corporate career, just because you have a financial need, is scary to me. After all, you put in all the efforts in preparing for and getting to your cherished retirement.
If we feel there will be lots of money left over in our 60’s and 70’s, we will create a charitable endowment (must be cool to look down from the beyond and see…is that really a TFR Zero Fee College in Nepal? or a TFR Hospital in Burundi?). With the 3.5% SWR and the cushion we have in expenses, I think we are covered for a 40+ year-retirement, even if capital market returns fare in the ‘bottom 10%’ of historical ranges. Considering the worst retirement ever, I am not so worried.