The long-term plan
In the About Us post we explained that our ultimate goal is to reach $1.5 million in net worth within ten years (2016) before semi-retiring. A curious, anonymous commenter asked if we had a long-term plan to reach our goal. Unfortunately, we’ve never formally posted anything here on this site and I didn’t have anything readily available to present besides a rough outline that is loosely documented in a text file sitting on my computer.
Figuring that others might also be interested I put together a spreadsheet where I could run a few different scenarios. Below is a snapshot of one of those screens which shows three possible paths that we could take. You can click the image below to better see it.
The first path shows a more conservative approach which makes the assumption that we can increase our total amount of savings 5% per year and that our existing savings will generate a return of 6% each year. It would take a little more than ten years to reach $1.5 million.
The second path shows our ideal plan which is to increase our savings amount by 7% each year while earning an 8% return on our investments. It would take a little less than ten years to reach our goal.
The third path assumes we will be able to more aggressively increase our savings by 10% each year while generating a 10% return on our investments. It would take about eight years to reach our goal.
We’re confident that we'll be able to increase our savings consistently each year as we pay down our existing debt and increase our incoming cash flow.
It would be unreasonable to assume we would exactly follow any one path to our ultimate goal - some years we will be able to increase our total amount of savings by more than 10%, while in others it might drop to only a 2% increase. The important thing for us is to continue striving to move forward and put away as much as possible each year, building upon the last without sacrificing too much in the way of our current lifestyle. At the end of each year we'll refer back to this post to get an idea of where we stand.
For simplicity's sake, I've ignored taxes in these calculations, but they will no doubt slow our progress. It will be very important for us to keep our investments as tax efficient as possible as we work toward our goal.
Figuring that others might also be interested I put together a spreadsheet where I could run a few different scenarios. Below is a snapshot of one of those screens which shows three possible paths that we could take. You can click the image below to better see it.
The first path shows a more conservative approach which makes the assumption that we can increase our total amount of savings 5% per year and that our existing savings will generate a return of 6% each year. It would take a little more than ten years to reach $1.5 million.
The second path shows our ideal plan which is to increase our savings amount by 7% each year while earning an 8% return on our investments. It would take a little less than ten years to reach our goal.
The third path assumes we will be able to more aggressively increase our savings by 10% each year while generating a 10% return on our investments. It would take about eight years to reach our goal.
We’re confident that we'll be able to increase our savings consistently each year as we pay down our existing debt and increase our incoming cash flow.
It would be unreasonable to assume we would exactly follow any one path to our ultimate goal - some years we will be able to increase our total amount of savings by more than 10%, while in others it might drop to only a 2% increase. The important thing for us is to continue striving to move forward and put away as much as possible each year, building upon the last without sacrificing too much in the way of our current lifestyle. At the end of each year we'll refer back to this post to get an idea of where we stand.
For simplicity's sake, I've ignored taxes in these calculations, but they will no doubt slow our progress. It will be very important for us to keep our investments as tax efficient as possible as we work toward our goal.
posted by Brian at
2:45 PM
15 Comments:
Just to comment on your calculation, your first calculation net worth ending 2006 should be higher (it does not factor return rate of your 2005 net worth). Net worth ending 2006 should be 154,500 (6%), 156,000 (8%), and 157,500 (10% return). This would obviously make all the other numbers higher as well. Just thought you should know. Signed, Intent Reader
By
Anonymous, at 3/21/2006 6:47 AM
Judging from the spread sheet, your guys are on top of the world and making serious money. You must blow off lots of them because your current asset is miniscue comparing to your earning. I was hoping to learn and follow your foot steps to early retirement and I may have to find it somewhere else.
By
Anonymous, at 3/21/2006 7:24 AM
Holy Cow! To save $75k+/yr, assuming you can save 50% of you income (no easy task), your are doing pretty well my friend. Seems very aggressive given your current net worth, but I like it, it should be aggressive.
How do you think you will be able to increase your savings by 5%/yr? Are you getting annual increases in income > 5%?
By
2million, at 3/21/2006 7:46 AM
anonymous #1 - I like your attention to detail! The 2006 net worth number is taken from the current goal set this year and I just plugged that value in manually. The spreadsheet is meant as a guide from this year going forward. But I do see your point; thanks for pointing out the technicality.
anonymous #2 - Sorry to disappoint you…we’re just a young couple that makes a reasonable amount of money that have, in the past, spent beyond our means which explains the lack of assets. Our total gross income from our day jobs is just over $100K combined. Good luck in your endeavors!
2million – You bet we’re aggressive! For the 5% increases, I am assuming we’ll progressively be able to raise our incoming cash flow each year with raises and at the same time knocking out the existing debt that is costing us.
By
Brian, at 3/21/2006 8:36 AM
I don't understand your savings rate. If you're saving 10% of your income, and that amounts to $75,000...you're making $750,000 per year???
By
Anonymous, at 3/21/2006 9:30 PM
Sorry for the confusion anonymous, no, we would be INCREASING our total savings amount from the PREVIOUS year by x%.
For example, this year we plan to save $69,000 of our incoming revenue. In 2007 we would ideally like to increase our savings amount by 7%, thus putting away $73,830 in the coming year.
As you can see, we’re saving quite a large portion of our income. I’ll admit that accomplishing our goal will not be easy, but I feel goals should always be set to push one’s self. No tricks here, just doing what we can to reach our goals.
I made some edits to the above post to help clarify for future readers. Thanks for commenting.
By
Brian, at 3/22/2006 7:59 AM
I am sorry to sound dense - how in the world do you guys manage to save something like $75,000 from a net income of about $100,000? Do you live in a country without taxes and rent?
By
Anonymous, at 3/22/2006 10:00 AM
First, I should probably apologize, I was being too conservative when I said we make just over $100K combined from our day jobs...I didn't take into account the employer matches and annual bonuses we receive. With those amounts included we're closer to $110K than $100K.
Sorry about that, I was in a rush to get replies out that day and underestimated the thirst for details. I was just trying to make the point that we don't make an obscene amount of money and we're very careful with our expenses.
I get the feeling you want more details, and unfortunately I don’t have the numbers in front of me right now to present. I’ll work on getting something on our FAQ in the “about us” post this week because other people are probably going to be as interested as you are in the future.
On a side not, just to clarify, we're trying to stash away $69K this year, not $75K. I know we’re probably more on the extreme end of the spectrum, but our goal is within reach if we are willing to stay disciplined.
By
Brian, at 3/22/2006 11:49 AM
I just did a quick run of the numbers and I have to call BS on this. Lets review:
110,000 yearly is $9167 monthly. Assuming you live in the US, you have to take $567 off the top for FICA plus another $1500 for federal taxes. I estimate your 1st mortgage payment to be about $750, 2nd mortgage $170 and student loan to be $100.
That leaves you with $6080. Saving $69,000 a year is $5750 a month. Your current savings of $93,000 assuming 6% rate generates $465 of income so the remaining $5285 of savings comes out of pocket. That leaves you with monthly cash of $795.
The $795 that's left must still pay for:
-property taxes
-state income taxes (if applicable)
-payments on your multiple credit cards
-car insurance
-home insurance
-health insurance
-phone/internet/utilities
-food/gas/clothes/etc
Granted your monthly cash would gradually go up as your investments grow and earn more each month however growth is not a straight line. Don't get me wrong, having goals is great, but having achievable goals is better.
I know there are plenty of people out there who make do on $795 a month or less but they generally do not have some of the expenses you do (rent instead of 1st & 2nd mortgage and property tax, student loans, multiple cars) and they would qualify for aid/welfare programs plus earned income tax credit.
Finally, I guess this is more of a personal preference, but I don't know if I would want to live a lifestyle of poverty for a decade in order to achieve this. Not only that but the amount of money you would amass wouldn't even be enough to retire at 40 unless you continued to live miserly.
I'd be very curious to see more of your numbers on how you figured this.
By
Adam, at 3/24/2006 1:10 PM
Good on you guys for working toward FI. My husband and I live on $20K/yr exclusively derived from interest (we're in our 30s). We have the freedom to do whatever we want, and never feel deprived. I wish you all the best, and congrats on making that $90k milestone!
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Liz, at 3/24/2006 4:48 PM
Adam, I’ve addressed the gross income question in the About us post due to it being a popular topic of late. In short, our current total gross annual income is around $125K.
I agree with you, even with that amount it will still be near impossible to make the $150K year-end goal considering our current liabilities, spending habits and taxes. The net worth milestone hinges upon us completing another goal - that of finding a new job for the husband which should give us the added boost in salary income needed to reach the $150K net worth mark by the end of the year.
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Brian, at 4/17/2006 2:18 PM
I share the general skepticism about your ability to hit these milestones, but I sincerely wish you nothing but good luck in achieveing them.
From the way you write, I would suspect you'll take all the non-believers here as more motivation to save.
Good luck. My own goals are not nearly as ambitious, but I'll be checking in on you constantly.
By
GIV, at 11/22/2006 3:01 PM
Thanks GIV. I agree that the goals we have set forth before us are quite ambitious and will not be easily accomplished without a lot of hard work and determination on our part.
Speaking for myself, I find that I am much more motivated to succeed when I set the bar just beyond my grasp. The problem I have is that, when left to my own devices, I’m too quick to settle on the easier path and tend to do just enough to get by. The setting of rigorous milestones seems to be the only way I am able to defeat this tendency.
Thanks for reading and good luck in your future ventures as well.
By
Brian, at 11/30/2006 9:17 AM
Very impressive! My husband and I have similar plans, although we are not saving as aggressively as you are. We are also in our late 20s/early 30s, no kids. We are confident that we can live comfortably on one person's income, and can invest the 2nd person's earnings. I don't think it will be that impossible to retire within 10 to 12 years, and our online research shows it shouldn't take more than $1m to retire, if your lifestyle is not too extravagant and you plan to live in a place like Costa Rica or Mexico. Your blog is very inspiring. Best of luck to you!
By
Anonymous, at 3/25/2007 9:53 PM
Thanks anonymous, good luck to you guys as well!
By
Brian, at 7/10/2007 7:13 AM
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