Understanding how much money you need for financial independence isn't rocket science. What do you need to consider yourself a financial success?
We talk about the basic calculator and the goal that most people have--whether conscious or not--of getting there by age 55.
Financial Independence means that you can focus less on earning as much as possible and coast into retirement. For a lot of people that means cutting back, reducing work, or taking the dream job that might not have as high of a salary.
For most people it means less worry.
Have you reached the benchmark? In this episode we talk about the major tasks that you may be working on in your 40 and early 50s. You may be raising a family, figuring out housing, dealing with elderly parents.
You might be working hard, saving a lot of money, yet still wonder if you're on track. Will you ever be able to not work so hard?
The fact is, there are specific benchmarks that we discuss to help figure out if you're on track.
Here's Bridget's firm website: https://www.sullivanmermel.com
John's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
Thanks for watching and please subscribe!
John: How much money should you have by the time you're 55 years old? We're going to answer that question on today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel, and I have a fee-only financial planning practice in Chicago, Illinois. And before we get into how much you should have before you're 55, please subscribe. It helps us out. We really appreciate it.
John: That's right. It’s one of the things that's interesting. There're no guidelines for people who ask this question. Most people think, I don't know, I hope I'm doing okay. Am I doing okay? How do I know that? And so, I want to hear what you have to say. I think we have a similar thought process, but what do you say to people as you start looking at the question: “I'm getting into my early 50s, how much money should I have by the time I'm 55?”
Bridget: Well, by the time you're 55, I like to see you have seven times your annual income in your net worth. So if you're making $100,000 a year, then you have $700,000 in net worth. And that's it. That's what I would like to see before you're 55.
John: Yeah. And that's the right range. We talked in a previous episode about how by the time you're 40, we'd like to see it your net worth at three times your annual income. So if you're making $100,000, your net worth should be around $300,000. And by the time you get into your 50s, we want to see it be up in the seven times range. So why is that useful? What's the meaning? I know that if somebody's on that path that they're going to be okay, whatever that means specifically for them even if we don't have the details.
I kind of relate it to driving a car someplace. If we're going to go to Florida from the Midwest, we need to head south. I don't need to know what road to turn on to get into Disney World when I'm leaving Chicago. I need to know whether I am going south, or I am going northeast. And so, these guidelines for me are sort of asking the question, “Are we headed in the right direction? South by southeast?” Super! As I get closer, then I need to get that road map out and nail it down, but this is that sort of directionally accurate thing for me.
Bridget: Am I on the right track?
Bridget: Okay. So that's what we are looking at. Now, there are people who may have that much in their net worth, and they're not 55, they're 50. They're 45. What do you think about that?
John: Well, again, this is a sort of guideline. What it gives me, and I think it's the same for viewers, is a benchmark. Hey, by the time I'm 55, I want to have at least this much. I'm a little bit ahead of the game. Maybe that means I can retire a little earlier. Maybe I can take a lower paying job. I'd love to do some teaching at the university, but can I take that pay cut? So it's going to give me some more flexibility if I'm ahead. And what if you're behind? Is all lost? No, if I’m not quite there, then, geez, maybe I have to work a little bit longer. Maybe I need to focus. Maybe the kids are out of the house now, and I need to save a little bit more. I need to focus on that because of various things.
So it's just this idea of, am I on the right track? Jeez, I'm actually ahead of the game. That's cool. I have some choices. Boy, I'm kind of behind the game. I better focus on this. And it's this quick sort of thumb in the wind test. I know when I get a new client or a prospective client, I can look at their situation with this guideline. If they're in their early 50s and they're around seven times their annual income, things are going to be pretty good. If they're ahead of that, we got some different discussions.
If they're behind, we're going to have to start talking about catching up. That's all that it is. But it's useful because it helps answer the question of: How should I be doing? I'm 48, and I've saved a bunch of money. I'm doing things, but what does that mean?” There's so little in the way of those metrics. How do I evaluate that? I don't really know. And I think this is a great way to have a sense for whether you're on track or not.
Bridget: You know, I think that some advisers tell people they need to have a lot more money than that. What do you think? Do you think that's true?
John: It's one of those things that it's sort of in the self interest in the financial world just to scare you as the consumer and say, “Woah, you need to have a gazillion dollars.”
Bridget: Or they might say about twice of what we're saying.
John: Yes. And so, I think that the reality is that having more is better than having less. Right. Running out of money before you die is a problem. Having too much money when you're gone, it's not ideal, but it's less of a problem.
John: So from that side, I understand that. But one of the things for me, and I know that's the way that you work also, is that it's not about maximizing the money. It's about maximizing what money can do for you—the experiences, the happiness, the lifestyle, the reaching your goals.
John: And so, focusing more on that helps. I've been doing this for 20 years now, and I'm telling you that if you're net worth is at seven times your annual income by the time you're 55, you’re in good shape. I've seen it happen. I think that those other things might be a little bit different, but it's also proven to be accurate over time. So a little bit more of a realistic viewpoint, perhaps.
Bridget: And I think that the financial industry can be very self-interested at times, and that's the difference between us and the overall financial industry. We're fee-only and fiduciary, so we work in the best interest of our clients. And people that are getting paid depending on how much money you have in their accounts have an incentive, conscious or unconscious, acted on or hopefully not acted on, to tell you that you need more and to scare you into it by making you feel bad that you don't have more.
Bridget: And so sometimes people are shocked at what we're actually okay with.
John: It's interesting as I reflect on that. Once people have been with us for a long time, we've got some history, we've got a good of how each other works, and we're on the same wavelength. But when new people come in and talk to us, it's a lot of the times either, “Oh, I'm really behind. I need to catch up” or, “Boy, I feel like I'm in really good shape. I can do these things.”
And I always talk with folks about whether it would be useful for them to have an evaluation of where they stand. And if you feel like you're not doing so well, oftentimes, you're actually doing better than you think. And sometimes if you feel like you're doing really well, you might go, “Oh boy, that's not so hot. I need some other things.” And so maybe that's why I find this such a useful conversation is because it’s difficult to know. How do you know?
There're various things to see if you’re healthy, right? I can gauge things like, am I in a healthy weight or not? Is my blood pressure good or not? But for questions like, are my finances good or not? Am I saving enough? There's so little out there. That's why I think this benchmark is important.
Bridget: And then some of it's self-interested.
John: Right. When you do get an answer, some of it's not completely objective.
Bridget: People tell you that you need more than you really need, which again, if you're going to err, it's probably better to err on the side of over saving. But telling people they need to save twice as much as they need to just so that you can earn twice as much off of it is a different story. Call me cynical, but I think that might be happening at times.
John: But it's interesting to think about that in the medical sense. If your doctor was able to charge the insurance company more the lower your blood pressure got, they would say, “Boy, Bridget, your blood pressure should be a little bit lower than it is right now,” and they would get paid more for doing that. You would go, “Hey, wait a minute. That doesn't sound cool.” And again, most people in our world, they're sincere. I don't think it's always intentional, but when you have those inherent biases, it can cause questions.
With that, I think that's maybe a good place to wrap things up. How much money should you have by the time you're 55, we want to see you approaching seven times your income as far as net worth. So if your net worth is seven times your income, then you're going to be in good shape. And remember, that's not a pass or fail. That's a guideline. If you're a little bit of a head, that’s great! You're going to have some flexibility. If you're a little bit behind, you might need to sharpen your pencil and think about your planning a little bit.
Bridget: Great! And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. This is John Scherer, and he's got a practice here in Middleton, Wisconsin. We want to encourage everybody to subscribe. That helps us out, helps Google find us, and helps our audience and reach more people.
John: That's right. And if you like what you hear on our show here Bridget and I are both members of the Alliance of Comprehensive Planners, a nationwide group of fee-only, tax focused, holistic financial advisors. You can check out acplanners.org to find an adviser in your area. And with that until next time.
Bridget: Thanks, John!
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.