This is the fourth in a series of articles on Net Worth. The last article Set a Net Worth Goal explained how to calculate a Net Worth Goal to retire comfortably at age 65. Here we show how three key elements: starting early; the power of compounding and; tracking progress with Net Worth Milestones can almost guarantee your success.
We determined someone earning the U.S. Median household income of $60,000, who wishes to retire at age 65 and maintain their pre-retirement purchasing power through retirement, needs to accumulate about $1,500,000 by retirement.
Now, you might be thinking: Is it possible to accumulate that much money? If so, how? Let’s dive in an find out.
Why Set Milestones?
Breaking large goals into a series of smaller ones shows how much we should accumulate over time, enables us to measure progress along the way, and lets us stop to celebrate the victories.
Milestones aren’t intended to compare yourself to someone else. They may be further ahead or behind, depending on different circumstances. Their wealth has no bearing on where you’re headed.
You may not yet be where they are or where you want to be. But the important point is that you’re not where you were before-you’re making progress.
A Chicken or the Egg Dilemma
What comes first: how much money you need for retirement, or how much you can save for retirement?
It might seem overwhelming when there are many moving pieces. Some people make the mistake of stepping away from the question instead of stepping into it.
The most difficult step is the first one: working the problem to a viable solution. It may not be the perfect solution, but it should eliminate doubts and uncertainties so you can determine other more fitting Net Worth Goals.
We know we want to accumulate $1,500,000 by age 65, and we make $60,000/year in this example. We need to accumulate a lot of money, so it’s safe to assume a robust savings rate is needed.
Let’s start with saving 10% of our income and see where that takes us.
We also know invested money works for you by earning a return while you continue to work for more money at your job. A good way to generate this return is investing in the stock market.
The stock market’s long term average historic real return is 8%. That’s much better than a savings account!
If you don’t know how to invest, we’ll cover that in a future post. Just know for now it’s not complicated, and we’ll show you how you can do it successfully.
Compounding; The Eighth Wonder of the World
The advantage of the stock market is that you can build more wealth by compounding returns at the higher 8% rate than with a savings account paying 1-2%. We’ll discuss compounding later, but for now, just know that compounding returns create millionaires out of ordinary people if given enough time to reach their Net Worth Goals.
The table below illustrates this point. It’s based on earning the U.S. Median income of $60,000 and investing 10%, or $6,000 each year, in the stock market, earning the long term 8% average return per year.
| Age | Annual Savings | Period Savings | Rate of Return | Return | Net Worth | |
|---|---|---|---|---|---|---|
| 25 | $0 | |||||
| 30 | $6,000 | $30,000 | 8% | $5,200 | $35,200 | |
| 40 | $6,000 | $60,000 | 8% | $67,713 | $162,913 |
|
| 50 | $6,000 | $60,000 | 8% | $215,723 | $438,636 | |
| 60 | $6,000 | $60,000 | 8% | $535,265 | $1,033,901 | |
| 65 | $6,000 | $30,000 | 8% | $490,438 | $1,554,339 | |
| 70 | $6,000 | $30,000 | 8% | $734,695 | $2,319,034 |
No wonder compounding is called the eighth wonder of the world!
For comparison, the following table is based on earning the same income of $60,000 and investing 10%, or $6,000 each year, but earning a lower long term 6% average return per year.
| Age | Annual Savings | Period Savings | Rate of Return | Return | Net Worth | ||
|---|---|---|---|---|---|---|---|
| 25 | 0 | ||||||
| 30 | $6,000 | $30,000 | 6% | $3,823 | $33,823 | ||
| 40 | $6,000 | $60,000 | 6% | $45,833 | $139,656 | ||
| 50 | $6,000 | $60,000 | 6% | $129,531 | $329,187 | ||
| 60 | $6,000 | $60,000 | 6% | $279,422 | $668,609 | ||
| 65 | $6,000 | $30,000 | 6% | $229,963 | $928,572 | ||
| 70 | $6,000 | $30,000 | 6% | $317,889 | $1,276,461 |
The following table shows the same income of $60,000 and investing 10%, or $6,000 each year, but earning a higher long term 10% average return per year.
| Age | Annual Savings | Period Savings | Rate of Return | Return | Net Worth | ||
|---|---|---|---|---|---|---|---|
| 25 | 0 | ||||||
| 30 | $6,000 | $30,000 | 10% | $6,630 | $36,630 | ||
| 40 | $6,000 | $60,000 | 10% | $94,004 | $190,635 | ||
| 50 | $6,000 | $60,000 | 10% | $339,447 | $590,082 | ||
| 60 | $6,000 | $60,000 | 10% | $976,064 | $1,626,146 | ||
| 65 | $6,000 | $30,000 | 10% | $999,409 | $2,655,555 | ||
| 70 | $6,000 | $30,000 | 10% | $1,627,874 | $4,313,429 |
Start Now
The key is starting now with your goal, any goal. Sure, the goal may change as your circumstances and aspirations change. That’s fine, as it should.
The point is to make realistic estimates for the lifestyle you wish for now. We can only act in the present.
Starting now puts the power of compounding to work for you sooner. And nothing changes the way you think about money more than when you hold yourself accountable for measured results.
So yes, our example goal is completely possible if we save and invest to make our money work for us.
Summary
The three elements in your power that can almost guarantee your success:
- Start early setting your Net Worth Goal to use your best real asset; time.
- Let compounding, the eighth wonder of the world, work for you.
- Set Net Worth Milestones, to measure and assure progress.
In the next article, Net Worth by Age, we’ll apply the 8% table to the different phases of life so you can see where you would need to be at each stage to hit the goal and how to adjust the goal for other sources of income.
Set a Net Worth Goal