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How much money do we need?

December 11, 2014

I don’t find net worth to be that helpful of a metric.  Without a target, is just an abstract number.  I like to see it grow, but what does it mean to me?  In order for it to be more meaningful, I need to have a rough idea of what I’m trying to get my net worth to be.

But net worth isn’t the whole story.  How much of that is income generating, and how much of that is in assets (e.g. home equity)?  In order to add meaning to my balance sheet, I’m calculating how much we would need in order to be financially independent.

Our total spending will be around $75,000 this year.  We had a lot of spending in the home category (>$20k) as we moved into a new apartment then a house.  We bought some furniture and did some home projects.  I obviously excluded our down payment.  I’ll let that stand for now, then revisit this calculation some time in 2015.

In order to achieve financial independence, we would need $2.5 million in investible assets (assuming 3% return, $75,000 / 0.03 = $2,500,000) in today’s dollars.

However, we are planning on some of our extra income into owning our house.  Ideally, we’ll have the house paid off in ~15 years.  With a paid off home, this number drops to about 37,000 per a year, or $1.2 million. Property tax & maintenance are included in that number, but I will need to revisit the number once we’ve been here a bit longer.

How far do we have to go?  Right now, we have $330k in investable assets, not including our various cash funds, not including home equity.  We have a long way to go!  Assuming a very conservative 3% return on investment and $36k per a year, our savings can grow to 1.2 million in 15 years (calculator).  This coincides nicely with my rough goal to have our mortgage paid off in approximately 15 years!

This calculation is pretty rough.  First, I don’t think this year’s spending is very representative.  Also, I ignored income taxes (the majority of our savings is tax deferred, but some is post-tax ROTH).  To top it off, we both have pensions (his growing, mine not).  I turned down a cashout of ~$20k for mine this year, as I calculated the value was about $33k  Yet, it isn’t going to generate an income stream until I’m older  And what about inflation?  Anyway, I think a fair compromise would be to track progress towards 2 million, and use that as a benchmark until I make a more detailed calculation.  That would be closer to 25 years, so we have to up our game or check our spending!

Doing even this rough calculation does give me some intuition about how I want to allocate my money towards my goals.  I’m not making any changes just yet.

PS – I do very much like the “PF Score” as a usable and useful metric, and have been tracking mine this year.

12 Comments leave one →
  1. December 11, 2014 9:18 am

    When I ran the numbers for us for CA a few years back, income assumptions and income taxes etc. made huge differences. We can afford to completely retire places we wouldn’t want to retire right now, but not CA. (Ditto the how much would we have to make to live in CA calculations.)

    Right now I’m wishing I could afford to pay 6K/month in rent!

    • December 11, 2014 10:18 am

      Yessss, taxes are a huge concern. I think I’d need to spend longer than 15 minutes to calculate a more realistic scenario.

      If we are spending a smaller portion of our income (esp $37k or so rather than $75k), our marginal bracket and effective tax rates should drop quite a bit compared to what we pay now. So having a paid off home would help in that respect – we wouldn’t have to pay taxes on the income needed for the payment.

      Also, social security tax and such will not be a factor. I don’t know if we would consider retiring somewhere cheaper. It is certainly a possibility,

      • December 11, 2014 10:19 am

        Maybe san diego. That seems like a nice retirement place. Not cheap, but likely cheaper than the bay area!

      • December 11, 2014 10:23 am

        Property taxes alone were a big chunk of expected spending in my hypothetical, though it was an 800K-1mil house in my scenario, since I had my eye on a specific neighborhood in Mountain View. (Of course, the cost of those houses has gone waaaay up since I last did the calculation.) Your property taxes can’t go up as quickly as mine can, but they start out pretty high!

        • December 11, 2014 10:27 am

          ah, that makes sense. Yes, our property taxes are about $12k/year to start (I think). They still would be high in san diego. Hmph.

  2. December 11, 2014 9:21 am

    I find your posts on how much you guys spend really helpful as we transition to “our spending”. I’m used to seeing my numbers, but multiplying them by 2ish just seems like a super large number and makes me feel really guilty about how much I spend.

    So thank you!

    • December 11, 2014 10:31 am

      Well, don’t read bridget’s post that i linked to, where she and her fiance are spending about $37k together including rent 🙂

      I waver between seeing our spending as a huge number, or seeing what we save and earn and feeling OK with it.

      • December 11, 2014 11:04 am

        Yeah that’s bananas! Good for them though. I think I’ve normalized my personal spending at this point at around 40-45k. I almost wonder if I’ll be more incentivized to reduce my spending when the mortgage is paid off!

        My current spending would require about $1.3M including a paid off condo. That number moves around a lot as spending fluctuates. The moving target is a bit annoying, but at least it is something to shoot for!

        I made a spreadsheet a while back that proved my plan to retire in 2019 would work and where I would withdraw money from each year. I should write a post about that 🙂

  3. December 11, 2014 12:53 pm

    The PF score is way more useful. I’m going to start using that and net savings, along with net worth as my 3 major year-end metrics.

    • December 11, 2014 2:13 pm

      Net savings, net worth, pf score. I like it!

      The Planting our Pennies blog uses “years of savings at monthly burn rate” and another figure they came up with to translate assets into something concrete: “Early Retirement Locale Index”

      The pf score is essentially years of savings at annual burn rate, which I find more useful. Except instead of investable assets, the PF score uses net worth. I think I’d tweak mine to be investable assets, but assume my mortgage was gone (not taxes though). Somehow I’d want to account for income tax overhead for tax advantaged accounts… hmm….

      • December 11, 2014 5:25 pm

        If you’re only spending/withdrawing 36k/year, you won’t pay much in taxes. If you’re withdrawing that from pre-tax accounts, you would pay about $3k in taxes if you were single or a bit less married. And then you would likely be in the 0% capital gains range, so any withdrawals from taxable would possibly be free.


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