Money Goes One Of Two Places
How much you consume = your standard of living.
How much you save = your ability to maintain that standard of living in retirement.
To start, I want to give you a quick overview about how we think of money so you'll understand the graph that will be created for you.
To explain it simply, we all make money (which we typically call a salary or income), and the amount of money that comes in is usually in the form of a paycheck.
Well, when we get our paycheck, money essentially goes to one of two places.
When we save money we usually think of the savings going into some sort of investment that will grow at some percentage rate of return over a period of time for the future (retirement).
The question that nobody seems to answer, and that we struggle with, is what percentage of our income should we save.
Well, to be honest, there really is no savings percentage that will work for everyone!
The typical advice to save 10 or 15% just doesn’t work.
Each person at a certain age, with a certain amount already saved up, needs to map it out in what we call a Cash Flow Ratio Model.
It sounds really technical but it's very easy.
So, here's a simple drawing of it..
There's a certain amount of money that we're going to consume, which is what’s spent to create our standard of living.
We know it's going to take more money to maintain our standard of living over our lifetime (due to inflation), so we have to increase this relative to inflation.
Because this is the minimum number to simply maintain our standard of living throughout our lifetime.
However, regardless of how long you expect to live (we plan for age 100 because we're learning how to live for a long time nowadays), most people have a goal of retirement sometime in the future.
The big goal is this…
The green line is your minimum target, but unfortunately, what we see for most people is the following….
Due to the way they've been saving and the way they've been taught, they reach retirement and this line completely drops off.
Then in retirement, their red line gets further and further away from the minimum target and it gets worse and worse and worse.
That's not what we want.
For every one of you, we want this red line to stay on that minimum target.
This is called BALANCE.
We want balance throughout our lifetime, so we call this “putting money in its place so we can get on with an intentional life.”
How It Works
So, this is the BetterWealth Assessment Tool and let's just say, for example, Joe is a 27 year old making $70,000 and plans to retire at age 65.
Joe has $10,000 saved up and he’s going to save 10% of his income every year, just like everybody told him to do (even though we don’t believe that’s the right way).
So, he’s going to save $7,000 per year.
We will account for inflation at 3% per year (the historical average is 3.22%).
The ‘before retirement’ percentage is asking “what’s a realistic growth rate you think you can earn on your investments before you retire?”
Some people are conservative and use 3, 4, 5%...
Some people have listened to Dave Ramsey and use 8, 10, or 12%...
Then ‘after retirement’ most people generally shift their investments into a more conservative strategy.
Joe thinks that 4% is achievable (you put in the number you’re comfortable with).
Joe’s current salary is $70k, he expects to receive a cost-of-living adjustment of 3% per year and plans to retire at age 65....
...and let's say Joe's Social Security benefit is $36,000 per year.
Social Security usually increases about 2%, Joe will start taking it at 67, and that will last as long as he's breathing.
And here's the graph that it draws…
There's a starting income of $70,000 (Joe's salary).
He's saving $7,000 per year, so he's consuming $63,000 for his standard of living.
Well, the green line starts at $63,000 and it's going to increase based on inflation at 3% per year (that's what we call the desired income to maintain your standard of living).
The red line says what these parameters produce.
Now you can play with this and ask, “well what if I got a better return and got 9%?”
Well that's better, but now I'm getting into more risk.
Let's say I'm comfortable with 7%, so then I have to ask, “how much do I need to save to get my red line back on the green line?”
Is it $10,000 a year? Is it $20,000 a year?
Well, looking at those calculations, it’s around $15,000 a year to drop off just barely before age 100.
As you can see, you can play with these parameters to figure out your balance, and this gives you an assessment of what your future will look like.
If you want more help to figure out your model and get in balance, we have designed BetterWealth Unlimited to be the ultimate solution for getting in balance and beyond.
But as for now, I hope this helps, and I hope this assessment becomes the pillar for helping you take back control of your finances!
To Better Wealth,