If you're minimizing your debt, putting money away for retirement and generally bringing in more than you spend each month, you're probably doing all right financially.
But if you want to reach larger financial goals, such as retiring early or becoming a millionaire, you need to know more, like how quickly you're able to build wealth. On their blog Money Sloths, Mike and Sophie, who use only their first names online and save up to 80 percent of their annual income, break down how to calculate your personal savings rate. That's "the amount of money, expressed as a percentage or ratio, that a person deducts from his disposable personal income to set aside as a nest egg or for retirement," according to Investopedia.
The formula is simple. "It's just your income, less your spending, divided by your income. Multiply by 100," the Money Sloths write.
They break it down into four steps:
When calculating your saving rate, it's important to note that it should include your income after taxes, because you'll over-estimate your savings otherwise. Besides, "it's much easier to look at everything from an after-tax basis right now since your future hypothetical self will face the uncertainty of different tax rates — whether it's because you live in a different state or maybe you're retired and now sit in a lower tax bracket," say Mike and Sophie.
You should also include any employer 401(k) matches in this number since those will go toward your eventual retirement as well.
On the spending side, be sure to include medical expenses such as health insurance, if those don't come straight out of your paycheck, as well as property taxes and interest on any outstanding debt, including your mortgage. Once you figure out your savings rate, you can get a sense of how close you are to financial independence. This varies according to your personal goals but experts typically recommend having $1 million set aside to retire in your 60s. However, if you want to kick back earlier, many early retirees rely on the "four percent rule." The idea behind that is, if you can safely withdraw four percent a year from your retirement savings portfolio, you have enough in the bank to quit your job. Flipping the four percent rule can help you figure out how big your portfolio needs to be, or what's called your "magic number." Simply divide your annual spending by 0.04 (or multiple it by 25) to get your target.
For example, financial blogger The Money Wizard — a Minneapolis millennial who goes by the pen name Sean and is on track to retire by age 37 — plans to live off of about $30,000 per year. Using the four percent rule, he estimates he'll need $750,000 ($30,000 / 0.04) in the bank to retire comfortably.
Although the four percent rule will give you a good idea of how close you are to being able to fund your retirement in full, it's not foolproof. Some experts recommend using a lower withdrawal rate to be safe. Source: CNBC
0 Comments
Leave a Reply. |
Corwin GroupOfficial Corwin Group Archives
July 2017
CategoriesBy submitting this form, you provide consent for Corwin Group to email you occasionally with industry news and promotions. You may unsubscribe from these emails at any time.Testimonials & Disclaimer
Important Disclosure:
By visiting this site, you agree to be bound by CorwinGroup’s Terms of Use and Privacy Policy. CorwinGroup.com is intended for accredited investors and otherwise qualified investors who understand and accept the risk associated with private investments. Investing in private investments on CorwinGroup involves risks, including, but not limited to market and industry risks, risks related to a specific property, currency fluctuation risk and liquidity constraints. Investments are not bank deposits and are not guaranteed. There is a potential for loss of part or ALL of the investment capital. CorwinGroup does not endorse any of the opportunities that appear on the site, nor does it make any recommendations regarding the appropriateness of particular opportunities for any investor. No correspondence or information provided on CorwinGroup.com or by any representative of CorwinGroup should be construed as a recommendation of a security. Each investor is advised to conduct his/her own due diligence as CorwinGroup does not provide any investment advice, business advice, or tax or legal advice. CorwinGroup is not registered under the Securities & Futures Act or the Financial Advisor’s Act. Neither the Securities and Exchange Commission in the country nor any federal or state securities commission or any other regulatory authority has recommended or approved of the investment or the accuracy or inaccuracy of any of the information or materials provided by or through the website. Please read Corwin’s Terms of Use for more detailed terms and conditions to which users of CorwinGroup are subject. |