The Most Important Number to Know if You Want Financial Freedom!
We all want to be able to live a life on our own terms, to be able to wake up one morning and say, '“I am going to do what I want to do today…”
Getting to the point where you can wake up, go for that two hour morning hike, or go to the gym whenever you want to, eat breakfast at your favourite café or be on a plane to your dream holiday destination, it takes knowing a certain number.
That number comes down to some simple math really, it comes down to knowing your net worth and whether your net worth can pay for your dream lifestyle (or dream expenses).
What is your net worth? You hear about Jeff Bezos having a net worth of $140 billion USD, but what exactly does that mean? Does that mean that he has $140 Billion dollars sitting in a bank account? Imagine if he had $140 Billion in cash, how many rooms would that fill up in his mansion.
No, net worth comes down to whatever you have in assets minus liabilities, meaning that whatever you own which could potentially reap monetary benefit in the future minus the debts or mortgages that you have taken out to own those assets.
A great example would be a house, you may have spent $950,000 on a new home, let’s keep it a nice round figure and forget about stamp duty, conveyancing fees etc.
You have $250,000 in cash to pay for said home and you acquire a mortgage from a bank to pay out the difference, in this case $700,000.
The asset before you signed on the dotted line was $250,000 in cash, and you had no liabilities. Now that you own your home, you now have $950,000 in assets, but you have a liability of $700,000.
In both instances, you still have a net worth of $250,000. Scenario one, you had cash only, scenario two you minus the debt/mortgage from the asset, so $950,000 - $700,000 to make a net worth of $250,000.
Now you know your net worth, you can start to create a plan around building the net worth you will need to be able to gain enough financial certainty/independence to be able to live your best life, without worry of running out of money before you die.
That is all retirement is, isn’t it? The ability to pay for your living expenses, without concern of outliving the money you have. Unfortunately, not everyone who retires actually has enough net wealth to be able to do this. Which is why knowing your number is so important, what number do you ask?
The amount of net wealth (net worth) you will need to be able to live in retirement, which takes a bit of planning and understanding of the average lifespan in Australia (the endpoint).
You have to start at the end point, when it comes to attaining or achieving any goal, you need to know what the end will look like.
How do we know how or when we will die though? Well, you don’t and who would want to know anyhow, imagine if you were told that you would die tomorrow, and you had no way to change it?
But, we can make estimations based on statistics and averages, whereby the average Australian male life expectancy right now is just over 81 years old and females are just over 85 years old. [1]
Now you know that you will most likely live until the age of 81-85, we will add on 7 years, just in case, so that if you are a male, you will most likely live until age 88 and female to the age of 92 years old.
We have the end date, not to say that it is concrete, you may live to 100 years old, but based on the stats, that is unlikely, for now…
Once we have the end, we will need to ascertain your dream life’s living expenses, how much will it cost you each month to live the life of your dreams? $5,000 per month? $10,000 per month? Maybe $20,000?
Let’s say that you have a simpler lifestyle and don’t have big plans to travel the globe and party everyday, you simply enjoy the presence of family and friends, will go on a few trips a year and just want to be able to go out once or twice a month to a nice restaurant.
Lets assume for now that the holidays will cost you $10,000 per year, gifts for children/grandchildren may come to $3,000 per year, living expenses may come to $2,200 per month (assuming that you own your home and don’t rent.) Maybe you still have children in schooling, education costs may come to $10,000 per year. Entertainment spending comes to $300 per month.
Adding all of that up, your number that you need to know before you can truly find your net wealth number that you need to attain to retire is…
$53,000 per annum or $1,019.23 per week.
You would need to be earning that much from investments/drawing down from assets per week or annually to be able to survive and that does not include inflation that continues to increase living expenses each year.
Not to mention, things can go wrong, emergencies or accidents occur and that costs money too. Therefore, you may need extra cash to fall back on, just in case.
Continuing with the example above though, we won’t include any more emergency cash bucket or include inflation etc.
Assuming that you are 50 years old, how much would you need in net wealth to survive off of $53,000 per annum? (Not including your home, I mean, you need somewhere to live.)
Based on the life expectancy averages above, a male will live another 38 years and a female another 42 years.
A male would therefore need… $2,014,000!
And a female would need $2,226,000!!
Sounds like a hefty sum of cash, but of course, that is why you would invest and make your money work for you. By investing your money and making it work for you, most couples would actually only need $402,000 to drawdown $64,000 per year, according to the Super Consumers Australia. (Assuming retirement at age 65 though, not 50 years of age) [2] I will not go into investing today, but I will touch back on investing in some future blogs again.
Therefore, in our example above, the net wealth the individual would need to be able to live in their home and live the life they want, would just be the number above plus the $950,000 from your home. For the male, the net wealth would be $2, 964,000 and for the female, it would be $3,176,000 **Again, not taking into consideration increase/decrease in home value for simplicity sake.
Now you know the number you need, you can track how far off or how close you are to attaining the goal through your net wealth.
A great way to do this is to use the money smart net worth calculator, it is a simple and easy way to calculate your net worth once a year to see how you are tracking on your way to attaining the number you need to live your best life!
Just click on the link to take you to the site - https://moneysmart.gov.au/managing-debt/net-worth-calculator [3]
By calculating your net worth once a year, you will be able to keep track of how you are doing, and by doing that, you can change behaviours to keep you on track.
As long as that net worth is increasing each year, you are on track to achieving that retirement goal and taking back control of your life fully.
Until next time,
Take Back Control
**All expenses are examples only, and do not constitute a real life scenario, so please do your own due diligence and work out your own living expenses and net wealth. Or speak to a trusted professional advisor who can help you do that as well.
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[1] - https://www.abs.gov.au/media-centre/media-releases/life-expectancy-hits-new-high
[2] - https://www.superconsumers.com.au/retirement-targets
[3] - https://moneysmart.gov.au/managing-debt/net-worth-calculator
