• 02:27:25 am on August 3, 2008 | 8

    Yesterday, one of our Final 15 asked for help with their spreadsheet – using their draft as a hypothetical, we made a couple of assumptions and came up with the following:

    Now 1 Year 5 Years 10 Years 20 Years
    Annual Income:
    From Job/s $ 98,000 $ $ 122,500 ???????
    From business/es $ 4,000 $ $ 5,000
    House/s:
    Purchase Value $ 250,000 $750,000
    Car/s: $ 4,500
    Purchase Value $ 2,000 $30,000
    Other Major Purchases:
    Travel:
    Peru $ 5,000 $ 6,250 $ 7,500
    Mexico $ 3,500 $ 4,375 $ 5,250
    Argentina $ 2,500 $ 3,125 $ 3,750
    Europe $ 10,000 $ 12,500 $ 15,000
    Living Expenses:
    Total (or list here) $ 44,000 $ 55,000 $ 66,000 $ 88,000

    Here we have somebody who apparently needs to spend $88k a year living (in 2018 dollars), and let’s just assume that by then their two cars are fully paid off, but essentially worthless, but their house still has $100k mortgage left on it.

    They like to travel, and we can assume from the numbers provided that their current travel schedule is expected to continue ad infinitum.

    Since, we expect that they will pay off their mortgage (we’ll see where from later) at retirement (who wants to carry a loan in retirement?) I am estimating that they will save about $8k a year in ‘living expenses’.

    Now, we can use this information to complete their +20 years required living expenses (the ???? in the spreadsheet above):

    $80k Living expenses + $42k Travel = $122,000 Annual Retirement Living Expenses.

    [AJC: if you expect to receive a pension/social security/part-time income/stipend/etc. and are guaranteed that for life, then you can simply subtract the annual value from the above number before proceeding. Alternatively, you can continue the s/sheet along and calc these numbers twice: once with the pension, then again – suitably inflated  for the future year – without … essentially giving you two Numbers. You will quickly see that you were better off simply ignoring the pension – unless major – in the first place!]

    MULTIPLY by the Rule of 20 = $2,440,000

    ADD $750K Purchase price of New House + $30k Cost of New Cars

    SUBTRACT $375k Future Value of Current House – $100k Remaining Mortgage

    [AJC: Remember the Inflation Adjustment Factors from this post?]

    So, this Finalist’s Number is a lazy $2,945,000 …nice house, a bit of travel, nothing too extravagant in their living expenses.

    No ‘saving their way to wealth’ …

    Which brings us to their rental properties: I have taken these out, because that is (part of) where the $2.945 Million is probably going to come from!

    The whole purpose of the 7 Millionaires … In Training! ‘grand experiment’ is to help this Finalist – and everybody else in the 7m7y Community (active participant or not) – to get to their Number.

    Understanding the Number for you is just the first (but, most critical) step off the precipice …

    … be warned, once you take that first little step there is no turning back 🙂

     

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