Wealth does not = happiness, but at some point one obtains enough money that unless it’s frivolously spent, there are many doors open for the remainder of her life. Perhaps she loves her current career and decides too stay in it today and long past retirement. Or, she is set free of the confines of taking jobs that pay well and instead tries sometimes entirely new, without concern that the investment in education may not “pay off.” Or, she decides to create art or travel the world or just sit and study the sunset over the same ocean every day while doing half-assed yoga on a beach.
In reality, my goal in life is to generate enough wealth to feel this sense of freedom. Yes, that likely means I would be in the 1%, and it is not necessary to be happy at all. Most people will never achieve anywhere close to this. I don’t know what the number is, exactly, but it’s certainly more than I’ll ever be able to obtain, especially given my proclivity for purchasing too many shoes. Yet, it’s what keeps me going – that hope that one day I’ll not only be able to afford a house, but also to decorate it, and to invite friends over for reasonably-lavish dinner parties featuring fine wines and whiskies that my husband and I have prepared in our gourmet kitchen.
When I look at my net worth, now a touch over $500k, I feel both thrilled and disheartened. I realize that most people in the US retire with a networth much lower than that – that most people in the world would be ecstatic to have this amount in savings and stocks. But, then I also spend too much time exploring housing options on Zillow.com and see that 2 bedroom, 1 bath houses in the area are now selling for $1.3M or more, and my dream of purchasing a 3 bedroom, 2 bath home with a private backyard goes poof in the night. I look around at my decent 1 bedroom apartment with its sterile white walls — my bicycle parked so elegantly in the living room filled with a Craiglisted, 10-year-old couch, broken IKEA coffee table, and two Target bookshelves that are about to crumble, and I know even at this stage of my mid-30s life I can do better.
I wish I was at a point where spending $100k on IVF wouldn’t put a dent in my savings, or that I felt I could have children and provide for them a life that is comparable to my own middle class upbringing in the suburbs of an east coast city, where housing is much more affordable. I keep wondering what that number is… even as I obtain jobs which provide greater potential for income growth, there is a giant gap between my life today and this concept of wealth I have in my head, that I haven’t fully quantified yet.
What is it?
- $2M per adult in retirement (so, $4M for a married couple)
- Ownership of 4br, 3ba home outright (additional $2M – or $1.5M for 3br)
- 50 years of $50k / year for house fixing as needed, taxes, other fees ($2.5M)
- 50 years of $100k / year for eating/travel/shopping ($5M)
- College tuition for 2-3 kids ($500k)
This is, of course, well exaggerating what is needed for financial freedom, but to put a number on the amount I’d want in the bank account to feel financially free (for family), that would be….
Now, even if I get more realistic here and half that…
- $1.5M per adult in retirement ($3M)
- $1.5M house (can’t reduce this / basic house cost here)
- 50 years of $20k / year for house fixes (~$1M)
- $50k / year of food and fun ($2.5M)
- College Tuition (assuming some scholarships) – $200k
$7,000,000 is the minimum amount of wealth for financial freedom if we continue to live in this area.
Is $7M obtainable?
Maybe. But only via compound interest, and with that one wouldn’t know if she met her goals until she was in her 80s… plenty time past when purchasing a home would make sense. So she must have blind faith in the stock market OR figure out a way to expedite the growth of her portfolio. In short, how fast can I get to $7M from $500k?
My goal at this point is to have $1M by the time I turn 40. That will only be obtainable if I maintain my current job for the next four years, perform extremely well (no pressure), and we keep our cost of living low for this time.
Contributing $50k per year for the next 6 years, if my portfolio grows at an average of 5% per year, I will have a net worth of $1M by 40. This requires maintaining my job and living in a 1 bedroom apartment for the next six years, living rather frugally, all during the time in my life when – if I’m going to have kids – I will be having children (hopefully, two, within the next six years.)
If I don’t end up having children, the numbers change significantly – but I definitely want kids and I definitely want to pay for infertility treatments as needed to have them. Which, ultimately means that I won’t likely get to $1M by 40. But I’ll be close, as long as I keep this job for 6 years (or keep this job for 4 and obtain a similar one with equal or greater salary for the remaining 2).
At that point, if I have $1M by 40, I will have 20-ish more years of prime earning, if I work full time for those 20 years. BUT I am convinced that I want to go back to school at 40 to change careers to a lower-paid job such as counseling, not to maintain my position in a role that I’m fighting day and night to pretend to be good at. So, the $1M mark is my first taste of freedom…
This is truly a recognizable moment of freedom because if I invest $1M for 20 years at 5% rate of return, I will have $2.6M by 60, and $3.38M by 65. My husband doesn’t need as much as I do in retirement, so The $3.38M by 65 is basically my half of the $7M goal. What I would be focused on then, at 40, after the $1M is hit, is obtaining a position that I can maintain for 25 years that I enjoy which enables paying annual costs, so we don’t touch the $1M in the bank.
I’d like to own a 3br, 2ba home by the time my first child is 4. At this point, I should know if I’m having 2 children or just one (or none at all.) So – some of my net worth will have to be put into the down payment of a house. I go back and forth on buying a house but I think at this point I’m diversified enough in stocks that I can afford to own real estate, even if its growth does not keep up with the stock market (and I have the liquidity in stocks to pay for mortgage should we have any bad years in the job market.) So, I’d need $300,000 for a downpayment on a $1.5M starter home, in ~5 years.
But – I need to invest for the next 5 years to hit the $1M goal… and then in 5 years, at age 39, I’d have to take $300M out of my stocks (well $366M with 20% tax) for the downpayment. My husband may be able to contribute to this a bit – probably $100k of it in 5 years, but for simplicity (and explaining to husband) we both need to provide $150k in 5 years for our down payment. That’s a more reasonable $180k stock sale in 5 years, leaving $748k to grow in stocks…
Annually, for the $1.5M house, costs would be…
- $90k mortgage (approx)
- $20k taxes (approx)
- $1k insurance
- $15k maintenance
- = $126k / year ($63k per person per year for 30 years …
$5.25k / month or $10.5k per month for 30 years)
- Which means, for our $1.5M house, all in 30 years later, it will cost $4.08M. (Is my math right?)
Ok, so, if the numbers above are right, we cannot afford a $1.5M house in 5 years. Which, basically means we cannot afford a house, unless we can put down a much larger down payment.
In 5 years, unless there’s a housing bubble burst, I doubt there will be any real estate around here that’s less than $1.5M. My take home income is $7,000 per month and my husband’s will be about $3,000…. so, even if I keep my job and he keeps his, we can’t pay $10.5k/month when we’re only taking home $10k per month.
Really, the only potential route to wealth for us is to rent. So, maybe I’ll never own a house. Even if that’s one of our financial goals. But, it’s just so much cheaper to rent an apartment than to own a house.
Maybe, one day when we can afford to put down a 50% down payment buying a house will be worth it. But by then, a basic home will cost $2M… so… I don’t think we’ll ever have enough money to own a home.
This is why I feel so hopeless… even if we have so much more than so many people right now… I just don’t know how to have the life I want, or anything close to it. I don’t need a home today, but I want to feel like I’m making progress towards not living in a 1 bedroom apartment (and a condo won’t help much, if we were to buy one since it’s slightly more affordable, because we’d still have shared walls and annoying neighbors… might as well just rent!)
I am hoping my math is wrong…