Financial Impact with Holly Morphew, AFC® Financial Coach

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How to Know if You are on Track to Retire

Simple Steps to Financial Independence: Know When To Retire

Four Financial Benchmarks to Build Wealth and Reach Financial Independence

When I was just starting out in the real world and I got my very first job, I knew that the end goal of my paychecks was to retire. Since money is a tool that does what we tell it to do, I wanted to find out exactly how much I needed to save each month in order to stop working one day. While there are countless methods to determine this, for simplicity I like to use Fidelity’s round numbers.

How much to save each month in order to retire

Fidelity provides the following targets for what is considered “on track” to retire at age 67. 

You want to plan to have saved at least one time your annual salary by age 30, 3x your annual salary by 40, 6x by 50, 8x by 60, and 10x by 67. (source). 

For example, if you are thirty years old and you make $100,000/year, you should have saved $100,000 in your retirement, savings, and investment accounts combined. If you are fifty years old and you earn $100,000, you should have $600,000 saved, etc.

If you are behind

Now, if you are behind with these numbers, don’t worry! There are infinite paths to wealth. What’s important is that you choose the one that is right for you and get on it!

What’s also important is that you measure wealth from all perspectives. There are four additional financial benchmarks that you should consider in order to build wealth and reach financial independence.

Four Financial Benchmarks to Measure Wealth and Reach Financial Independence

Benchmark #1: Financial Independence

Achieving financial independence is the real American Dream. This is the point when you can stop working and the money you have saved, or that you are earning, can support you for the rest of your life. 

Many people call this retirement, but you can achieve Financial Independence (FI) well before age 65. In addition, saving in traditional retirement accounts is only one of many ways to create the residual income you’ll need to stop working.

There are two ways to measure Financial Independence. 

Calculate your Financial Independence (FI) number

The first way to measure financial independence is by the amount you have saved. What I love about this method is that it gives you an actual, numerical goal to aim for. This number is your Financial Independence (FI) number. It is the actual dollar amount you need to accumulate in order to stop working. 

If you want to save your way the FI, in other words, accumulate enough money for it to support your lifestyle, then your financial independence number equals twenty-five times your annual expenses. Add up what you spend in one calendar year and multiply it by twenty-five. Your FI number = 25 x annual expenses 

Based on historical data of returns in the market from 1926-1976, there is a theory that says you can safely withdraw 4% of your portfolio value each year in retirement without the risk of running out of money. Therefore, when you have saved 25 times your annual expenses in liquid assets (money saved), you are financially independent.

Monthly passive income > monthly expenses

The second way to measure Financial Independence is simple addition and subtraction. You can stop working when the income you receive from sources other than a job can pay for your expenses. In other words, when your earnings from passive income sources exceed your expenses, you are financially independent. Financial Independence = monthly passive income > monthly expenses

Let’s consider what Financial Independence looks like for someone who makes $100,000/year and spends $60,000 year. Financial independence could look like one of two things:

  1. $1.5mm saved ($60,000×25)
  2. Annual income of $60,001 from sources other than a job. This income could come from any combination of earnings from retirement and investment accounts, life insurance, real estate, annuities, MLM, subscriptions, affiliate marketing, royalties, memberships, and more. 

You can see that his current income doesn’t matter. What matters is how much he spends and how much he earns from sources other than his job, like his retirement and investment accounts, among the other residual incomes sources listed above. 

When your expenses are less that what you earn from passive sources you are financially independent!

Benchmark #2: Debt to Income Ratio

Your debt to income ratio is a way to measure the health of your personal finances. A high debt to income ratio means that you have a lot of loans compared to income. It’s likely that you are finding it tough to pay bills. 

A low debt to income ratio means that you have little debt. On paper, you have very few payment obligations each month. In reality this may not be true. On paper simply refers to debt obligations that are reported to the credit bureaus such as loans and child support. Every-day expenses are not reported. 

Your monthly minimum debt payments divided by your gross monthly income is your debt to income ratio. (D/I)

The lower your D/I ratio, the more financially healthy you are. The recommended D/I ratio is 36%, including mortgage or rent. The recommended D/I ratio not including mortgage or rent, is 20%. 

Not only is D/I an important indicator of financial health, lenders also use the debt to income ratio as a factor in loan approval. Any time you are planning to apply for a loan, be sure to reduce your debt to the recommended ratios.

Benchmark #3: Balance Sheet

A balance sheet, or net-worth statement, describes an individual’s or family’s financial condition on a specified date (often January 1) by showing assets, liabilities, and net worth. It provides a current status report and includes information on what you own, what you owe, and what the net result would be if you paid off all your debts. 

A balance sheet answers the question “Where are you financially right now?” It consists of three parts: assets, or what you own, liabilities, or what you owe, and your net worth, or what is left over when you subtract liabilities from assets. 

To become wealthy, you must be “net-worth positive,” or have more assets than liabilities. Ideally, your net worth will increase over time.

Benchmark #4: Cash Flow

A cash-flow statement, or income and expense statement, lists and summarizes income and expense transactions that have taken place over a specified period of time, such as a month or year. It tells you where your money came from and where it went. It answers the question “Where did your money go?” To build wealth, you need positive cash flow, or more income than expenses, on a regular basis.

Bottom line, if you want to build wealth there are some things you can do to ensure you reach financial independence with plenty of money in the bank. Create positive cash flow, save, minimize debt, and build positive net worth. 

author avatar
Holly Morphew AFC®, Award–winning financial coach, author, global speaker, and multi-generational entrepreneur
Holly’s own journey to eliminating $67k in debt in her twenties, reaching financial independence in her thirties, and creating 11 streams of income are what inspire her to help others live their wealthy life.
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