I’ve got a confession for all of you: I’m getting impatient! It was approximately 10 years ago that I first learned what a 401k was (I had never even heard of one before) and began my first steps towards saving for retirement.
Like many of you, I knew the path to create wealth would be lined with hard work, lots of saving, and choosing the right investments. I took the conventional financial advice and began with a modest 10% savings rate. It wasn’t until the last few years that I’ve tried to accelerate my results by bumping my savings rate to extremely high amounts.
So is it any wonder that when I look at my 401k balance and see how long I have to go that I feel I’m playing a rigged game? Sure if I stay the course I might have a decent nest egg in 20 to 30 years? But what about NOW? What if I’d like to experience financial freedom sooner rather than later? Isn’t there a better way to build your wealth beyond simply saving for the next +30 years?
Questioning Our Ability to Create Wealth:
Believe me – this post is NOT meant to discourage you from saving your money. In no way shape or form! Saving for retirement is still VERY much an extremely important part of my money design for one day achieving financial freedom.
Nor am I slighting the fact that it takes time to become wealthy. I still believe wealth is something best earned. Most of us will never have the metaphorical “keys to the kingdom” simply handed over to us. To create wealth will take a lot of hard work, risk management, and creativity.
That last word … creativity …
As we often do here on My Money Design, I have to stop and ask – is there a better and more creative way to grow my fortune? Am I really getting the maximum return for all my efforts?
Exposing the Flaws of the System:
Like I said, this is in no way meant to put down savers. But at the same time, let’s examine the system and see if you can identify with where I’m coming from.
Conventional financial wisdom says to save about 10% of your gross annual income. You can find this mantra (and other variations) repeated over and over again in lots of financial literature.
Let me ask: Will this help you to create enough wealth to achieve financial freedom?
Last week in my post What is Financial Freedom, I asked the readers how they would define financial freedom. The majority of the comments answered with things like “being able to quit my job” or “having enough money to cover my expenses”. All of these statements are true.
So using the conventional route, let’s do the math and figure out how long it will take to save for retirement. Here are our variables:
• Whatever our gross income is now, we’ll target needing 80% of it for retirement.
• To fund our retirement income, we’ll assume that we’re going to draw 4% out of our nest egg each year. That means we’ll need our nest egg to be 20 times the amount of our retirement income (1 / 0.04 = 20).
• To eliminate variability, we’ll assume that all our investments are in a stock market index fund producing an annualized average return of 8% per year.
So let’s say I make $50,000 per year. If we use that conventional 10% savings rate, then how long is it going to take me to create the wealth I need to retire and experience financial freedom?
Wow, 37 years? That’s pretty lame. If I start a job at age 24, then I’ve got to wait until age 61 to finally be rich …
Does my situation change if I’m a higher income earner and made $100,000 per year? Now how long will it take?
… Wait, it’s the same thing? Why is that?
Consider that your standard of living is naturally dependent upon your income level. We all want to enjoy the fruits of our labor and our expenses tend to gravitate towards whatever the number may be – meaning that you’ll have to save that much more for your nest egg.
Can’t I Just Save More of My Paycheck?
You might just think that the way to create wealth quicker would be to save more of your paycheck, right?
You’re correct. That helps. But guess what – you’re still going to be working for THE MAN for a very long time. Check out these examples:
Even the ultra popular bloggers who advocate saving EXTREME levels of income (50% and beyond) are still not cutting it. The path to creating wealth still takes almost 20 years!
In fact, just for fun, we can even show that even if we save 100% of our income, it would still take 12.4 years to reach our goal!
So What Options Do We Have for Building Our Wealth?
What if I put my money into riskier but potentially higher return investments? You could try this out and might even have a few good years here and there.
But dozens of studies are out there to show that over the long-term you can’t beat the average annualized return of a stock market index fund. So in reality this isn’t really a very good option.
What if I just decide I’m going live ULTRA frugally? Going back to the first chart, if I make $50,000, what if I drop my Target Retirement Income to $20,000? Then I wouldn’t need to save so much for retirement!
Again that’s true. But why sell yourself short? Who really wants to live on LESS money than they have now? I don’t know about you, but my mental picture of financial freedom is worry-free and full of possibilities. Not penny-pinching and scrapping to get by. Why not set your sights higher?
So while this may work for some people, again, this option is again out for me.
Utilizing Our Entrepreneurial Creativity:
That brings us to the only option we have left: To conclude that the only real way to create wealth is to start our own business or at a minimum leverage our entrepreneurial tendencies through some type of side-income.
Think about all the truly wealthy people you know or have read about it, and you will find this to be a universal trend among them.
This blog has been a tremendous amount of inspiration in this area. It took me a year, but the income it generates now is worth the effort. And the best part – I keep it separate from our regular income so that it can go towards other investment endeavors.
Of course this isn’t enough substance to quit my job or do anything rash. But I can quickly see how the only logical alternative to truly create wealth is to go into business for yourself. Creating income that is sustainable and beyond the scope of your employer is the only way to accomplish this in the shortest amount of time possible.
Over the next year, this is a topic that I’d really explore in further detail. Like I said – there are no plans to quit my job or anything like that. But what about gaining more Internet properties? What about holding more dividend stocks? What about making the leap of faith on a rental property? The MMD portfolio is only a seedling with room to sprout branches that reach high in the sky. I’m looking to 2013 and beyond with great optimism!
Readers – What do you think about the conventional system to create wealth? Is taking 37 years to build a nest egg really the best method, or have you found a better way?
Image courtesy of Teerapun / FreeDigitalPhotos.net