After publishing my latest Net Worth Targets By Age post, I received some pushback from people who felt it was more appropriate to use a multiple of spending as opposed to a multiple of income to calculate a net worth target. The argument is that most people spend less than they earn, therefore taking a multiple of spending creates an excessive net worth target. Fair enough. But don’t you want a challenge?
What if your spending goes up drastically due to unforeseen medical expenses? What if you have to start supporting more people? What if your investments lose money as we forget they sometimes do? What if you get laid off with no severance? What if you can’t sell your house to pay for living expenses because the market dried up? Because there is no rewind button in life, I think it’s better to be more conservative with your financial calculations.
EXTREME NET WORTH TARGETS
If you agree shooting for a net worth equal to 20X your income is sufficient to declare financial independence, let’s talk about what it takes for someone to get to 50X. Achieving a net worth equal to 50X your average annual gross income is secretly my true net worth target. I’ll explain why below.
Take a look at the chart below. To get a better view, mobile phone users please hold your phone horizontally. Sorry for the small print. You can also pinch and zoom.
For a “normal” extreme financial freedom seeker, I assume s/he can achieve a 50X multiple by the age of 50. Call it 50 for 50 if you will to make remembering the goal easier. The net worth goals are therefore $2.5M, $5M, $7.5M, $10M, $15M and $25M by 50 for those who earn $50K, $100K, $150K, $200K, $300K, and $500K respectively. Obviously, the 50X multiple target is harder to achieve the less you make due to basic expenses.
50 is a very important age target because the median life expectancy is only about 80-85. You might feel very healthy at 75, but what I’ve found with more and more people who’ve passed away recently is that you can look good one day and be dead within a couple years. Once we get ill, it’s very shocking to see how quickly our bodies deteriorate.
Here’s a chart from the American Association For Long Term Care Insurance on the average stay/need for long-term care patients. As you can see, most patients die in under three years once they need care. Therefore, the best hedge to an early death is to not only get life insurance, but to retire by a certain age and not a certain financial figure. If you can’t get to 50X by 50, then so be it.
Average length of stay for long term care patients
WHAT IT TAKES TO GET TO 50X
1) Extreme frugality. Living way below your means is a must in order to save 50% or more of your after tax income after maxing out your 401k or IRA. While most of my peers were buying bigger houses and fancier cars in their late-30s, I decided to go the other way by downsizing to a smaller house and buying a Honda Fit after my 14-year-old vehicle couldn’t pass the California smog test. I’ve worn the same clothes for the past 10 years and have shoes from before 2005.
2) Extreme hustle. Not only do you have to maximize your career earnings, you must also maximize your side income. Take none of your time and energy for granted. I love the story about a reader who makes $100,000+ a year and still works at his friend’s restaurant every week for an extra $200 – $300. It’s awesome to hear from an Uber driver how he drives for four hours in the morning before attending classes at SF State. Over the years, this hustling work ethic will provide huge returns. People who change from consumers to producers are those who create much greater wealth for themselves.
3) Extreme sacrifice. Sleeping two hours less a day than you normally do will yield 700+ hours more of production a year. You may need to delay courtship or start a family. You may have to live in your basement while you rent out the rest of your house. Toro sashimi, lobster, and dry-aged beef will need to be replaced by mac and cheese. Tap water will be your main source of hydration. The thrift store is your Nordstrom’s. The funny thing is, what’s considered sacrifice in America is considered routine to the average Joe in most other countries.
4) Lucky breaks. Give yourself enough chances to have as many lucky breaks as possible. If you work hard to get the best grades, your luck getting into a good college or getting a good job increases. If you get in an hour earlier and work an hour later than your peers for a year, your luck getting a raise and a promotion increases. If you spend an hour before work each morning getting smart about investing, your chances of finding a hidden gem increases. If you strategically decide to get to know everybody at a bar frequented by wealthier people, your luck dating and eventually marrying a wealthy person increases. If you decide to start a website one day and write nonstop for three years in a row, you might be lucky enough to negotiate a severance package and be free to work for yourself.
5) Investment returns. There is no way anybody at any income level who just aggressively saves can achieve a 50X target multiple without investment returns. For example, even if a $50,000 income earner saved 100% of her gross income for 28 years, she would still only end up with $1,400,000. The only way a $50,000 gross income earner can get to $2,500,000 in 28 years is by contributing $29,000 a year and earning 7% a year. Can it be done? Of course it can if you are extreme! $18,000 of the $29,000 contribution is pre-tax anyway into a 401k. Good thing 7% is within the average historical total return of the S&P 500.
I strongly encourage everybody punch their numbers into a retirement calculator and play around with their expected expenses and expected returns to see what their finances will look like. It’s a fun exercise that I do at least once a year to keep myself on track.
WHY 50X IS THE EXTREME MULTIPLE
50X is the magical multiple for extreme financial freedom seekers because you want to match the risk-free rate of return of ~2%. For example, if you earn $100,000 on average and accumulate a $5,000,000 liquid net worth, you can dump the entire $5M into a 10-year US bond and earn $100,000 a year guaranteed and never have to worry about money again. Declining interest rates have forced us to create or own more income producing assets.
$5,000,000 is probably the most common extreme net worth target to shoot for because many people I know who are extreme hustlers make $100,000+ a year. The baseline extreme hustler makes the median household income of ~$50,000 and uses his/her extra time to earn double their income through side gigs or entrepreneurial endeavors. Nobody I know who wants to reach financial freedom early just sits around and watches TV after they come home from work. They are working on their entrepreneurial endeavors!
There are endless ways to make six figures a year at almost any age.
A BALANCED LIFE IS NOT REALISTIC
The only people I know who’ve achieved 50X without too much sacrifice are those who won the lottery, worked at a startup that became a huge success very quickly (Instagram, WhatsApp, Facebook), or who already came from wealthy families.
I know a lot of you will say or think things like, “there’s more to life than just money,” or “I’d rather enjoy my life now,” or “YOLO” etc. That’s totally fine. Only a small minority of people are extreme. Similarly, only a minority are entrepreneurs, multi-millionaires, or weirdo early retirees. Heck, probably only a minority of people read personal finance sites on a regular basis.
But what some of you may not realize is that after sacrificing for so long, sacrifice no longer feels like a sacrifice. It feels like normal everyday living because hedonic adaptation works both ways.
Based on my latest net worth, which I track using Personal Capital, I’m at a ~35X multiple of my average gross income over the past three years. It does help that I make less now on average than in the past. Given I plan to continue saving and investing 50% of my after-tax income, I believe I will get to a 50X multiple by age 50 in 11 years. After age 50, I plan to accelerate my giving before the government takes half of my assets away!
After reading this post, doesn’t having a net worth equal to 20X your average income seem so much more achievable? Even if you don’t achieve the goals, you’ll go much farther than if you had no goals. Here’s the original net worth target by age chart again for your review.
Shoot for a net worth equal to 20X your average income to be financially free
Readers, what do you think of the 50X multiple? Too extreme? Reasonably extreme? What is your current multiple? What do you think is the best target multiple to live a balanced life while striving to achieve and maintain financial freedom? BTW, I use a picture of Arnold to remind us there’s no way he could get that big and ripped without endless hours in the gym while also eating a super lean diet. Things just don’t happen without a lot of effort!