Tuesday, 14 May 2013

Am I confident of hitting my $90 million net worth goal?

Yesterday on twitter, one of the readers of this blog asked me whether I was confident of achieving my $90 million net worth target even though I was at the early stages of my journey.  I was going to send a quick response with something along the lines of 'of course...but small steps just yet' but then I really started to think about the question.

I went back to my first post on this blog which outlined my goal which I have quoted below:
I started off with the number I'd be willing to retire with today and never work again (as I'm in my mid 20s it has to be pretty high) and I settled on $50 million.  I also set a super aggressive target to achieve this in 20 years - inflation adjusted (3% p.a.) that comes to $90m which is my target.
Other than some sloppy grammar, I now realise that the one big thing that was missing in this goal was the how.  That is how do I get to a $90 million net worth and this is the question that had me stumped when thinking of a reply on twitter.

If my goal was a net worth of $15 million I think I could confidently reach it

I did some very basic maths in an excel spreadsheet and did the following calculations and made the following (reasonably conservative) assumptions

  1. I took my wage today (and included my bonus)
    • I won't outline it here but if you look at my expenditure tracker you can see what my take home wage is today.  
  2. I assumed my wage increased in line with inflation assumed to be (3% p.a.)
  3. I assumed that I could save 50% of my wage
  4. I assumed I could (over the long run) get a return of 6% on my net worth
  5. I then calculated what my net worth would be in June 2051 (my target year my revised target year...my original goal of 20 years was too aggressive so I increased this to 40 years) and this came out to ~$16 million
Obviously there are many simplifying assumptions in there (the most aggressive one being my ability to save 50% of my take home wage) and this does not take into account big life expenses such as having children, getting married and all those other things we hope we will do in our lives.  However I do not think I am being overly aggressive in my calculations.

If anyone would like me to upload the spreadsheet or send it through to them post a comment and I'll set up a basic spreadsheet so you can do it for yourself.

The problem is how do I get from $15 million to $90 million

The best thing about
the spreadsheet I set up above is that I can play with any (or all) of the assumptions to see what I would need to do to get to my $90 million net worth target.  Some of the things I could do would be to:
  • Seek out better returns on my investments
    • A 12.5% return on my investments would get me to the magical $90 million number 
    • However over the long run I truly believe that this is an impossible number to get to without going seriously far up the risk curve
    • You are never going to get that sort of number from fixed interests and shares on average offer much lower rates of return
    • You may get this number in bull periods but in normal times it is very hard to achieve
  • I can up my savings rate
    • If I increased my savings rate to 70% I would need an 11.5% return on my investments to get to the $90 million target
    • There are two problems with this
      • Firstly anyone that has read my expenditure tracker knows that I find it notoriously hard to keep my personal expenditure under control and a 70% savings rate is really high
      • Secondly I really don't think 11.5% is achievable 
  • I can look for more sources of income
    • This can be from working a second job or starting a side business
    • If I assume that I save 50% of my first job's income and can put 100% of any other income I bring in towards my net worth goal I would need
      • $350,000 extra p.a. at a return of 6% p.a.
      • $275,000 extra p.a. at a return of 7% p.a.
      • $200,000 extra p.a. at a return of 8% p.a.
      • $140,000 extra p.a. at a return of 9% p.a.
    • That is a significant amount of extra cash to earn and you would need to have a very successful side business to bring this in.
Getting to the $90 million net worth target will be a challenge

Going through this exercise really emphasised to me how challenging getting to my target would be.  It has also refocused me on starting my own business and getting some income in which does not come from my primary place of employment.

It was also a useful exercise in working quantifying how much I need to get in order to get there.  So all in all, my answer to the original question is - yes I think I can get there but it is going to be a lot of work and the biggest piece of the equation, my business, has not yet fallen into place.

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  1. Great response to my tweet mate.
    I think you're right, the most important part is the "how".

    I'm going through a similar journey and have realised that the most important part of the wealth journey is having a roadmap of how you're going to get there.

    The second part is being disciplined enough to follow the steps.

    Would love to see your spreadsheet!

  2. I'd love to see the spreadsheet too, you've hit the nail on the head streetikons there's quite a few paths and while I'm not aiming as lofty as 90 million I too would love to be "financially free" and not have to rely on a 9 - 5 job if I chose not to.
    My idea is that it is important (although tempting) not to get sucked into "keeping up with the jones'" and buying the latest sports car, mansion or designer suit every time it comes out. Sure while these are nice, it's not really about how much you earn but how much you spend/save.

    Have you thought about margin lending as a way to leverage your portfolio? Am highly considering this myself & moving into an etf or low fee managed fund, shares for me require too much monitoring.

  3. Hi JM,

    If you send me your email address I'll send you the spreadhseet. Email me at 90millionblogger(at)gmail.com

    The target of $90 million was always meant to be one of those crazy lofty goals that causes you to think about different ways to get ahead rather than an actual hard goal. I guess, like you, that financial freedom is the end goal (though a sports car would not go astray ;) )

    Also I've thought about margin lending several times. I already have leverage in my investment portfolio though through my investment property loan. The lending rates are much lower and I'm never going to be subject to a margin call if the value of my shares fall in the short term.

  4. Update: I just realised that my original goal was to achieve my 90m target by 2031. Whilst that would be nice it is not particularly realistic so I have added on another 20 years to make it 2051 (retirement age)