Now that you’ve decided to become wealthy, you must ask yourself: what do I consider wealthy? Your financial Enough is a personal search for balance between income and spending. Early in life, your spending will include spending to live this month, and saving money to spend later in your life. During retirement, your only spending includes your living costs, which you will pay for with the money you saved earlier in life.
Your monthly expenses in the here and now that you will need to add up are housing, groceries, dining out, insurances, utilities, subscriptions, transportation, childcare, travel, health care, pet care, hobbies and probably some more. You can be meticulous about your expense budget, or roughly take the biggest expenses and add a reasonable ‘Other’ category to get a solid estimate.
With your monthly spending known, we can calculate the total sum of money you need in investments to live off indefinitely. The goal here is to find an amount that will grow yearly with the exact amount that you spend each year. At the end of the year, you end up with the same amount of money, but you’re now a year older. If you keep doing this until you die, you’ve succeeded financially.
The expected interest rate varies with experts and users, usually between 3-6%. Let’s take 4% as an example (also called the 4% rule). As your investment grows yearly with 4%, this is the amount of money you can safely take out of your investments and use for your living costs. As the 4% amounts to your yearly expenses, the 100% that you need to invest amounts to 25 times your yearly expenses. If you spend €50.000 a year, you will need 25 × €50.000 = €1.250.000 in investments. This can then grow by 4% or €50.000 per year, which you can then spend and end up with the same €1.250.000.
With the end goal in sight, we can work backwards to calculate our monthly deposit to our retirement savings. There are several compound interest calculators available that help you out determining your savings rate. Factors you include in the calculation are the final amount of money needed, your starting amount of money (which can be €0), the projected annual interest rate and the amount of years remaining until your retirement.
The 4% rule has been applied to your spending only (or maybe that of your family’s), but doesn’t take into account any money you might want to leave to your children, other inheritors or good causes. You do have the investments left over from which you paid your expenses, which might be sufficient as an inheritance. Any surplus money has to be gathered separately.
The inheritance relies on you dying before any heirs will spend their part, but chances are that some expenses of your children happen (hopefully) before your death. This is the case with educational expenses which you will have to account for separately.