Paly Enterprises

Financial Independence Fundamentals

Fourth Step to Your Plan

But What About Financial Goals?

by: Daniel P. Matthews

Well, isn't it noteworthy that your interest in financial independence is treated as a goal? Goals support your Vision. This difference might appear subtle but think of your vision as the "why?" you want to accomplish the goal of financial independence. Without a clear vision, achieving financial independence is meaningless. At the risk of being repetitive, you should spend time thinking through your vision and matching it to your life system. It is from this vantage point you begin to clearly establish financial goals.

Did you know that in contemporary thinking, an individual will need about 70% to 80% of their current income to sustain their lifestyle, at today's standard, when they retire? That fact helps you set your goals. Imagine (part of the Vision thing!) having the level of income you receive today and not having to go to work to get it!

A model for our discussion has been created for your review. The model will be referenced frequently. So, please read it and if you have questions feel free to email questions to me. I would be glad to answer them!

Step 1 - Part One - A Model for Illustration
Let's create a model so you can see how the numbers flow together. Assume you make $50,000 per year. The job includes a retirement plan that has a defined benefit of paying you 30% of your salary after you complete 25 years of service.

Another important measure is Social Security. For the sake of illustration assume you were earning $35,000 in 1989 and that you are age 40 in 1995 and that you are married. Social Security would pay you approximately $1,650 per month(you can get your specific benefit quotation from the Social Security Administration, write me I'll help)or $19,800 per year.

In our model your annual income at retirement is:

$15,000 Retirement Plan
$19,800 Social Security Payments
$34,800 Total

This total annual income of $34,800 is equivalent to a monthly income of $2,900. Remember, today's thinking is that you must have 80% of your income set aside for retirement. In our example that equals $40,000 ($50,000 annual salary * 80%). That being the case, our model shows us that we are $5,200 short of the goal ($40,000 - $34,800). Again, this model is for illustration only. Your specific case will undoubtedly be different. But, the information in the model is useful for the rest of the discussion on the Paly Enterprises web pages.

Use 80% of your current income as your first financial independence goal. The model uses a current annual salary of $50,000 and 80% of that figure is $40,000. You can see from the model that the current anticipated level of retirement income is $34,800. This anticipated level and your $40,000 goal (80% of the current annual salary used in the model) reveals a need to generate an additional $5,200 in annual income to accomplish your goal.

Of course this is only an example of establishing a bonafide financial goal. How you go about accomplishing the goal leads to a discussion of how can the model couple save enough money to generate the additional $5,200 per year income necessary to maintain their lifestyle.

Another point to be understood is the principle used to establish the model couple's goal is as applicable to a specific case, such as your own, as it is to the model couple. For example, a goal for someone might be to leave work before retirement age and still have the same income level. This would establish the goal of accumulating sufficient wealth to generate an annual income stream of $50,000. Both goals are achievable. They require different actions (that Action thing from VGAP). Both goals will also require persistence (the P of VGAP). But, they are achievable!

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