by Damon Carr
Hi Damon. I’m not sure if you remember me. You helped me put together a financial plan a couple of years ago. I can’t say that I followed it to the letter, but I have implemented many of your ideas. I follow you on Facebook. I’m also an avid reader of your column. I believe in your advice and the principles you teach. There is one thing you told me during our coaching session that I’m having a hard time grasping. You told me that if I follow the advice you shared with me, I will retire a millionaire.
I was recently looking at my 401(k) statement. My current balance is approximately $24,000. As much as I believe in your advice, I don’t see how this $24,000 will turn into $1 million by the time I retire. I’m currently a single mom with 3 children. I’m 42 years old. I plan on retiring at age 65. Please explain why you think I can retire as a millionaire?
Hello Marie. Of course I remember you. I think your story is inspiring. I often share your story with my clients and Facebook followers.
Thank you for trusting me enough to work with me. Thank you for reading my column and following me on social media.
I’m going to be completely transparent here. It’s hard to follow sound financial advice to the letter—even for me. I’m happy that you started implementing some of my ideas. As you continue to experience success with some of my ideas, it will encourage you to implement more of my ideas. Conversely, if you shall make a boneheaded financial decision, you’ll think to yourself, I wish I followed Damon’s advice.
Why do I believe you can retire as a millionaire? For starters, you’re frugal by nature which allows you to live below your means. When we met for the financial planning session, I was shocked to learn that you were able to pay all of your bills with one paycheck. You had an entire paycheck remaining to do whatever you wanted to do. That’s a rarity. Quite frankly, it’s impressive! With that disposable income, I know that you didn’t have to make any major lifestyle changes. It was just a matter of showing you how to purposefully manage, save and invest your hard earned dollars.
You mentioned that your 401(k) balance is approximately $24,000. That, too, is impressive when you consider the fact that just 2 years ago when we met your 401(k) balance was zero. You didn’t have one penny saved for retirement. Look at you now with a quarter of $100,000 saved. I call that progress. I’d like to emphasize a point here. I said you’d retire a millionaire. I never said you’d be a millionaire overnight. You’re inching towards that end one dollar at a time. You still have 23 years before you retire.
I went back and reviewed your file. I’m going to walk you through a few things to make it clear why I believe you can retire rich. But first, let me explain why I said you’re going to retire a millionaire. I’m not just talking about the balance in your 401(k) plan. I was looking at the totality of your assets and liabilities. In other words, I looked at both your current and projected net worth. Net worth is obtained by subtracting your debts from your assets. For example: Let’s say that your assets were a car worth $10,000 and a house worth $100,000. You had a car loan for $8,000 and a mortgage for $80,000. Your total assets were worth $110,000. Your total debts were worth $88,000. Assets of $110,000 minus liabilities, $88,000. In this case, your net worth is $30,000.
At the time of our coaching session you had $10,000 saved in your savings account. I recall you saying, with your being a single mom, having a large cash cushion is a must. I agreed with you and said let’s call it your emergency fund. That $10,000 is an asset with zero debt attached to it.
You recently inherited your grandfather’s free and clear house. It was valued at approximately $100,000. You owned your own property valued at approximately $150,000 with a mortgage balance approximately $60,000. That’s $250,000 in real estate assets with $60,000 of debt.
You own your car outright. It’s worth approximately $15,000.
The only debt you had besides your mortgage was your student loans. Your student loan balance was approximately $60,000.
Your assets including your 401(k), emergency fund, real estate, and car is valued at $299,000.
- 401(k) – $24,000
- Emergency Fund – $10,000
- Real Estate – $250,000
- Car – $15,000
Your debts including your mortgage and student loan is $120,000.
- Mortgage – $60,000
- Student Loan – $60,000
Your current net worth is $179,000. I’m lowballing. I’m not taking into account the value of your household furniture, jewelry, or other assets you may own.
By the time you retire, both your mortgage and your student loans will be paid off. In addition to that, your two properties that you own and your 401(k) balance will have increased in value.
Let’s take a look at your 401(k). The stock market has averaged an annual return of 10 percent per year for the past 100 years. This means that your money will double in value every 7 years. If you never invested another dollar into your 401(k) and you simply allowed the $24,000 to continue to compound (grow) over the next 21 years, that $24,000 will double 3 times.
- Year 7: $48,000
- Year 14: $96,000
- Year 21: $192,000
Just looking at the projection of you being debt free, and your appreciating assets including your real estate and your 401(k), your net worth will be over $500,000 by the time you retire. That’s over a half of a million. You may be thinking a half million sounds good, but you said I’ll be a millionaire by the time I retire?
Actually I said you’ll be a millionaire by the time you retire—if not sooner. I said that because I know you’re going to continue to invest in your 401(k), continue to earn raises at your job, and continue to make smart money moves.
(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website @ www.damonmoneycoach.com)