What's your magic number? The (literally) million-dollar question

Today I present a Guest Post by @FinEngr, fellow Yaekzie member and author of Engineer Your Finances. He applies a background in engineering to personal finance. Under the belief that everyone has the ability to reach their financial goals through education and continual refinement, FinEngr tries to give readers a different perspective on money.

What’s your magic number? The (literally) million-dollar question.
People like whole numbers. They’re simpler to calculate and easier to track. This is why tips are rounded up to 20% (or down to 10% depending on the service) or why investors are worried if the Dow is below 10,000 or gold is above $1,000/oz.

Simon DavisonTalk to anyone about their personal finances, and the magic number is $1,000,000. The holy grail which defines success for the average person. While personally I don’t think this is enough anymore (remember Austin Powers?), this remains the standard benchmark.

Of course, it’s good to have goals. But simply setting broad ones isn’t enough. If you’ve read through this site, you’ll know of Lean Life Coach’s Principles of Financial Management.

This guest post was featured in the Carnival of Personal Finance hosted by Amateur Asset Allocator. Please take a look for a list of many other great personal finance articles.

If you haven’t, check out each article. For now, I’ll summarize “Goal Setting”, which falls under #7 on the list. When you truly want to achieve your goals, you must create SMART goals. This acronym refers to goals which are: Specific, Measurable, Actionable, Realistic, and Time Based.

So let’s start over. What’s your goal? To become a millionaire. Okay, specific enough. You go through each step until you arrive at Time Based.

Geez, I have no idea how long it will take. Thankfully, there are numerous calculators out there to help you answer just this question. Problem solved right? Not really.

Deciding to test the value of each, I ran a sample on 10 different online calculators. Assuming the same variables for each (salary, savings, age, tax bracket,etc), the outputs returned interesting numbers. The results varied by 16 years!

That’s a really big range for determining such an important goal! Why does it vary so much?


Some of the calculators asked what percentage of my investments would be in taxable vs. non-taxable accounts or what I anticipated my annual raise to be, some did not.

For any model, your calculations are only as good as your initial assumptions. Much like the idea that housing would always appreciate or the use of mathematical models to design mortgage-backed securities, the underlying assumptions play a very important role.

Imagine if I told you I could guess your weight with three simple questions: your age, height, and if you liked McDonald’s. Doesn’t seem like enough information, does it? What about how much you eat there, how often you eat there, how often you exercise, or what your general metabolism is like.

Point being, the more detailed your initial assumptions are, the stronger the results. This is why creating SMART goals will give you a clearer picture. And the more clear the end result is to you, the easier it will be to reach that goal – kind of like driving in the rain versus a sunny day.

And of course, the world is significantly more dynamic than any of these calculators would have you believe. No matter how sophisticated the algorithm, there’s always the human element.

If you like to be challenged to see things with a fresh perspective, if you like to learn new ideas and different concepts, sign up for my RSS feed or enter your email address here to receive updates directly to your in-box.

photo by Simon Davison’s

26 comments to What’s your magic number? The (literally) million-dollar question

  • It’s it funny how math fails so many people? That and you have no control over assumptions. Everyday people make predictions about their futures based on nothing but guesses. Then their financial people supply some more guesses to “help” them get where they want to be. Interesting way to do it?
    .-= Evolution Of Wealth´s last blog ..7 Disability Insurance Add-on Features =-.

  • What I like about SMART goals (or I would just call them a goal) is that you can apply them to any part of your life. Whether it’s a 5k time or financial projections, the process of creating the goal is the same.

  • Hah–recently my husband and I spent quite a bit of time mapping out financial goals and how longs/hows etc. Then he got in a wicked car accident and we thought–ok, it’s all out the window. Now it seems we’re saving even faster than we initially planned–in part due to the accident.

    It’s great to have a plan . . .but you can’t plan for everything!
    .-= Simple in France´s last blog ..How to budget for inspiration not deprivation. =-.

  • A good magical number is simply the amount of money you can generate to replicate your salary based on a risk free rate of return.

    Let’s say you earn $100,000 a year. At a RFR of 4%, then a good magical number can be $4 million. But, since one should have some Social Security and little to no debt, you can probably get by with less.

    Best, Sam
    .-= Financial Samurai´s last blog ..The Mental To Physical Connection For A Healthier Lifestyle =-.

  • Sam gives a good idea of how to calculate the Number. Or at least a start. Social Security isn’t linear, it replaces more of one’s income if you are a lower wage earner than high.
    Replacing salary 100% is a decent data point, for some it’s way too much (I save 20% right now, pay about 15% of income to mortgage, 7% to FICA, etc, so live on less than 60%) and for others, it’s too little, as their time frees up they may spend far more than they do now.

    Getting there is part 2. In 2000, if you plugged in a ‘conservative’ return of 6%, expecting your savings to nearly double over the decade, but wound up flat, you lost ten years in your planning. Ouch.

  • You definitely need to take into account Social Security (assuming it will still exist in some form by the time you retire), cost of living increases, and what percentage of that “magic number” you’ll need based on these and other factors. It’s a giant puzzle, but I’d rather be overprepared than caught without enough to retire on.
    .-= RainyDaySaver´s last blog ..Saturday Link Love: Spring Is in the Air Edition =-.

  • I actually haven’t really planned to any magic number. While in my early 30s, I’m comfortable with simply paying off debt and increasing my savings. I live rather frugally and know I’m headed in the right direction.
    .-= Tom @ Canadian Finance Blog´s last blog ..Frugal Getaways: 5 Ways To Treat Yourself With A Frugal Vacation =-.

  • @ Evolution of Wealth: We have 100% control of our assumptions, but 0% control on how they turn out. Like how you relate financial “experts” to better guessers. It is interesting how something so concrete can be so subjective.

    @ Aaron. Part of what I am realizing is the transference of skills within life. So much outside of money can end up affecting many aspects of our finances.

    @ Simple in France. … :/ Sorry to hear about your husband. Glad to hear you’re saving faster. And here in lies Murphy’s Law and the unpredictability of life. In scouting the motto was “Be Prepared”. You can’t plan for everything, but you can try.

    @ Financial Samurai. Social Security apparently will pay $36,000 for that amount (using link below). Even then, you’re assuming that life will remain relatively constant without any significant fluctuations. What about SIF’s case. Or say you have 20 grandkids 😉

    @ Joe the Taxpayer. You hit the post’s point in the second paragraph. Not sure, but it seems like the only controlled part is spending less than you earn. After that, everything else is opaque.

    @RainyDaySaver. There’s never any downside to being over-prepared. The saying, “don’t assume because it makes an ass out of you and me” would come in here. Imagine being in retirement without enough to live on, shrug your shoulders and say, “Well I assumed…”

    @ Tom. Definitely. Ever hike a mountaintop? From the bottom, everything at the top is hard to see, but the closer you get to the top – the clearer things become. There’s no urgent need to define some number, keep trekking along and it will eventually become evident.
    .-= FinEngr´s last blog ..The Best Defense is a Calculated Defense =-.

  • Little House

    The human effect is definitely something to factor in!

    I also want to throw out there that assuming is really another word for making inferences or educated guesses (semantics, I know), and some people struggle with this skill. As a teacher, this is the hardest skill to teach elementary students, taking clues or basically what’s not there, and making a generalization about it. With retirement goals, Rainy Day Saver made a good point, we are making inferences based on what we know, what our parents are doing or did, and trying to factor in many different variables, all of which are like a puzzle that we must piece together. Only making it more difficult is that the pieces aren’t clear and there’s no picture on a box to follow!
    .-= Little House´s last blog ..Amazing Home Makeovers =-.

  • My wrestling coach used to be Garbage in Garbage Out…however it doesn’t matter if you are using the best calculator in the world if you aren’t following through.

    Great Guest Post!
    .-= Evan´s last blog ..Comparatively Speaking A Million Dollars is Still a lot of Freaking Money =-.

  • @ Little House. Really liked your last sentence! 🙂 Very interesting. You take for granted the things which you already understand… How do you go about teaching kids about inference?
    Much like studying for an exam, you don’t necessarily have to know the correct answer, you just have to know which one’s are wrong *more semantics for you 😉

    @ Evan. HA – my grandma used that phrase, but in reference to fast food. Great point on follow through, hardly even touch on that here – but did in the new post on my site. Guesstimates can only provide you the information, you still have to act on it yourself. Just like how “green” technology will only help us get so far, but much of it still rests on us.
    .-= FinEngr´s last blog ..The Best Defense is a Calculated Defense =-.

  • The LeanLifeCoach

    @ FinEngr – Excellent guest post today. Thank you so much for sharing your thoughts with us today!

  • Lots to think about here. You do have to beware of ‘anchoring’. It’s true that all of us grew up with the idea of a millionaire being a lot of money, because we don’t have a word for ‘$3.76 millions-aire’. But by the time most readers are in their 60s, I’d imagine most will have a million in pension and housing assets. A million already isn’t anything special somewhere like New York or London.

    I agree with Sam about replacing your salary, although I would prefer to use some inflation-beating assets to do it. Not sure what the policy is on EtM on posting links to one site, but I have written a post readers may find youseful on this, which is actually called “The One Number to beat”, so chimes well: http://monevator.com/2008/02/15/try-saving-enough-to-replace-your-salary/

    (Please do feel free to edit this post if you don’t like posted links. I don’t as a rule but I think it’s a useful and relevant follow-up).

    Good work guys.
    .-= Monevator´s last blog ..US historical asset class returns =-.

  • @ LeanLifeCoach. Thanks for the opportunity to guest post!

    @ Monevator. Not my site, but I don’t mind the link. Checked it out. All this energy spent blogging, I need to get back to focusing on my own investments!
    .-= FinEngr´s last blog ..The Best Defense is a Calculated Defense =-.

  • I’m pumped social security will be around in 30 years, even if it’s only 70% of benefits. I’ve worked so long and never counted on SS, but apparently we can!

    Time to spend all my money on fast cars and nice watches now! 🙂
    .-= Financial Samurai´s last blog ..The Art of The Interview =-.

  • Thanks for allowing the link, glad @FinEngr found it useful! 🙂
    .-= Monevator´s last blog ..US historical asset class returns =-.

  • innocriss

    great post,
    A million is often the goal of many. And as years go by, they don’t realize the depreciation in it’s value. A million nowadays isn’t enough. It’s not as valuable as it were 50years back.
    .-= innocriss´s last blog ..An Investor’s Strategy to Making Money Online =-.

  • For any and all interested – recently made aware of this retirement calculator…Now THIS is comprehensive, it goes through the past 150 yrs and calculates the variance between worst/best/most likely

    .-= FinEngr´s last blog ..3-Month Performance Review =-.

  • @ innocriss: That’s part of the problem. While the number is still a lofty goal for many…That amount doesn’t provide the same abilities as it did 50 yrs ago.
    .-= FinEngr´s last blog ..3-Month Performance Review =-.

  • I truly can’t comprehend people who believe they can lose fat with diets & pills. I mean, come on!!! Its not rocket science now, is it? Intake less calories than you burn and you will probably shed pounds – yes, its that easy!!!

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