I’ve always been a goal-oriented person. I like to plan ahead and have a general sense of which direction I’m going. It’s difficult to become financially independent without being deliberate about certain actions, such as saving, controlling expenses and investing.

A critical component of planning is envisioning where you want to be in the future. For example, when I turned 30, I set out to pay off all my debt before the age of 40. Having that goal firmly in mind is what helped me eliminate all student loan debt and my mortgage debt.

Now I’m 100% debt free and haven’t looked back. Had I not planned ahead for that goal and taken specific actions to achieve it, I wouldn’t be able to claim success today.

My ultimate goal has always been to become financially independent by the age of 45, which is in less than 5 years. Unlike the prior goal of eliminating debt, which was quite straightforward, this one involves a bit more planning.

As I’ve written before, being financially independent is a function of your net worth and its make-up. Predicting what your net worth could look like in the future helps to validate whether your expectations are realistic. It also forces you to question your assumptions and pressure test your projections.

I’ve never really sat down and modeled out my net worth into the future, until now…

Future Net Worth – Household Overview

The graphic below is a representation of what my lifetime household net worth could look like over time. Theoretically speaking of course. It includes my actual net worth from the past, along with projections of future net worth values.

I aggregated the data in 5-year increments because it’s easier to digest, and because it allows me to adjust assumptions within each period independently. The age shown at the bottom would be my age at the end of each 5-year period.

I’ve also split the period into three phases, in line with my general philosophy on maximizing the number of years spent financially independent.

Preparation Period

This is the period I’ve spent working as a serf in the grand hamster wheel of corporate america. Based on my current strategy, I still have 5 more years pumping away at maximum potential. It’s basically the traditional working phase most people have to endure. It started around the age of 20 for me, and I hope it will end at 45.

Financial Independence Period

This is the period of genuine freedom, where I get to cash in 25 traditional working years for 25 years of whatever the hell I feel like doing. Financial independence is what most personal finance nerds aspire to, and I’m no exception. A one-for-one trade off is a fair exchange in my book. I might spend time slow traveling on my terms, perhaps focus more on this blog, or even start a small business for fun. Either way, I’ll have more time for family, friends and myself. This should be a period of choices, and the ability to make them based on my own terms.

Traditional Retirement Period

I’m not sure what this period will look like exactly, or whether I’ll be spending much time in it. Assuming I make it that far, I’m pretty sure I’ll be slowing down a bit, and my priorities in life will be completely different. Most people work their entire lives to make it to this period, and never really get to enjoy it. Generally speaking, it tends to be a lower quality of life period, from a physical and mental standpoint.

If you think the chart and associated net worth values seem overly optimistic, you're not alone. I had the same reaction when I stepped back and looked at the results.

Here are the details behind the numbers…

Future Net Worth – Assumptions

Like any good analysis that requires forecasting the future, this one is full of assumptions. Those assumptions are going to have a big impact on the results. I designed the model to give me as much flexibility as possible in manipulating them.

I did this in two ways. By breaking up the time periods in 5-year chunks, and by isolating different components of my net worth. This method prevents me from taking a linear approach to projecting future returns. Meaning, I'm not going to take a 7% historical return and compound it evenly across the next 40 years and my entire net worth. Which is what most retirement calculators would do.

I also incorporated my three bucket strategy, to help me distinguish between traditional retirement funds, investable assets for my FIRE period, and my home.

MYF Future Net Worth Assumptions 1
Table 1: Original Model Assumptions

The table above shows the compound annual growth rate assumptions across each 5-year period and investment type.

I was relatively conservative in my assumptions, although I chose to be more aggressive with my alternative investments.

Here's the breakdown of the actual numbers, which used the interest rates above for future projections.

MYF Future Net Worth Details 1
Table 2; Model Original Analysis

You can see that over the entire period, my net worth only grows about 3.4% per year on average. The traditional retirement bucket grows at the fastest rate of 4.4%, followed by the investable asset (FIRE fund) bucket at 3.2%, and finally the home bucket at a low 1.4%.

The most explosive growth happens during the next 5 years, clocking in at 11.9% during that period. This is largely due to the fact I plan to grow my investable asset bucket aggressively over the next 5 years, to the tune of $1M. This will be accomplished by maintaining a savings rate of 75%+ on a net income basis.

The model above currently assumes that this new cash injection will not be invested, which is why the interest rate assumption for that line is 1%. This was just my attempt to take a very conservative view on this initial model.

You'll also notice that my growth rate assumptions drop quite a bit once I reach the age of 70. This assumes I would want to reduce my exposure to riskier investments during the subsequent periods.

Future Net Worth – Analysis

By the age of 45, I should have a net worth close to $3.2M. Although this figure is fairly healthy, I'll need to ignore the first two buckets when evaluating how prepared I would be for early financial independence.

I obviously can't touch my home bucket, and will just let it grow at about 1% per year, with the occasional 2% growth spurt here and there. Since we paid off our mortgage last year, this bucket allows us to maintain a fairly low expense budget. This is the biggest advantage this bucket gives us relative to early financial independence.

The second bucket is my traditional retirement fund. I don't intend on touching that bucket until I turn 70. This means that it can snowball from about $1M at the age of 45 to almost $3M by the age of 70. This assumes the stock market index performs close to historical norms during that period.

This leaves the final bucket of investable assets which can be used to facilitate my financial independence between the age of 45 and 70. This is by far the most important bucket if your goal is to become financially free.

Based on my analysis, I should be able to enter financial independence with about $1.7M in investable assets. Left untouched, that bucket could grow to almost $4M by the age of 70.

As much as I would like to leave it untouched, the desire to be financially independent early, prevents me from doing so…

Future Net Worth – Adjusted Analysis

What this model doesn't take into account is withdrawals during the financial independence period.

If I want to enjoy this period with no strings attached, I would need the investable asset portfolio to generate at least $50,000 per year in net income. This would equate to a very comfortable lifestyle, also known as my gold package. Ideally I would want the income to be closer to $75,000 per year for a platinum lifestyle.

I would need to adjust for withdrawals at the $50K per year level, which would obviously impact the size of that bucket by the time I reach 70, and consequently my overall net worth at that age.

The same is true of traditional retirement, where my model doesn't account for withdrawals either.

If I maintain the same growth rate assumptions for the investable asset portfolio, but withdraw all gains during the entire period, the table would look  like this…

MYF Future Analysis 2
Table 3: Adjusted Model

You'll notice that the investable asset line remains flat throughout the period.

To calculate how much income is generated during all the periods from the FIRE (investable asset) bucket, I would simply take the difference between the table above and the original table, and divide by 5 years.

Future Net Worth – Income Projections

By making those comparisons, I end up with the following income projections…

MYF Future Analysis 3.1
Table 4: Net Income Projections

Assuming I'm after my gold package lifestyle of $50,000 per year in Net Income, I fall short of my target. Due to the compounding affect of the varying interest rates in the original model, my income would grow slowly over time, but wouldn't reach my desired level until my 60s.

Since inflation is not factored into this model, I have to use the initial net income of $34,008 per year as my basis, and not count on the growth over time.

Another constraint I've put in my model is keeping the investable asset fund principal intact throughout the period. This also has an impact on what's available during FIRE.

Keeping all this in mind, it appears that I won't be ready in the next 5 years to pull the cord, unless I adjust my 5-year plan, or my assumptions.

Doing this kind of exercise helps me think through all the different factors and assumptions. In a future post, I'll evaluate my 5-year plan relative to this model to see what I need to do to overcome the shortfall.

Final Thoughts 

There's a lot more that goes into planning for early retirement than simply tracking net worth. The success of my exit strategy depends on many assumptions, lifestyle desires, and yet unearned income.

The resilience of my plan over a 25 year period of financial independence depends on those same factors as well. Every time I do a deep dive of my finances like the one in this post, it makes me evaluate how prepared I really am.

It ultimately helps me become more comfortable with the potential reality of financial freedom. It also helps me avoid sugar coating my expectations of the future. Which is a delusion that pure compound interest calculations sometimes enable.

If you haven't done a future net worth projection, you should give it a try. Might get you to question some of your own assumptions!

Readers, have you ever tried projecting your net worth into the future? What sort of assumptions did you make? Do you find this approach too complicated? Do you prefer a simple compounding calculator instead? Share your thoughts and comments below!