"I want to be rich" is the most common financial goal in the world, and the least useful.
It has no number, so you can't tell whether you are on track. It has no deadline, so there is never a reason to start today. And it has no why, so the first time the market falls 30% there is nothing holding you in place.
This is level 1 of the Wealth Principles pyramid: a goal with a number.
The problem: your future self is a stranger
People give far more weight to the person they are today than to the person they will be in 30 years. Researchers at Stanford and NYU tested this directly. Participants who saw realistic, age-progressed renderings of their own faces chose to put more money towards retirement than a control group (Hershfield et al., 2011).
Your future self stays a stranger until you give them a number.
The formula, in four steps
It is often called the retirement number. We call it your freedom number: the amount of wealth that can fund the life you want without you having to work for it.
- Add up the monthly cost of the life you want: home, car, food, travel, hobbies.
- Multiply by 12 to get the yearly cost.
- Divide by (1 − your tax rate) to get the pre-tax income you need.
- Divide by a sustainable withdrawal rate (for example 4%, or 0.04).
Freedom number = (monthly cost × 12) ÷ (1 − tax) ÷ withdrawal rate
| Step | Calculation | Result |
|---|---|---|
| Monthly life you want | your choice | €3,000 |
| Per year | 3,000 × 12 | €36,000 |
| Pre-tax at 20% tax | 36,000 ÷ 0.80 | €45,000 |
| Wealth at 4% withdrawal | 45,000 ÷ 0.04 | €1,125,000 |
| Wealth at 3.5% withdrawal | 45,000 ÷ 0.035 | ≈ €1,285,700 |
Try it now. Swap in your own monthly number. Every €500 a month you add to (or cut from) your target lifestyle moves the freedom number by about €187,500 at 20% tax and 4% withdrawal.
Where does "4%" come from?
In 1994, financial planner William Bengen tested withdrawal rates against US market history. A first-year withdrawal of 4%, raised with inflation every year after, never emptied a stock and bond portfolio in under 33 years. In 1998, three professors at Trinity University (Cooley, Hubbard and Walz) reached a similar conclusion for periods of up to 30 years. That paper is known today as the "Trinity study".
Two honest caveats:
- It is one country's history, and the US had one of the best stock markets of the century.
- It was designed for about 30 years. If you plan to stop working at 45, or your market's history is weaker, many planners run the numbers at 3–3.5% instead.
Time is the strongest ingredient
Same habit, three outcomes. €1,000 a month at an assumed 6% a year (an illustration, not a forecast):
| Years | Paid in | Value at 6% |
|---|---|---|
| 10 | €120,000 | ≈ €164,000 |
| 20 | €240,000 | ≈ €462,000 |
| 30 | €360,000 | ≈ €1,005,000 |
Starting ten years later does not cost you a third of the result. It costs you more than half. In this example, the last ten years add more than the first twenty combined. That is compounding: growth on top of growth.
The truth about "fast money"
Let's be blunt here:
- There is no such thing as fast money.
- There is no such thing as easy money.
- There is no such thing as free money.
Real wealth takes around ten years, and "get rich quick" thinking quietly poisons good decisions. That is an opinion, but the maths above supports it: the compounding curve is flat at the start and steep at the end. People who quit in year three never see the steep part.
Your checklist
- Write your monthly lifestyle number, honestly.
- Calculate your freedom number at 4% and at 3.5%.
- Pick a deadline and write one sentence on why it matters to you.
- Work out the monthly amount that gets you there. A compound-interest calculator will do.
- Put the number somewhere you will see it every week.
Next in the series: the behavior gap, and why the most expensive person in your portfolio is you. If you want to see how a target turns into a weekly routine, here is how Pace works.
Sources
- Hershfield, H. E. et al. (2011). Increasing Saving Behavior Through Age-Progressed Renderings of the Future Self. Journal of Marketing Research, 48(SPL), S23–S37. Link
- Bengen, W. P. (1994). Determining Withdrawal Rates Using Historical Data. Journal of Financial Planning, 7(4), 171–180. Link
- Cooley, P. L., Hubbard, C. M. & Walz, D. T. (1998). Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable. AAII Journal, 20(2), 16–21. Link
Educational content, not financial, investment or tax advice. Returns shown are illustrations, not forecasts. Investing carries the risk of loss.