Living off the returns on your own savings is something most people do in a sense when they get old.
The pension system
The pension system is supposed to work in exactly that way: You save your whole life and then retire and live on the returns.
The Swedish system is not really that simple. The pension pyramid is high and has more parts than just the own pension savings.
Most people say that private savings are not as important for the pension as, for example, a general pension or occupational pension. But you can get a real golden edge in the fall of old age through a real savings plan.
Financial Independence – Retire Early?
If you want to become financially independent, i.e. live on your savings before retirement, or more or less double your standard of living during retirement, it can be done. It requires a lot of zealous saving, but the savings expert Graham Stephen have a reasonable overview of how it is done.
Saving as much as he suggests will require giving up a lot of everyday pleasures. In any case, if you have a normal Swedish average income – around SEK 35,000 before tax.
The expert: Becoming a millionaire only costs SEK 110 a day
In an interview with Go banking he says like this. If you put in $10 a day for 30 years, that money will have grown to $920,000. In Swedish kronor, the corresponding sum is 110 kroner a day in savings, which grows to quite precisely 10 million kroner.
So that’s SEK 3,300 a month in long-term savings that you need to put away, instead of buying more fun things for it.
If you’re going to save money, there won’t be much left over to buy new video games. But maybe you can play some game you already have and put the money into the savings fund? Photo: PexelsSom 30 Big Macs – a month
For example, it is as much money as it costs to buy 30 Big Mac & Company (109 kroner each at McDonalds), or almost a Nintendo Switch console a month (3,590 kroner at Power).
That’s a good bit above the 10 percent a month that most savings economists suggest you put away.
They also usually think that you should divide the savings into short-term savings and long-term savings.
The price tag: SEK 3,300
But if you still manage to collect SEK 3,300 a month, which is a lot of money, you will soon have a decent amount in your account.
This is via what is known as interest-on-interest.
As a suggestion, you put the money into an index fund, or divide it into a few pieces, which together can give you an average growth of 7-8 percent at low or no fees.
The ISK account for your index funds
If you have the money in an ISK account, the tax will also hopefully be low, just over 1 percent on your saved amount.
In Graham Stephen’s calculation example, you start by putting $1,000, equivalent to SEK 11,000, into an index fund with low or no fees.
Avanza or Nordnet, for example
Most index funds, such as those at Avanza or Nordnet’s internet banks for example, reinvest the shares’ dividends for you. This means that your growth per year in the long run will be reliable and risk-balanced.
Wall Street’s large-cap index, the S&P 500, has risen by 7-8 percent on average every year for the past 100 years.
There are no guarantees
No one can guarantee that you will make any money at all from your stock or mutual fund investments, but assuming things go as they have for the past 100 years, your stock value is almost guaranteed to rise over a five-year period provided you have a sufficiently diversified investment. And an index fund is exactly that.
This is how an index fund works
If you invest SEK 11,000 in an individual company, there is always the risk that that company will collapse. But if you divide your savings into, for example, 1,000 companies where you put SEK 11 into each company, your chance of getting a growing value from your share investments is much greater.
And that’s exactly what an index fund does.
Who wants to Be a Millionaire?
If you start by depositing SEK 11,000 in today’s monetary value, and then continue saving SEK 110 a day, after 38 years of saving with an annual return of 8 percent you will have saved just over ten million kroner because the value increases every year by 8 percent of what you have already saved.
After 38 years, you will have made 456 payments in addition to your first SEK 11,000 in the index fund.
SEK 8.5 million “free”
In total, you will have saved an incredible SEK 1.5 million in savings. But thanks to the interest-on-interest effect, you will have SEK 10 million in the account instead of if you had saved the money under the mattress or the salary account, where you receive no interest at all.
And every year you will then receive a continued return of 8 percent of your 10 million, or SEK 800,000.
If you withdraw only half of the return, SEK 400,000, you will have a full year’s salary in today’s monetary value without having to lift a finger – and your savings will actually continue to grow rather than decrease even though you withdraw almost half a million kroner per year.
Then you get SEK 1,100 a day all year round
Or SEK 1,100 a day, all 365 days of the year, if you want.
And because you keep saving money, because you don’t take out the full year’s growth of 8 percent but only 4 percent, you’ll never run out of money in your account either.
– If you can save more than that, you can of course increase the rate. If you invest 20 dollars (220 kroner) a day, you will reach the goal after 30 years. If you save 50 dollars a day (550 kroner) a day, you will reach the goal in 20 years, says Stephen.
But SEK 550 per day in savings is a lot of money. This would mean that you save over SEK 200,000 per year for retirement, and that is not very reasonable for the vast majority of people.
Never run out of money
Why has Graham Stephen figured out just 38 years of saving? Most people’s small savings start at the age of 27.
– And if you save for 38 years, you reach your savings goal until your 65th birthday, and can then start making withdrawals of $100 a day, at a reasonable rate without ever running out of money, says Graham Stephen.
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