Ever wondered just how much money you’d actually need to in order to be Financially Independent, to quit your job, and retire early? Here’s the answer. Enjoy! Add me on Instagram/Snapchat: GPStephan
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First, lets define “financially independent,” because this term means different things to different people. To me, it’s having enough money to support your current lifestyle without you ever needing to earn another dollar. It’s knowing that you’ll have a certain amount of money at your disposal every single month that covers your daily expenses without ever running out.
For each of us, that number is different. For someone in rural Kentucky, maybe it takes $35,000 per year to cover all of your expenses…food, housing, entertainment, health insurance, just everything you’d ordinarily spend in a given year. For someone in New York City, maybe that number is closer to $90,000 per year…or maybe for a family of 5 in Southern California, it’s $125,000 per year. But what’s unique is that even though each of us will have a different level to what we’d consider financially independent, the math behind it stays exactly the same.
For most situations, how much you need invested in order to retire is as simple as this: 25x your annual expenses. This means if you want to spend $50,000 per year, you’ll need 25 times that…or $1,250,000. You want to spend $80,000 a year? You’ll need 25x that, or $2,000,000 invested. Spend $100,000 per year = invest $2,500,000.
In order to accurately do this, it requires you to really sit down and think about the lifestyle you want, how much it’s going to cost, and what you currently spend. By first going over your current expenses…and literally counting every cent that goes in and out of your account, you’ll get a great baseline as to how much you regularly spend on a monthly basis. From there, determine if there’s anything else you’d want and how much that will cost. Once you add everything up…multiply that number over 12 months…then multiply that by 25, and that’s how much you’ll realistically need to have saved.
So how does this work exactly when it comes to financial independence? Well, that’s what’s known as the “Safe Withdrawal Rule” or “The Trinity Study.” This study suggests that you can withdrawal 4% of your total investment annually – which is usually studied as an investment portfolio consisting of 80% equities and 20% bonds, with a fairly high success rate of never running out of money. This means that for every $100 you invest, you can safely spend $4 of that each and every year for basically the rest of your life.
This study takes into account that you’re invested in 75%-80% in equities, like stocks of a corporation, and 20-25% of bonds, which represent a more stable, secure return. On average, a portfolio like this should return an average of about 7% annually adjusted for inflation over a 30+ year period. This means that your investment MAKES YOU 7% after inflation…you then spend 4%…leaving you with an extra 3% left over as a buffer for safety. And this is the basics of how this study is calculated. This takes about 100 years of historic data and market returns into account to determine a number that should be safe in the majority of market situations.
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