17 March 2016 –
Otherwise known as, the deceptively simple maths behind reaching financial freedom
Ok, so tell me. How do I achieve this?
Now that we’ve all made a commitment to achieving financial freedom and, being in a position to stop working full-time whenever we choose, the big question is…..how much money am I going to need?
Well one simple rule-of-thumb is….25 times the amount you need to live on. This is based on historical stock market performance giving you an average return of 7% (after tax). And how do we work that out? Well, we want to be able to withdraw a maximum of 4% per year, and allow 3% for inflation (averaged out over 30 years). And that’s all we need to live a more than comfortable life for the rest of our days.
Remember too, that with all of this spare time you have on your hands, and with another 25 years of prime working life left in you, you may choose to delve in to some part-time activities that yield you some extra cash which also goes towards your annual income.
As a result, you may find that you don’t even need to draw all of that 4% which means it can stay invested earning you more interest for the future.
So if your annual expenditure is $50,000 then you are going to need $1.25m working flat-out for you in your various investments to keep you in gravy for the rest of your life.
However, if you trim the excess spending out of your life (and you can if you try) and get your annual spend down to $25,000, then you are on your way to ‘easy street’ at only $625,000!!
So how quickly can you get there? Well that all depends on how much you have left over at the end of each week and what you choose to do with it.
If you are only saving 10% of your take home pay, you won’t be retiring for nearly 52 years. If you save 50% of your take home pay, you will be able to retire in around 16 years. It’s that simple.
Use this calculator to work out how long it’s going to take you to get there. And play around with the numbers to see how increasing your saving rate can knock years off your working life. Hmmmm, powerful stuff I hear you say.
Now think about what you can do to speed up the process. Investing wisely in managed funds, rental property, your superannuation fund*, and peer-to-peer lending, for example, will get your dollars working even harder. This is long term strategy stuff so it’s not all going to happen straight away. But to achieve your financial freedom goal, you need to start the planning process as soon as possible.
*Remember that your superannuation fund is building up during your working life too, even though you can’t touch it until you reach the required age. That’s 60, in Australia, and 65 in NZ. However, this will ensure that you have a further stash of money set aside for the future.