Financial Independence 101.

We are all taught that retirement is an age (eg; 65 in Australia). We are taught that retirement is the time in our lives when we no longer “have” to work and can live off the pension/retirement savings.

What if I told you that retirement isn’t an age but a number? A dollar amount.

The dollar amount is the amount of financial resources or wealth you need to support your lifestyle without relying on a traditional job or paycheque. This dollar amount is often referred to as financial independent.

Financial independence if having the ability to cover living expenses, fulfill financial goals, and have the freedom to make choices without being constrained by financial limitations.

How can you work out what your Financial independence number is?

US financial adviser Bill Bengen led a study to understand how much his clients could take out of their share portfolios without running out of money before they died. Basically, how can people get to the end of their lives without getting to the end of their money?

Result: The 4% rule.

The 4% rule is commonly used as a guideline for determining the amount of money needed to achieve financial independence without depleting the asset = total amount your invested share portfolio is worth. I’ll use shares for this example.

According to this rule, you can withdraw 4% of your invested assets in the first year of retirement and adjust subsequent withdrawals for inflation each year. as an example, to draw an annual income of $40,000 using the 4% rule, an individual would ideally need to have invested a total amount of $1 million.

Note: You do not need to have invested $1 million dollars, your investments needs to have grown to be worth $1 million.

See blog post - Compounding explained