Financial Freedom in 2021! Take Action: Day 19
Whether you plan to retire early or work until the Lord takes you home, it’s helpful to know the magic number you’re aiming toward to no longer be dependent on a regular paycheck to pay your bills and live a full life. Your FI (Financial Independence) number is the amount of net worth you need to support you for the rest of your life moving forward.
The breakthrough Trinity Study published by three professors from Trinity University in 1998 determined a safe withdrawal rate* from stock portfolios despite the fluctuations of the market, and the conclusions they made have had a huge impact on retirement planning. Their research produced the “4% Rule” mentioned in yesterday’s post. What this means is that if you can estimate your annual expenses for when you plan to retire (or when you’re hoping to reach that state of financial freedom), you can multiply that yearly amount by 25. This is a simple way to calculate your FI number.
Here’s an analysis of how I’ve calculated my family’s FI number:
- Anticipated Retire Early Date: January 1, 2030
- Family Status (at that time): 2 children graduated from high school, 2 still in grade school
- Potential Side Income: Real estate investing (monthly cash flow)
- Estimated Annual Expenses: $70,000
- Expenses Remaining after Side Income: $70,000 – (10 homes * $3600 cash flow) = $34,000
- Required Net Worth: $34,000 * 25 = $850,000
- FI Number (with RE investing): $850,000 … almost there!
- FI Number (without RE investing): $1.75 million … NOT almost there!
There are so many variables, right? But that’s ok. The analysis is the the fun part. It’s a game to see how low you can get your expenses by paying off debts and cutting unnecessary spending. There are also so many ways to earn a passive income to offset your anticipated annual expenses and decrease your FI number; real estate is just one of them. What’s important is that you continue to keep track of your expenses and net worth with intentionality. If you do that, chances are that you’ll reach FI much sooner than planned.
In the example above, I conservatively estimated owning 10 doors in our real estate portfolio at $300/month cash flow, but our goal is to own 20, and maybe our average cash flow will be even higher than that. If so, we may be able to cover ALL of our anticipated expenses through those investments. We may also downsize our home with fewer children living with us or we may decide to do traveling homeschool, which will decrease our living expenses, and therefore, our overall annual expenses.
The point is that things will change; the future is unknown. The good news is that you now have a framework and an easy way to calculate your FI number even as income, expenses, and investments change.
Another aspect to consider is that many believe that the safe withdrawal rate is now higher than 4% and closer to 7%. This would significantly reduce how much you’d need in your nest egg. At a safe withdrawal rate of 7%, our FI Number (without real estate investing) drops to $994,000!
Today’s action step is to calculate your FI number. It’s ok if you have a few different scenarios with a few different outcomes. Just doing the calculation will give you a ballpark to aim for and get you in the habit of doing the math as things change. There are FIRE calculators online that you can use to find your FI number while taking into consideration your side hustles, higher or lower withdrawal and return rates, as well as anticipated expenses. So… what’s your number?
*The safe withdrawal rate (SWR) method calculates how much a retiree can draw annually from their accumulated assets without running out of money prior to death.
Frugal with Four 