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Have you ever wondered how much money you need to have to stop working? The amount may not be as enormous as you think. There’s a misconception that how much you need to save is dependent on your salary, but that is false. How much you need to save depends solely on how expensive your lifestyle is. If two people make 100k a year but one of them has a lifestyle that costs them 50k a year and the other has a lifestyle that costs them 100k a year, the person who has the 50k lifestyle will only need to have half of what the person with the 100k lifestyle need to have to stop working. So, to figure out how much money to you need to have to stop working, you will need to figure out what your total annual expenses are, then multiply that by the number 25. Let’s say my total annual expenses are 50k. 50k times 25 is $1.25 million dollars, so $1.25 million dollars is the amount I need to have to never work again. This amount is also referred to as your “FI/RE” number, which stands for financial independence/retire early. The more expensive your lifestyle is, the more money you’re going to have to have to retire. Now, to understand where the “25” comes from, I’ll have to explain what the 4% rule is. The 4% rule comes from a study conducted by a group of financial professors from Trinity University. They ran some numbers and concluded that if you withdraw 4% or less from your FI/RE number that is invested in at least 75% of stocks and no more than 25% of bonds, 100% of the time, you will not lose money after 30 years. This is because the amount you withdraw will be compensated by growth from your money that is invested. To exemplify this, let’s say you decrease the money you have invested by withdrawing 4% of it per year. Since you have your money invested in index funds that return you an annualized average of 8-10% per year, this will make up for your 4% withdraw and get your money back to its original amount before you withdrew and potentially even grow it to an even larger amount. If you don’t have your money invested and keep it in a savings account, you will only deplete your savings year by year and will run out of money. Investing here is key. And it’s not only key after retirement, but key in your wealth building phase to get you to your FI/RE number. You simply cannot save your way to wealth; you must invest. Now, back to where the “25” in the math is from. “25” is just the reverse engineered math for the 4% rule. Going back to our original example: 50k of total annual expenses x 25 gives you $1.25 million, your FI/RE number. Well, 4% of $1.25 million is 50k. Let me know what your FI/RE number is and if you’d like me to talk about what I’m investing in to reach my FI/RE number in 15 years. #financialliteracy #financialfreedom #retirement #retireearly #loudbudgeting #investing #invest #savemoney
Duration: 178 sPosted : Sun, 03 Mar 2024 19:44:23Views
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