Some people work only for the day they no longer have to. For others, life without the fulfillment of a meaningful endeavor would be hard to enjoy. Similarly, plans for what to do in retirement range from regular and exotic travel destinations to quiet enjoyment of one’s home and garden. For anyone, however, it can be said that financial independence is achieved when you have acquired enough in your investment and savings accounts that the average annual return is equal to or exceeds your living expenses. How much money you need to achieve financial independence, that is, how much is enough, is very much specific and individualized for each investor.

Living expenses

Clearly, the amount of money required to achieve financial independence is directly proportional to the amount needed for living expenses. It’s important to be realistic about what your expenses will be. Basic expenses, such as housing, utilities, food, insurance and medical costs are often easier to gauge than what may be considered flexible expenses. Hobbies, entertainment, travel and other activities may be more difficult to budget for, and always, the specter of the unexpected looms. If you regularly exceed your targeted living expenses total, you may see your goal of financial independence slip away. 

A safe withdrawal rate

If, for example, you had $1 million in your investment and savings accounts and could expect a 10% average rate of return, you would have $100,000 a year to live on. But most experts believe it unwise and unsafe to set your withdrawal rate at 10% or even at a far more modest 5%, which at one time in the not so distant past was considered a safe benchmark.

The 4% rule

The 4% rule is a general rule of thumb many financial planners use, but it has its limitations. Initially, the rule was developed using data over a 50 year period from 1916 -1976. Secondly, even its proponents base the success of the 4% rule on a maximum of 30 years. Skeptics point out a significant or protracted downturn could foil such a plan, and 30 years may not cover all individuals as people are retiring earlier and living longer. And, of course, the planned withdrawals must be followed without significant deviation.

An individualized plan for you

At Spinnaker Investment Group, we take the time to get to know you and your financial goals. We can help you devise a plan that makes sense and is achievable. 

Where are you with your present investment situation? For a quick reality check on where you stand with your current portfolio, please enter our SpinnCycle survey here: spinninvest.com/spinncycle.

Disclosure

The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.