How much wealth do you need to realise ‘Financial Independence’?
I define financial independence as having sufficient wealth accumulated to meet your own personal needs and desires for the rest of your natural life without having to engage in any further money-earning activities.
According to Lyle Daly writing for The Fool a ‘safe’ pot to retire on is equivalent to 30 times what you think you’re going to spend in retirement, this figure is safe for even long draw-down periods of 40-50 years and is based on the success rates of people who have retired without running out money, drawing down at a rate of 3.25 to 3.5% per annum.
This means that the amount any one individual will need to be financially independent will vary enormously depending on what their own perceived needs and desires are.
Lowering your income needs drastically lowers the size of your retirement pot!
A typical American family man or woman who thinks they will need to spend $70 000 annually will need to accumulate $2.1 million dollars of wealth to be able to sustain a fairly average consumption based lifestyle during retirement, or longer.
An individual living a more modest lifestyle who can get by on just $20 000 a year would need only $600 000 to see them through a 30 year retirement, or longer.
Global growth rates matter...
The amount you need to be financially free also depends on how you think your accumulated wealth is going to grow in the future. The annual growth rate for global wealth over the last 20 years has been 6% according to Credit Suisse’s latest Global Wealth Report’s figures, however with increasing uncertainty surrounding the Coronavirus pandemic, increasing global debt, rapid inflation and the ongoing Climate Crisis (temporarily forgotten about) you might think a continued 6% per annum increase is unlikely.
Total draw down or Leave some for the kids?
The amount also depends on whether you’re going to base your income from wealth on a draw-down model or not. If it’s just you and the wife and dog (who’ll probably die before you) you probably won’t mind clearing out your wealth pot before you die, in fact that would be rational, what’s the point of leaving anything behind, after all? Although it might make sense to have something of a buffer. It’d be a bit of a bummer if you planned to draw down until you were 85 and actually ended up living until you were 100, although if your wealth ran out at 85, you probably wouldn’t live that much longer. If the cold didn’t kill you pretty quickly the sense of relative deprivation and general humiliation at getting it so wrong probably would.
If you’ve got a family, you’ll probably want to leave your house for your kids to squabble over, so your wealth pot would be the value of your house plus your pension, which IMO puts you at something of a disadvantage compared to people without children or more sensible parents who refuse to pass down their property wealth.
If you’re able to treat your main property as an income generator (of course you might be looking to have more than one house in your portfolio) then that could have a massive influence over the date at which you can declare yourself financially free.
This is precisely what I’ve done in moving to Portugal - my house is now generating me an income, more than what I’m paying in rent in Portugal, and assuming this situation continues I now need to accumulate less additional wealth to be financially free than if I had stayed in the UK living in said house!
State pensions?
State pensions are also going to influence how much you need to retire - if you’re lucky enough to live in a country like the UK where you’re entitled to a state pension worth currently around £700 a month (assuming you’ve worked and paid NI for 35 years), that’s quite a chunk off the wealth pot you need!
Of course state pensions only kick in after a certain age, and that age seems to be disappearing further and further into the future, but ATM they still pay-out for well over a decade based on average life expectancy.
Other factors which influence the amount you'll need to save!
There are number of other factors which can also influence how much money you’ll need in ‘retirement’, for example:
What physical assets you own that you can use to meet your needs without money (land being the most obvious one for food growing and off-grid electricity generation for example
The more skilled you are at the more in-demand skills, the better position you’ll be in to be able to swap that skill for other goods and services - although it might be more rational to just work if a global crash sent your wealth into free-fall.
Personal connections - which can save you a fortune if you’re mercenary enough about it - rent out the house and a perpetual trip around the world to visit Hive users? Pushing that ‘welcome period’ to its limit every time? I could milk free accommodation for years!
Your own physical resilience - if you’re fit enough to be able to ride a bike, you can save $A LOT on the cost of running a car.
Finally, mental resilience is probably the most important thing of all - if you can just learn to live without all that unnecessary shit, you could retire now, if you’re prepared to monk it up!
I mean, a monk, happy to live without property and rely on the charity of others needs no wealth, but that’s pretty extreme by most people’s standards!
Postscript: On active wealth management/ trading and FI
If you’re someone who’s got a wealth pot insufficient to meet your needs going forwards and who is relying on trading to increase that wealth, I don’t regard you as financially free - if you’re in that position then trading is like a job - it’s something you must do in order to become financially free.
If, on the other hand, you’ve got all you need invested relatively safely and all you’re doing is spending an hour or two a week doing sensible wealth maintenance, that’s different, then you can claim the FI label, well done you!