How much wealth do you need to realise ‘Financial Independence’?

in LeoFinance3 years ago

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.

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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!

So, how much do you think you need to realise financial independence?

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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.

A house is usually a simple thing to divide among kids. Besides, a house like anything can be liquidated before one's death. All kinds of arrangements can be made while alive if one suspects there will be a fight among one's kids over one's estate. Also, there are many parents who only have one child.

With income disparity growing in many countries, I think it would by more than a little selfish to leave one's children completely without inheritance. Accelerating technological development means that skills are becoming obsolete faster than ever. I think it would be quite a number do to your children to purposefully liquidate and spend all your net worth before your death because that would mean leaving them to the tender mercy of a future job market from which people with single digit IQs or any sort of persistent health issues are most likely to be permanently shut out. A disappearing tax base to which multi-national giant corporations are scarcely contributing anything to even today does not bode well for government welfare programs, either. Sure, the cost of everything will probably fall rapidly owing to the same technological development but that is no consolation if one's income falls even faster.

As long as the state doesn't get it, that's the main thing!

What I was thinking of when I said 'squabble over' is I've met a fair few people who've inherited a share of a house, one of their siblings moves in, the one that's not quite as stable as they are, and then it's just not the done thing to force them to sell! Whatever the will says!

I wouldn't blame anyone if they wanted to leave their house to their kids, but it is the one thing which probably ties people to working for longer more than anything else!

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That scenario is a tricky one. Selling the house before one has to move into a nursing home means the state could take a cut of the liquid property. A possibility is to give it away before dying.

I'd say having kids is the thing that keeps one working longer than anything else. It's much more difficult to adopt an alternative lifestyle to save a massive chunk of cash with a family in tow.

It's a brave person that does the latter for sure!

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To retire right now with quite a bit of mortgage to pay off, I'd need about $1.5 million to retire in order to maintain my current standard of living indefinitely. The fact that the mortgage would have been paid off before my normal retirement age is not factored in that. However, when it is paid off, that will not be the end of house-related expenses that exceed the usual monthly running costs such as utilities or small irregular repair costs. All structures and components of the house continuously age at a slow rate. At regular intervals, larger renovation work will have to be done. About 20 years from now, all the bathrooms will have to have been renovated. The house must have been repainted. The roof tiles are so durable that that it's probably not necessary to do anything about the roof by that time. But the drainage system around the foundation, the sewers and all the plumbing may have to be inspected and possibly renovated. A house like this accumulates a repair deficit at an average rate of about $200 per month. What that means is that $25,000 or so will have to spent on renovations per decade on average. That's about a fifth of what goes towards paying off the mortgage. Of course, we could always move once there's just my wife and I but I'd rather not unless we are looking at becoming physically incapable of living here any longer.

$1.5 million sounds about right!

Fair point about housing costs, a regular house is damned expensive, this is probably why I'll end up selling mine, but that'll be a few years down the line!

I've got at least 3 years before I need to start worrying about anything like bathrooms at least!

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We've got bathrooms to worry about probably in 2-5 years.

This is the passive portfolio type of thinking. It works for most.

Robert Kiyosaki of Rich Dad Poor Dad works hard to educate the world on thinking about cash flow. By using business interests, real estate and paper assets (passive stock/bond portfolio) the wealth needed could be vastly different based on the cash flow generated by each type of asset.

Real estate investing at 10% cap rates needs much lower wealth to achieve the same cash flow of a 3% dividend stock portfolio. Plus you can buy more property using debt than you can buy passive investments with debt.

I have various targets on many asset classes (sadly I have not entered the real estate game yet would love to own some Dollar General Stores at 7% cap rate once I am wealthy hah).

Currently I am focused on LEO. At $10 each I will be quite comfortable with all other assets a cherry on the top!

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Excellent point!

I keep seeing that book mentioned, I might have to give it a read.

BTW what's your take on what a realistic long term (Say 10 year return is?) Outside of moonshots I mean.

I'm actually suspicious of anything offering above a 20% annual return, even that seems too good to be true!

If LEO does hit $10 make sure you sell some, I doubt it will last that long!

Then again I'm sure you know that.

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The average person will likely achieve long term returns of 7 to 10 percent per year on average using a broadly diversified portfolio. The greatest stock market investors in the world like Warren Buffet had long term returns averaging 20% but most of that came when Berkshire was a smaller more nimble company.

The crypto markets remain small relative to global assets, therefore if this industry survives which I believe it will the returns over the next several years will be fantastic. Once the industry reaches trillions of dollars in market cap the future returns are likely to be in line with other major asset classes. During the next 5 to 10 years total crypto market cap could easily grow 20%+ per year.

I will likely begin selling 1 btc over a twelve month period once the price reaches $100,000. My remaining btc will be held to moon shot potential to $1 million.

LEO at $10 would be worth around $70 - $80 million based on token supply growing to 7 to 8 million. This is a very low amount for a crypto project in general and is a low valuation compared to websites with growing audience. Dips will occur but I could see a long term price established above $10 per LEO.

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Long story short, when alts start pumping, I'll financially independent. I guess the same goes for most of us.

Won't take long before we get there...

Now gimme my LEO back. NOW!

Better get some RUNE ready for that PUMP then!

There's yer LEO, sorry it took longer than the average BTC transfer!

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I think the amount will be a moving target depending on various life circumstances. Right now, if I'm going to get my own property at some point, I will need to have enough to pay that off which will be in the region of 200k+, that will be 20 years most likely...

But once that is paid off, outgoings will go down and/or it can be used as an asset. Although you can rent it out whilst living in it and get the mortgage paid for with a tax free allowance.

Basically, there's a lot to think about and I'll have to expand my spreadsheet whilst also building up the sat and hive stash in the mean time!

We all need a spreadsheet!

It's next on my list of essentials, right after oxygen.

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Ha! Mine's more:

Oxygen
Sats
Spreadsheet
Cheese Toasties

Did someone say cheese Sat-toasties? :P

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LOL, two currencies I can easily sink my teeth into 😃

That all depends on the price of crypto in Fiat value...

0.01 BTC by 2025?

Or 1000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 Hive

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Good thinking and writing.

Of course state pensions only kick in after a certain age, and that age seems to be disappearing further and further into the future,

We will bever retire :) at least not officially.

I think we will need more than 30 years of the buffer. Our lives are getting longer and longer. The quality of our last fourth is an issue and a challenge. How do we manage our life/health/sanity to reach the last quarter in a good condition?

@tipu curate

That's an interesting point about how much of a buffer we'll need - to my mind it doesn't necessarily make that much sense to make future predictions based on past performance.

As to the later I am kind of writing from a fortunate British perspective - with one of the best pension systems and health care systems in the world.

Although they too may collapse!

So maybe a larger buffer/ euthenasia strategy is a good idea.

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Sometimes I feel that it depends on a lot of narratives for example in a country like Nigeria, the amount you save may not matter because of the excessive rate of inflation and the rate of spending of an individual nevertheless 10 million dollars would do it for me

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Yes fair point, I do tend to work in Dollars or Euros which generally aren't affected by Hyperinflation.

$10 million is a lot!

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Ten million dollars is fine lol hahah you never asked if I didn't want a lambo?

You must do surely!?!?

Or if you're staying in Nigeria maybe that and a Bullet Proof Hummer if you ever want to venture into some of the not so safe regions up north!

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I seem that I can get Financial freedom if I have 10 million dollars.
Now, I am 38 years old.

But, my monthly income is less than $500.

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Sounds like you'd need $5001230 = $180,000 to achieve financial freedom by the criteria laid out by @revise.elo if you can live on $500 per month.

If you can live off $500 then surely you don't need anywhere near $10 million to retire!?!

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If Monthly income $500 is Passive income, I can/may be stay to retire.
But, I can't save $500 per month now.
It can be soon, I want to believe.

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As you mention on your post its subjective to our own needs and goals, what makes each of us happy, there have been very rich ppl who have abandon their life style because of all the rush and noise that having lots of wealth brings, awesome post

Hey cheers!

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I guess the ideal is to have investments that keep paying enough to cover your costs. Property seems to be a good one for that. I'll want to provide something for the kids as things could be tough for them.

!BEER

Agreed, it's all about that passive income!

I think you have to leave something for the kids, the future is probably going to get tougher money wise for sure!

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I do wonder how they will afford to buy a home. We are in a relatively fortunate position, so will do what we can to help. Daughter is renting for now, son is at home.

Luckily we do not have expensive tastes. Looking at getting the mortgage paid off and then our finances will improve.

Based on the type of life I envision myself living, maybe $5million, which Im still quite far away from achieving, perhaps 1 hive turns to $5k, it might be
more achieveable

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$5 million,

You're after the Lambo life then? No Jet required, I take it!

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A typical Central American family need around $7,000 per year for survived I spoke about a normal poor families, with this scenario the American central families maybe need around $100,000 for the retirement but the American families in the south as Argentine and Uruguay the things changes they need around $250,000.

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Very interesting, and quite a variation!

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2 million dollars? :D

That'll just about keep you in Splinterlands cards for the next couple of years!

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My property is paid for and I'm starting a campground on it.. that's my retirement

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Nice plan! Fingers crossed that the Pandemic gets under control asap!

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1000 btc

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Jesus, your'e high maintenance!

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In South Africa I think under current value without accounting for inflation I think $20 000 - $30 000 a year will have you living pretty comfortably, you wouldn't be living the most lavish lifestyle but you won't have to worry about most things have all your expenses covered and have money over to have fun with

My goal is $1 million to retire on (since I cant tell how bad inflation will be) and that we have basically negative interest rates here due to how bad our money losses value. I've set it there because it will give me a large buffer should SHTF and I need to make a run for it too

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$1 Million sounds like a reasonable amount!

In crypto most of it?

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I'd say 20% crypto at the moment, I still have stocks, bonds, fiat that I keep just in case, but as things progress I might move it over more well see

I'd be good if I had no debts and had a stable income which isn't gone at the end of the month. If I'm earning more than spending, it's good and I can invest, probably in Leo. As I don't have it at the moment, it's a bit of a struggle. Hopefully, hard work and consistency will lead me to new heights and some sort of freedom.

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You just have to try and save what you can depending on your circumstances, I think LEO is a pretty good place for any spare cash you do have though!

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10 Bitcoins and 50K LEO :)

You must be practically there already.

Which you be most reticent to draw down on though?!?

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Well for me I can't decide that, as you know human wants increases on a daily. Even at the point of trying to minimize spending range we end up exceeding based on different changes in life.
A men is never too rich, so seeing a particular figure as enough to say am financially independent seems unreal to me, things may end up crashing but that's not anyone's wishes... Judging from my response you'd know by now that if am to pick a figure as enough, it would be a very huge one... So let's 10 million dollars seems enough as reinvestment is always open to earn more profit.

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I definitely agree that there's a lot of uncertainty, and I guess the longer your pot has to the last, the more of that there is.

I think $10 million is more than safe!

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After much consideration and number crunching, I recon $3.56 will be required.
($3.87 if I party).

Is that your hourly rate?!?

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NOOOO! - that an estimation for the amount of dosh I'll ever need!


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