July 4th commemorates our Nation's Independence from Great Britain. The day we adopted the Declaration of Independence in 1776, free to choose our own destiny. It's a celebration of American freedom, democracy and the birth of our Country. Well, this July 4th, I challenge you to see when YOUR personal "Financial Independence Day" has arrived. The day that you've saved and invested enough money to break free from handcuffs of a job. But how can you determine your own personal "Financial Independence Day"?
In financial planning, there have been many studies indicating that a 4% withdrawal rate from your investments, historically could provide you the inflation adjusted income you need for a lifetime, without running out of money. So, the first thing we need to do is determine how much monthly income do you need to retire comfortably? Hypothetically, let's say that number is $6000 per month to cover all of your living expenses. And if we factor in social security, again let's hypothesize and say that number is $2000 per month. That leaves a $4000 monthly gap that your investments need to fill.
By annualizing the $4000, or $48,000 per year, you divide that by 4% and in this scenario, you would need $1.2 million invested to support a $48,000 a year income to supplement social security, which would increase annually with inflation, for life. Simple, right? Yes and no. This is a very overly simplified calculation to give you an idea of what your personal "Financial Independence Day" number would look like. But of course, there are factors that only a real financial plan can model in. Things such as, what if you hit that number but you're not eligible for social security yet or may want to delay starting your benefits? What if you have current debts that will be paid off at some point and no longer need that additional income to pay the debts, such as a mortgage, home equity line or car payment?
The one thing in planning that I have come to realize, is plans do change. Sometimes frequently but at least having a goal and a strategy with which to achieve that goal, is the first step towards hitting your own personal "Financial Independence Day". So, this 4th of July, let's celebrate our Freedom as Americans but take a few moments and a little pulse check and see if you're on track to hitting your personal "Financial Independence Day" number!