True freedom comes from achieving financial independence. However, it can be hard to define what financial independence actually is. Is it some nebulous number like $1 million? How do you actually know when you’ve become financially independent? There is a simple way of determining this number and it can be done in pieces. When I finally decide to drastically cut my income in semi-retirement, what is my biggest fear? I would say that my biggest fear is drawing down my saved income too fast and ending up destitute. So, in order to at least survive, I need to be able to cover housing expenses and food. I am a big proponent of retiring outside of the US and having my dollar go further. The Philippines comes to mind. Using that as an example, I can rent a modest one bedroom apartment for approximately $400/month or $4,800/year. Assuming that I cook most of my meals, I estimate monthly food prices to be approximately $200/month or $2,400/year. Total for food and shelter = $7,200/year. What do you need to save in order to produce income of $7,200/year? Most people will tell you that 4% is a safe withdrawal rate whereas 3% is an absolutely safe withdrawal rate. According to FIRECALC , there is no period in history in which you would have depleted your savings by withdrawing 3%. What this means is that I need between $180,000 – $240,000 saved and I have food and shelter covered for life. Obviously there are probably a few more things to consider such as health insurance, recreation, and other costs. This is just a start. You will also need to adjust your numbers accordingly depending on where you want to live. Assuming that you semi-retire instead of fully retire, even a modest income can drastically decrease the amount of money you need to save in order to achieve financial independence. Using a 3% withdrawal rate as an example, earning $500/month, or $6,000/year, is equivalent to having saved $200,000.
Saving is difficult. However, if you view every dollar you save putting you one step closer to eliminating one expense towards retirement, it is a powerful feeling.
