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.
May 28, 2011 at 8:42 pm
I suspect it is very difficult if not impossible to plan this far ahead. You’re assuming much more is in your control than history has shown will be the case. However, the good news is that you’re on the right track. Just don’t get ill though…that could seriously throw off all your plans.
May 29, 2011 at 2:00 am
Deb,
Thanks for the comment. Yes, life is full of assumptions and as someone who wants to get out of the rat race decades before the government says I should, I will have to make plenty of them. One thing is for certain, though. The more I save and the less I spend, the quicker this will be achieved.