Exactly how much money do you need to achieve financial independence and never have to work again?
We calculate our annual expenses
Applications like Fintonic, or Mint allow us to connect our bank accounts and categorize all our expenses. Even so, it is not necessary to complicate with categories, with an analysis of how much we spend per year would be enough.
We multiply our annual spending by 25
We already discussed the 4% rule in the Fire Movement article. The 4% rule comes from the Trinity Study, conducted by Texas Trinity University of Finance. What this study indicates is that if 4% of our financial portfolio invested in an index such as the S&P500 is enough to cover our annual expenses, we will never run out of money, since the S & P500 in the long term has always given annualized profits of 10 %.
For example, if we calculate that our expenses are $30,000 gross per year, we would need an equity of
30,000 * 25 = $750,000 invested in the stock market in a stock index such as the S&P500.
Every year we can sell 4%
Every year we can sell 4% of this equity and according to this rule we would never lose money. In fact, if we consider that IRPF taxes are much higher than on the sale of shares (although the exact value this depends on each country), the necessary equity would be much lower.
For the assets of $750,000 we can spend $30,000 per year as we have calculated and it would not be necessary to work a single day more, since all the money withdrawn would be recovered by the S&P500 growth as has been the case for the last 100 years.
Try to predict future expenses
It is a good idea to try to exceed our calculation to avoid possible changes. Some of the questions we should ask ourselves to calculate our future annual expenses are:
- Do I have Social Security included?
- How much would life insurance cost me per year?
- Do I intend to have children in the future?
We can use the FIRE Calculator to calculate how long it would take to reach that exact equity or if we want to play with a withdrawal rate other than 4%.