Do I just reach Financial Independence?
When I first heard of the term” Financial Independence,” the questions come to my head immediately are:
What exactly is financial independence?
How much net worth or income do I need to accumulate or generate to be financial Independence?
Here was what I found out…….
Financial independence means one has sufficient personal wealth to live, without having to work actively for basic necessities. In another word, your incomes or assets are enough to cover your expense whether you clock in or not. Hmmm….Like Paris Hilton?
There are so many ways to evaluate if you have reached financial independence.
- Based on 4% withdrawal rate: When your net worth is 25 times your annual expenses, and you withdraw 4% from your portfolios, then you have reached financial independence.
- When the passive income is enough to cover your expenses. If your monthly expense is X, and your passive income consistently is at least X or more, then you have reached financial independence.
I have very low expenses, right, you guessed it, I don’t live like Paris Hilton. Since I don’t have debt, either, my net worth is already exceeding the 25 times of my annual expense. Wait, did I just reach the financial independence?
I was excited! That did not feel real. After 2 minutes of excitement, then I realized, ya, it’s not real yet.
How come I don’t feel like celebrating yet?
The reason being is that I don’t plan work 9-5 until my 60s. 4% withdrawal rule was designed for the generations who majority retired at their 60s, thus, 25 years to spend down the assets seems reasonable.
For early retirees, it’s possible that one can live to 95 or more with less stressed life style? Even not, it seems safer to plan such possibility. So if you retire at 45, then, you need to plan for 50 years. Your assets or income need to at least last that long.
Pension and social security can help some. I don’t have pension. I am pretty sure the way how the government run their budget, by the time when I reach my social security age, the benefits can be cut one way or another. Social security benefit used to be tax free in the old days.
Since the passage of the 1983 Amendments to the Social Security Act, Social Security benefits are subject to taxation. The actual benefit amount might not be cut, but they can change how it’s taxed. In the end, the net you are getting is much less than people received their benefits in 1970s.
In conclusion, I like to have a little more buffer.
How about you? How you define your target number for financial Independence?