Investment income is the money you receive from investment assets like real estate, stocks, and bonds. When your investment income exceeds your personal money needs, you no longer need to trade hours for dollars in order to survive financially.
In the language of real life, this financial independence number means you could survive at a certain level only using the production of your investments. For example, your net income from rental properties would cover your personal overhead. Or with more traditional investments like stocks and bonds, the 4% rule for safe withdrawal may allow you to live off of 4% of your total holdings each year for a long period of time.
But before you begin hustling to accumulate wealth and income, let’s look at how to actually calculate your own financial independence number.
How Much Does the Ideal Life Cost?
The formula for financial independence may be simple. But actually squeezing all of your financial hopes, dreams, and insecurities into a math formula is challenging. But the financial independence number does not have to be perfect to be useful. Like any other goal, you can benefit from moving towards a goal even if the goal is just a reasonable guess.
I like to begin with the present by calculating your current expenses. You can do this a couple of different ways:
Once you have an estimate of what you currently spend over a 1 year period, you can make a guess for the future.
Many people find that their personal expenses will actually go down after retirement. If you pay off your home mortgage before retirement, that obviously reduces one major expense. And you may be surprised how much you can save in taxes when you live off of investment income.
My own number may or may not be relevant to you, but I’ll share it just to give you another perspective. I have a bottom line number of $36,000 per year, which is what I know our family could live off of based upon current expenses. And I also have a comfortable number of $60,000 per year which would give us plenty of cushion.
But the most important number is yours. And that’s something you can now figure out for yourself.
Chad Carson is a member of Metrolina REIA (metrolinareia.org), which provides education, networking, and networking for real estate investing in the Charlotte region. Chad also writes about real estate, money, and life at coachcarson.com.