How much money do you need to retire with financial freedom? Is it One million dollars…Or Two million dollars?
The truth is many people wish to have financial freedom. However, when you ask them how much do they need to gain financial freedom…
they will tell you they have no idea… or they have not really thought about it
The US National Institute on Retirement savings report that 38 million Americans of working age households (45%) do not have a retirement savings account.
The same situation applies for the rest of the world.
A HSBC global pension study reported that globally most workers would run out of money just halfway into their retirement.
As you can see from the studies highlighted you need to seriously look at how prepared you are for retirement.
Most importantly, you need add a sense of urgency to your plans to become financially independent
There are two questions you must answer in your quest for financial freedom:
What is financial freedom?
How much money do you need to accumulate to achieve financial independence?
The answer to the first question is simple. Financial freedom is the ability to maintain your current lifestyle without working
How much do you need to achieve financial independence? This depends on your lifestyle
Your lifestyle may be different from mine because of your obligations
For example you may be single with no family obligations.
On the flip side, my lifestyle situation is different. I have a spouse, children and extended family to support. In addition I have mortgage payments, taxes and other maintenance costs
The key to knowing-how much you need for financial freedom-is to calculate your financial freedom number?
Know your financial freedom number
Your financial freedom number or magic number is how much money you need to replace your active income and pay your expenses… after you quit your 9-5 job
Finding your magic number is what separates financially independent individuals from the individuals that are broke.
In other words you must know the magic number. That is the amount of money you need to succeed at becoming financially free
When you don’t know your magic number you are just like someone shooting at a target blindfolded.You can’t achieve a target you cannot see
The good news is that you can calculate how much you need to become financially independent.
Calculate your lifestyle expenses
The starting point of finding the number you need for financial freedom is to calculate how much money you need to maintain your present lifestyle
Your lifestyle expense include all the expenses you incur monthly.
You need to include the cost of housing, basic living expenses, entertainment, education (if you have children), taxes and charity
Calculate your monthly expenses and multiply them by 12 to give an annual expense
For example if your monthly lifestyle expense is $3500, then your yearly expense is $42000.
Next you calculate how much money you expect to get from your pension savings at retirement.
The next step is that you want to calculate the rate of interest from the assets you need to become financially free.
Most financial advisers recommend investing in stocks, bonds and high interest saving accounts towards retirement.
I personally do not believe in trusting my retirement on stocks and bonds because of volatile nature of the stock market
I would recommend adding rental real estate as part of your retirement assets
Let’s assume you expect the following rates of interest from your asset and you have invested equal amounts
Rental real estate: 12%
Stocks: 8%
Bonds: 3%
Cash: 1%
Your average return will be 8 percent. That is the total return on this asset divide by 4
You magic number is your lifestyle expense divided by the rate of return
$42000/0.08, which equals $525,000
The amount you need become financially independent is $525,000
Congratulations you now know how much you need for financial freedom
Calculate your income gap
The next step is where you do what I call a reality check. Which means you find the income gap you have to fill before you hit your magic number.
The difference between your present income and your magic number-that is the amount of money you need to retire financially free-is your income gap
Here’s how to calculate your income gap…
The first step is that you calculate your cash flow each month. Your cash flow is calculated by subtracting your expenses from your your earned income.
Next you look at your income and write down the proportion of your income that comes from the assets that will generate your magic number
For example… assuming your monthly income is $2000
List your income stream like this
Salary… $1500
Rental real estate…. $300
Stocks…. $100
Bonds… $80
Savings… $20
You will agree with me that your income stream shows that you are earning $500 monthly from your desired retirement. Which means you are earning $6000 from your asset
Your income gap is $519,000. That is how much money you need to generate between now and when you intend to become financially free
By calculating your income gap you can focus more on working towards achieving how much assets you need to accumulate to earn your financial freedom
That’s how you find out your income gap. So start making plans today to work towards your plans to become financially free
The most important thing is that you know what you want. And you’ll surely accomplish your goals
Whatever the mind of man can conceive and believe, he will surely have