So I decided to try this fun game – You can try it too. Pretend you decided to stop working tomorrow and were going to live off of absolutely nothing else other than your financial assets (and good looks) for the rest of your life. Call it an early retirement. Call it what you will.
The magic question would then be: How much money would you be able to pay yourself each month?
How Much Money Would You Need?
In the past I’ve determined that my magic number to reach financial freedom was somewhere around $5,000 per month. In other words, if I had $5,000 rolling in every month from something other than my job, then I would basically consider myself financially free and could responsibly decide if it’s necessary to continue being employed.
So after going through the motions, how much would I be able to pay myself?
The answer – Around $1,445 per month.
How did I come up with that figure? Pretty easily actually. To get a round ball-park figure, I simply added up all my retirement accounts, went to this handy 72t calculator to see how much money I could safely pull from them, and then just divided the yearly figure by 12 to see what I’d get per month.
Readers – Please try this out for yourself and let me know how it goes for you in the comments below.
What I’ve Learned From How Much I Want Financial Freedom:
Obviously figuring out your finances like this is just a quick estimate. I could have taken more time to look at each individual asset (retirement accounts, dividend stocks, etc) and see how much I’d really be making. Or I could have used the traditional 4 percent withdrawal rule and ended up with a monthly figure closer to $2,000 per month.
At any rate, I learned quite a few things from this fun little exercise:
I don’t have anywhere nearly enough money to declare that I’m financially free yet!
There are no shortcuts to an early retirement. Despite how much I want financial freedom, like it or not I’ve got a long ways to go before all my savings and all my assets can truly take care of me for the rest of my life.
This puts things into perspective and brings me back down to reality.
My wife and I always joke after a long hard week of work that we’re going to quit our jobs and just live off the land.
Even though we’re not serious, the thought does start to infect your head with thoughts and ideas, and you start to really think hard about an early retirement. In fact – it can plain mess with your head!
I once shared my thoughts on how thinking too much about an early retirement can actually be harmful to your career and life in the present. Why? Because you start to believe you’re almost there and that you don’t have to put up with anymore crap from anyone. (Remember the last 3 months before high school ended how bad you had senior-its?)
That’s where doing a reality check like this get your head out of the clouds and stop you from being delusional. Simply taking 10 seconds to crunch the numbers and do a quick reality check can help you take one giant step back and show you just what a long, long ways off you are from actually pulling it off in real life.
I guess it’s back to work tomorrow …..
But it does inspire hope!
If I would have done this same exercise about 5 years ago, I probably would have calculated and found out that I only have about $200 per month to live off of.
Now somehow I’m almost 30% of the way to my financial freedom goal. Personally I find it kind of remarkable that I could hypothetically make over $1,000 appear out of nowhere each month if I had to!
It’s kind of sad, but a lot of people who actually are age 65 or older and looking to finally retire can’t even generate +$1,000 from what they’ve got.
So rather than looking at my current situation as a giant shortcoming, I’m very proud of what I’ve accomplished so far. It shows me that I’m on the right track to where I want to go and only have just a little bit further to go.
And thanks to the magic of compound interest when it comes to investing, my savings should theoretically grow a lot quicker than they did during the first 10 years.
It also inspires me to think more creatively.
So maybe ~$1500 is all my financial assets will produce right now. That makes me wonder how I can make this goal happen even sooner. This is why I’ve done so much research into how taxes affect your savings outcome and how I can create even more passive income opportunities to grow my money even faster.
What about my other money making avenues like this blog?
Say I was able to pull in another $1,000 or $2,000 per month from my advertising and niche websites efforts. If I could find a way to reliably keep that up, that means I’d only need $3,000 to $4,000 instead of $5,000 a month from my savings. Now how close would I be to declaring financial freedom?
Conclusions:
Overall, I think it’s always important to have an understanding of where you stand financially time to time. Though you don’t have to know exactly what your investments are doing in real-time, you should get a “snapshot” of how much money you have saved up and what potential doors it could unlock for you. Some day I’m going to run this exercise and you know what I’m going to find? I’m going to learn that I have more than enough money saved up and more than enough passive income streams to support my family for the rest of my life. Though I may not be there yet, all I need to know is that I want financial freedom and can see that I’m heading in the right direction.
Readers – How far off are you from reaching your financial freedom goal? What are you doing to get there and how are you monitoring it?
Images courtesy of FreeDigitalPhotos.net
That’s a sad calculation. I’d only have about $650 a month from retirement accounts. If you add what we make on rental income, we could maybe have $1000 a month if it was a good month, so pretty depressing. Now, when my office building is paid off in about 5 1/2 years, it’s a different story. It makes me sad to see how much we are putting toward that mortgage, but hopefully it will pay off down the road.
If that mortgage carries a higher interest rate than what you could theoretically be earning if you were investing the money instead, then I’d say that’s a pretty good use of your money in paying down that debt. Plus you should be able to count the office building as an asset that could one day bring in some potential income.
I learned everything I know about money from my mom. Even though she had little formal education, she understood how money works, how to get it and how to make it grow.
There are plenty of people who have really hit a home run when it comes to money without ever having any formal education. Congratulations to your mom for inspiring your curiosity with managing your own finances.
Haha… I literally told someone over the weekend that I was “close to early retirement” even though that’s not nearly true at all 🙂 Once you start thinking about this all the time it DOES sometimes feel like you can just live off what you’ve amassed and “figure it all out.” So great point indeed. If I weren’t about to get the boot from this coffee shop I’m currently at (wifi about to expire!) I’d calculate this myself and share… will try and remember later to – interesting post!
Thanks J. The concept of early retirement, as precious as it is, can really warp your mind if you don’t do little reality checks on yourself every now again. I can’t tell you how many times I’ve had to tell myself I’m NOT a millionaire yet and no where close to being ready to supporting myself if I were to lose my job. It stinks to come back down to Earth, but it also puts the fire under you to just keep working away at it.
“it’s always important to have an understanding of where you stand financially time to time” So true. I will have to do that calculation, but to tell you the truth I’m afraid. I don’t know if I’m anywhere close to financial freedom, and I need to do a new check in to see where Im at and where I want to be going.
I can understand being afraid to know. During the Great Recession I wouldn’t check my mutual fund balance because it was just sad how far down it had gone ….
I think I’ll just save myself the trouble of doing the calculation and estimate that I am roughly $4,900 short of my monthly income retirement goal. =(
LOL. I hear you. You’ve just got to keep pushing forward those niche site projects!
I’m about 80% off of my goal. But I am aggressively investing every month and saving for another rental property to increase the amount I can live off of. Just like anything in life, I’m not going to get there overnight. But by making a priority, I’ll get there in the length of time I hope to.
That right there is the key! You’ve got a plan and you’re slowly chipping away at it.
I’m doing the same thing with my dividend stock fund. If I can keep adding a few +$10K to it every year, eventually I’ll have such a large amount of monthly dividend payments that I’ll be set for life.
Even though I’ve personally quit my job to be a stay at home dad/writer, I don’t consider myself (our family) retired. My wife still works full-time and we would not feel comfortable enough with our assets for her to quit doing that. The complication with the early retirement and the issue of financial freedom is the unknown future, specifically how long will we live and what will our health be like during that time. You could live to 100 (like my grandfather) or come down with a disease that literally wipes out your savings. It’s such a difficult thing to plan for and say with surety, “I’ve arrived.”
We’re nowhere near financial independence either. I actually think it will be a while for us since our kids are so young. I want to get them through college first.
I’m right there with you in having a long way to go. But having a goal in mind is very helpful in making me progress towards that goal. Point well taken that focusing too much on early retirement could be harmful in a current job. There needs to be a good balance between planning for tomorrow and living well in the present. I work at finding that balance in my own life.
The thing is once you are ready to retire, many expenses drop off so that 5000 grand can be reduced to maybe 4 grand a month. Mr Money mustache lives off about 25K a year which is closer to 2 grand. I think if I have the mortgage paid off by then I will need only 3K a month to allow for some luxuries, and a saftey buffer. This is all dependent of course on the direction inflation goes in the future. BAsed off the 3K im going to need 2300 more to go. Residual income where are you?
Just as how much I’d like to have a financial freedom as soon as possible, I know there’s still a long way to go for me to live comfortably without having to worry about making money actively. Nevertheless, I don’t want to be obsessed with it and not enjoy life. Save as much as you can, but there’s more to life than early retirement. Sure it is nice, but if it only makes you stressful then it’s not healthy.
Seriously, this made me realize that I haven’t saved enough. The thought of paying myself for a month would not give me the ideal life I would like to have when I retire. I would have $350 to live off, which makes me feel uncomfortable. Reality check! Need to be more saving-oriented.
Yes, being more savings oriented will be helpful in increasing the amount of money you’ll have to live off of. But don’t neglect also being more “cash-flow” oriented as well. For example: If you were to make a financial freedom plan that included owning rental houses and dividend stocks, the +$1000 you could get from them would greatly reduce how much money you actually need to save for retirement.
Interesting read! It made me realize that I, too, have a long way to go to my financial freedom. I am still working for money rather than letting my money work for me. But I am not losing hope when it comes to my finances. Increase my income and decrease expenses. Manage my cash flow and invest more. I still have a long way to go, but I am determined to reach my goal.
Just keep your focus and you’ll get there.