Freedom Days

So I have used big words and claims so far: financial independence, controlling your destiny, and enjoying your life. Is this even possible? It very much is, if you understand your current financial situation and how much you need to account for in the future. It doesn’t have to be an exact science, even starting with a ball park figure should suffice.

Let me illustrate a simple concept:

Let’s assume that my average yearly expenses E = $55,000. In this amount I include essentials for my family, health expenses, children’s education and savings and enough buffer to enjoy the vagaries of daily life.

I will also assume the average rate of return in the market is R = 10%^#1

Now if I have retirement money M = $550,000 in my account that yields 10%, I can retire right away as the amount will yield $55,000 per year, forever^#2. That’s it. It is that simple.^#3

Many people calculate their “M” and they will track how far away are they from achieving the target. This is a great way, it shows whether you are 35% or 95% away from the target. You modify your savings, and if lucky, your income to achieve this target quicker. However, for many of us who earn salaries just above or below the country’s median, this could be a few years away.

To keep myself motivated, I keep track of how many days I am able to “buy” with my current savings. In this case, I divide $550,000 by 366 days, and it gives $1500 approximately. That’s it! Every time you save $1500 of your earnings, you are buying one Freedom Day for your future, FOREVER^#4. Thinking of upgrading your TV from already monstrous 55″ to a ridiculous 80″ ? Save that $3000 and buy 2 days of your future. Thinking about getting a 2015 version of a car when a 2011 would do just fine. Save that $6000 and buy yourself 4 days of your future. You only have to make 366 “$1500 decisions” to buy 366 Freedom Days, and suddenly you find yourself Financially Independent! The best thing about keeping track of this way is that you make decisions to alter your work schedule. Want to go 50% part time? Just have 183 Freedom Days bought and you are good to go!

#1 Average market returns are only that; average. I am not using Compounded Annual Growth Rate (CAGR) here. Some years markets perform well and some years don’t as in year 2008. It also behooves well to diversify your holdings into bonds, fixed rate deposits, real estate rent etc. More on this in later posts.
#2 This concept is called perpetuity. Depending in your country, a 10% market return Y-O-Y may not be achievable, and in that case we would use a safe withdrawal rate (SWR) that is a few points below this rate of return.
#3 We will get into the brass tacks on how to calculate this rate in later posts and what to do when market doesn’t do well as in the case of 2001 or 2008 financial crises. Also, we would discuss in detail about inflation, an agent that derails many a retirement target.
#4 Same as #2. For simplicity purposes I have assumed that I will be able to get 10% from portfolio forever. In reality, it won’t be and I discuss this in detail in the post about SWR.