How much do you need to retire early?

What is retirement?

When most people think of retirement the first thing people tend to think about is the freedom that comes with not having to go to work each and every day. Taking this further the vast majority of people ‘want’ to retire early, but very few dare to explore the options available to make the dream a reality, until time is heavily against them.

But retirement usually has a few common factors namely, having enough money available to support their quality of life without needing to work for more.

So retirement can be defined as;

“Being able to financially support a quality of life through passively generated income”

It is important to note that there is no mention of time in this definition so achieving this criteria can be done at any point in ones life. Remarkably this definition can also be reduced further to the definition of financial Independence.  

So what is financial Independence?

net passive income ≫ total cost of lifestyle

Where the money that you earn passively ‘significantly’ outweighs the cost of your lifestyle. i.e. being able to do whatever you like, whenever you like and being able to do it.

Related: Why being Rich and being Financially independent are different.

What the stats say

In order to satisfy the above statement the first factor that must be known is the cost of your lifestyle. It also has to be said that the final number is neither right nor wrong, but simply what is needed for yourself and or your partner for financial independence, for your lifestyle and once again there are no limits as you will see shortly.

To put some context around this, there are statistics that suggest that the cost of living for a single is $2,835 per month ($34,020 annually) or $4,118 per month for a couple ($49,416 annually)

Other values such as the single retirement pension is $24,268.40 per year. [Up by $187.20 per annum from the previous financial year]

Alternatively I know of an entrepreneur who’s Monthly money goal for their lifestyle was [is] in the order of $32,000 per month. [$384,000 annually]

Related: How Household wealth is in the wrong places

The True Reality

I can already hear the cries of greed across the internet. How can someone justify $32,000 per month as their money target?

Honestly it does not matter, because your money target is going to be different from someone else’s and once again the financial independence target is arbitrary for any individual.

However, the annual target of $384,000 is actually much closer to a ‘realistic’ number than you might think. Here’s why.

When it comes to the costs of living, there is an over-arching assumption that the majority of spent money is used on weekly consumables and the remainder is spent during the limited amount of time on the weekends.

To that end, Financial Independence not only has to support the current cost of living, but also the lifestyle when you buy your time back giving you a permanent 7 day weekend. This means that unless you want to have a permanent staycation at home in front of the TV, the cost of living could (and should) rise by 2.5 times.

This drags the cost of living up to, $85,050 per single or $123,540 per couple.

For the sake of round numbers I round up to $150,000 for raw calculations because it offers a surplus, but when using this as a net income value, the gross begins to creep beyond $200,000 per year for a couple.

$225,000 is the gross requirement for a $150,000 net.

Related: Why you can’t buy back your time … yet

Goal Setting and starting the journey

All of a sudden $49,416 per couple starts to look like a small amount, and the comfort of a $384,000 income starts to become far more necessary.

The first step when it comes to planning for your financial independence (and you have to think about it, because you’ll only be employed for so long) is setting a target.

Right or wrong, when the reality of a target starts to become clear, such as realising the value of assets needed to achieve the passive income, understanding the growth or appreciating the amount of savings that needs to be poured into investments, the natural reaction is for people to lower their target.

Personally I find the reaction very interesting.

Namely because the instinct is to sacrifice their end quality of life while sub-consciously remaining to choose a money for time trade, rather than look for supplementary or alternative means to support their financial independence.

Like always Investing is a modern necessity, but the cost of entry is not cheap.

Cash Flow is king, and an efficient scalable business model is a non-negotiable for anyone who wants to retire above the poverty line.  

Related: How you’ve been setup for financial failure

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