Since this is 1/25 of your portfolio, then as a general rule, your portfolio must be at least 25 times your annual spending in order to retire. Therefore, withdrawing 4% of your investment portfolio every year should cover your annual expenses. Thus, from this study, 4% became known as the safe withdrawal rate. The study concluded that if you withdrew no more than 3-4% of your investment portfolio every year, then it would be extremely unlikely that your portfolio would run out of money.
The study looked at a number of different stock/bond mixes of portfolios and their withdrawal rates from 1925 to 1995 in periods of 15 to 30 years. Why? In 1998, three professors at Trinity University released what is now called the Trinity study. You need to save at least 25 times your annual spending. How much money do I really need to save in order to retire? The less you spend, the less you will need to save. The more you spend, the more you will need to save. The key to financial independence is how much money you spend. Some people want to retire as soon as possible and are more willing to cut back some expenses.
Some people want to have a more lavish retirement and therefore will need to save more money. Your assets are producing more income than you spend in a year.Įveryone has a different financial independence number. You become financially independent when your wealth's assets produce enough income to cover your expenses.įor example: If you have $500,000 in assets and your assets produce $20,000 per year (4% of your total assets value) and your expenses for the year are $20,000 or less, then congratulations, you are now financially independent. Financial Independence, Retire Early What is financial independence?įinancial independence is having enough wealth such that you no longer have to work for money.
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