What’s Your Number?

At some point we all try to calculate how much money we need to set sail and leave this (working) world behind.

In this article, we want to highlight some numbers to help you establish yours.  The numbers highlighted in this guide are on the basis of being fully done with work, living completely off passive income and/or current assets. This is not considering additional income streams such as a job or side hustle.

We look at wealth levels and consider 4 different approaches of how you may invest and spend the money dependent on your aspirations and comfort level. These are summarized below.

 > Cash spend down – don’t want to worry, or be hassled with investing anymore? Want to stop filing taxes? This approach would include keeping all your cash in a simple checking account and spending the balance down each month over a duration of 45 years. Savvy investors would not likely consider this approach, but there are certainly plenty of people in retirement that do so. It’s worth looking at the numbers and how they compare in any event.

 > Lifetime Annuity – (Single Premium Lifetime Annuity) this is based on moving the money into a lifetime annuity which will distribute money (part of the principle and interest) to you each month over the duration of your estimated lifetime. It also is locked into an interest rate so it continues to accumulate interest on the remaining principle during those years. We used a 4% interest rate and 45-years as the duration of payout. The annuity policies are used as ‘transfer of risk’. Basically, you turn the money over to an institution to structure and handle, so a.) you don’t make a mistake, or b.) run out of money! You utilize these annuity policies for what they WILL DO. Not what they MIGHT DO. They are excellent options for people who are looking to retire with simplicity and also to mitigate risk, particularly as you age. You can play with the annuity calculations here

> 4% rule  – The 4% rule is not a perfect calculation, or approach, but it illustrates a useful measure of how much you should be able to theoretically draw down your investment (stocks / bonds) portfolio each year over the course of 30 years, without running out. The math is pretty easy to understand, if you invest in a stock/bond portfolio, historically it has  matched or outperformed 4% annually after inflation and taxes. It’s been modeled rigorously across different portfolios, and different periods of time. In some scenarios you may actually increase your wealth over the 30 years of 4% annual withdraws, in other cases you may run out of money before 30 years. Much depends on market cycles, how you invest the money, etc. The 4% rule calculation is widely used to establish your financial Independence ‘number’. Just take your annual expenses (i.e $60,000), multiple by 25, and you get your number.

> Aspirational FI (‘Financial Independence’) – Your aspirations here are to be able to live off your passive income, while still growing your net wealth on average, each year. In order to do this, you should have your investments generate both cash to live on, and also be invested in such as way that assets can appreciate in value. For this model, we will use a diversified portfolio, across – stocks, bonds, cash, property fixed income, alternatives (gold, collectibles, P2P lending), and private investments, that generate on average 3% cash, and an increase in NAV of 4% annually.

So, whats Your Number? Here are some common figures for net wealth that people often aspire to get to in order to be financial independent and have the option to retire.

There are many variables to consider around how you live,  where you live, how long you will live, your liabilities, market fluctuations, etc… so please remember that these are just rough numbers and analysis to give you a basis to consider.

$500,000 USD

> Cash spend down:

  • $925 /mo for 45 years

> Lifetime Annuity:

  • $1,974 /mo ($23,688 /pa ) for 45 years

> 4% rule:

  • $1,666 /mo ($20,000 /pa)

Analysis – you can see what a considerable difference it makes to have the money invested earning 4% (lifetime annuity), versus just keeping it in a checking account and spending it down each month. You can literally double your monthly payouts.  At this wealth level, being single, outside of a developed country is possible. If you have dependents, live in a developed country, or you’re retiring early, it could be challenging without additional income. Inflation will squeeze your purchasing power as you age, and you can not afford to make a mistake with your finances, and thus need to invest and generally be financially prudent. It’s also not realistic to expect you can grow your wealth here while also living off the lump sum and dividends.

$1 Million

> Cash spend down

  • $1,851 /mo for 45 years

> Lifetime Annuity

  • $3,949 /mo ($47,388 /pa) for 45 years

> 4% rule:

  • $3,333 /mo ($40,000 /pa)

> Aspirational FI:

  • Cash – 30k, $25k net / ($2,083 / mo)
  • Appreciation – $40k / year, in 10 years your wealth can grow to $1.5m while living passively off $25k a year.

Analysis – At this level it is likely still to be difficult if you live in a developed country and have any dependents. Recessions would be difficult to stare down if you are heavily exposed to the market, and there would be significant pressure to consider going back to “work”. You cannot afford to have any considerable investment fail, so you need to invest conservatively. and maintain your Aspirational FI. However, at this level, it certainly makes a lot more options available to you, especially if you have no dependents , are able to move to a less expensive destination of choice, or are older and thus need to stretch the money over fewer years. Aspirational Financial Independence is possible here in the right conditions.

$2 Million

> Cash spend down

  • $3,703 /mo for 45 years

> Lifetime Annuity

  • $7,899 /mo ($94,788 /pa) for 45 years

> 4% rule:

  • $6,666 / mo ($80,000 /pa)

> Aspirational FI:

  • Cash – 60k, $45k net
  • Appreciation – $80k / year, in 10 years your wealth can grow to $3m while living passively off $45k a year.

Analysis – More options open up to you at this level, including if you are living in developed countries. Recessions are still difficult to stare down, especially,  if as they are in most cases, the conditions are unprecedented.  Smaller investment mistakes are not likely to ruin your FI and unexpected costs are easier to bear. A lifetime annuity of monthly payouts of $7,899 over 45 years will be appealing and satisfying to many people. Decrease the number of years from 45 to 25 and you can increase your payouts to $10,447 /mo.  Aspirational Financial Independence becomes more interesting here, as your net wealth will grow quicker (in $ amount).

$5 Million

> Cash spend down

  • $9,259 /mo for 45 years

> Lifetime Annuity

  • $19,749 /mo ($236,988 /pa) for 45 years

> 4% rule

  • $16,666 /mo ($200,000 /pa)

> Aspirational FI:

  • Cash – $150k, $100k net
  • Appreciation – $200k / year, in 10 years your wealth can grow to $7.5m while living passively off $100k a year.

Analysis – If you have limited liabilities and live within your means, this number can cover the basis for most people. At this wealth level, you could have $1 million in personal (unproductive) property such as real estate, cars, toys, and still have $4 million invested and working for you. You do need to be careful here to minimize investing losses and not give way into too much lifestyle inflation.

$10 Million

> Cash spend down

  • $18,518 /mo for 45 years

> Lifetime Annuity

  • $39,499 /mo ($473,988 /pa) for 45 years

> 4% rule

  • $33,333 /mo ($400,000 /pa)

> Aspirational FI:

  • Cash – $300k cash, $200k net / ($16,666 / mo)
  • Appreciation – $400k / year, in 10 years you increase your wealth to $15m, while living passively off $200k year.

Analysis – On paper many people would be more than happy here, but things can can still go wrong. We’ve heard of plenty of stories, including (James Altucher ILAB 56) who have made this type of money, and then lost it all.  Lottery winners go broke more frequently than not. Now most of you reading this are more savvy, but at this wealth level its more common to splurge, invest in risky businesses, give way to lifestyle inflation, bank roll a new business, and so on. A couple things go wrong, the market goes into a recession, you panic and sell your new house (that you overpaid for) and equity positions, and pretty quickly you’ve cut your fortune in half! However, if you are prudent, and live within your means, most people will have plenty here to live with a surplus to do some philanthropic contributions, start-up investing, luxury vacations… whatever your into.

$20 Million

> Cash spend down

  • $37,037 /mo for 45 years

> Lifetime Annuity

  • $78,999 /mo ($947,988 / pa) for 45 years

> 4% rule

  • $66.6k / mo ($800k /pa)

> Aspirational FI

  • Cash – $600k cash, $400k net / ($33,333 / mo)
  • Appreciation – $800k/ year, in 10 years your wealth to $30m, while living passively off $400k.

Analysis: This is a common aspirational number in entrepreneurial circles  for Financial Independence. This is a significantly different position than the other numbers, in that, assuming you invest it smartly, or even not invest it, you should be able to achieve a financially-free life of your dreams. Of course, you can still blow $20m, and celebrities and athletes do it all the time, but you wont. Although not enjoyable, you can afford to make larger investment mistakes of c. $1m — you’ll make it back in a year or two of future investment gains. You can easily afford a few million in personal property (houses, cars, boats) that you simply lock-up when you are not using. Multi-year recessions don’t make you sweat, in-fact, you may actually enjoy them for that very reason. While your total net worth grows easily and passively, you have plenty of money for you and a family to live within reason while you hold your head high, signing 6 figure checks each year to your favorite charity or ESG project. And you can, and likely should hire help. A full time personal assistant, nanny, chef, driver… whatever you need is financially available here.


Additional Reading

The 4% Rule – below is a chart provided by JP Morgan that shows some of the backtested calculations using withdrawal rates between 1% – 10% over the course of 30 years. As you can see the 4% withdraw has success in most portfolios over that time, but doesn’t work every-time (roughly 85% success rate).

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