How much money do you need for financial independence?

To understand how much you need to retire, you need to know how you want to live.  It's important to consider the following factors:

• How much do you want to spend on a monthly or annual basis?
• Do you want to keep living in your home for as long as possible?
• Do you want to drive newer vehicles?
• Do you like to travel and is it on a budget or luxury vacations?
• What do you want to leave your family or children?
• Do you have any philanthropic wishes?
• When do you want to stop working?
• Do you have any preferences for asset classes? (e.g. ethical investing)

In addition, there are some factors not in your control, e.g.:

• What is the state of inflation in the domestic and international economy?
• Could there be "shocks" along the way (e.g. Covid-19 or 2008 recession) and how much contingency do you want to save as a percent?
• Projected or expected returns on assets versus actual returns
• Future changes in income, sales or other taxes that affect cost of living

Reality is complex and dynamic. Depending on your preferences, there is a wide range

What you can see from the points above is that there are many personal preferences, as well as macro-economic and political factors you want to consider when thinking about your future financial independence.

So lets start with a simple assumption.:

• Financial planners typically provide ranges of 60-80% of your pre-retirement spending in retirement. Depending on your answers to the personal questions above, you should pick a range between these two estimates. More high-end choices mean staying closer to the higher end of the range.
• Once you know the monthly spend, you can then apply a few assumptions: 3-4% for annual inflation, 10 to 20% for "contingencies" like pandemics or recessions, etc.
• Then plug your monthly living costs into a present-value calculator to determine the cost of the cash flow on the day of your retirement. This is how much you want to have available.
• If you have family, and children, you have to decide on whether you want to leave them an inheritance of a certain amount. Similarly, if you have goals for philanthropy, you need to account for them in your "retirement model" as well. Start by adding this figure to your required assets on retirement day.
• Don't forget to account for taxes as you draw income from your registered and non-registered investments.

If you would like assistance with starting to put together a comprehensive financial model for your retirement planning, a good place to start is listing out estimated monthly or annual cost for everything you would like to do (e.g. annual trip to Europe, 3 months rental and living expenses in Florida per year, budget for dining at restaurants each month, monthly vehicle costs, professional memberships costs,  etc.). If you would like a professional to help you put this together, we are always happy to help you put together a realistic model that helps you assess your financial situation and come up with a plan - just drop us a line.

Things may change or require tweaking along the way, but you will always benefit from having a well-quantified plan, so you know where things are at. It is never too early or too late to get started on having a strong retirement model and plan.