Reaching financial independence has become increasingly important to my husband and I over the last few years. We think the ability to decide what to do in life on a day-to-day basis is liberating, whether that includes working or not.
Having the freedom to pursue what drives you, what moves you to action because you care, not because you feel you "have to," is unmatched in our opinion. You feel alive, purposeful and satisfied day in and day out. The feeling of having a choice and being able to act upon it is, well, priceless.
This focus on feeling free to forge our own path grew in stages:
- Stage 1: Save enough of our income yearly to support a comfortable retirement at age 65 - you know, what you’re “supposed to do”.
- Stage 2: Save enough to be able to address emergencies beyond a yearly retirement savings rate, for us that was somewhere over 10%.
- Stage 3: Go beyond a 10% savings rate and maintain a lifestyle that would enable either of us to leave any job/career we no longer feel is a good fit.
- Stage 4: Be able to go out on our own and not worry about bills for at least a few years without touching retirement savings, which translates into building a large emergency fund.
- Stage 5 (Current stage): Save enough never to have to work again, if either one or both of us so choose. That means official FIRE* status!
How much is enough?
So, how much money does it take to be truly financially independent, to go beyond the feeling of still needing to work at some point in the future? Well, search around the web and you’ll find all sorts of definitions. One that seems relatively common is the one Mr. Money Mustache explains as the “rule of 4%”. Figure out your yearly expenses based on the lifestyle you want to maintain once you are financially independent and multiply that figure by 25. That would allow you a 4% withdrawal rate on your investments, which, theoretically, would have your nest egg at least keeping up with inflation and then some. And, that assumes you would make no additional income, ever, which is likely a stretch.
What would your number be?
Everyone’s number is different. The answer could be as low as Jacob suggests is possible over at Early Retirement Extreme, or as high as any exorbitant lifestyle might dictate, but why not start with a cool $1,000,000?
The word “millionaire” has a nice ring to it, doesn’t it? That means $40K per year in pretax income to support your lifestyle. Not too shabby, and certainly a good start - though many, such as Mr. Money Mustache, would consider $40K gross far more than enough for a family to live on comfortably each year. One million dollars in investments would enable us to live a comfortable lifestyle while allowing us the freedom to pursue our long term goals, which include getting through a wild and crazy bucket list.
Let’s make it official by telling the world:
My husband and I intend to be millionaires (sooner rather than later).
So what’s our plan?
Here are the yearly goals the F2P family pledges to achieve, starting in 2014:
- Ensure we save at least 30% of our net income yearly:
- Continue to automatically set aside 30% of all income we receive.
- Put all income windfalls automatically into long-term savings. It will only get us to our goal faster!
- Use tax-efficient vehicles to help our money grow faster.
- Max out our TFSAs (current limit is $5,500 per person per year).
- Invest in RRSPs as long as it is most advantageous. That meant $14K for us in 2013.
- Achieve a reasonable rate of return on our investments, 7% or more, over the long term.
- Focus on purchasing equities via low-cost index funds.
- Buy when value stocks are "on sale."
- Minimize transaction and MER costs.
It feels good to put it out there. We’ll report back on a yearly basis to give you an idea of whether we are meeting our goals or not and whether anything has changed.
Million Dollar UPDATE #1 - 2014
Million Dollar UPDATE #2 - 2015
What about you? Want to take the plunge and make the pledge? Are you forging your path towards financial independence? How are you staying motivated?
*FIRE: Financially Independent & Retired Early