Smart Reasons to Save, Use and Invest Money

The Real Financial Independence Crossover Point

The crossover point of financial independence isn’t where you’ve been told.  Let me explain…

You see the crossover point where you are now considered financially independent and work is optional isn’t really the point that you think it is, instead it is just another financial milestone on the journey to financial independence…

The real crossover point of financial independence is much higher that point where your income equals your expenses.  So let’s say that you calculate that you need an even million for financial independence.  So if you have one million, and it was investing in such a way that it could provide you with a 5% yield (via a combination of bonds, stock dividends, real estate, etc), that would provide and income stream of about $50,000 a year.  For some of you 50k a year might not seem like a lot, but financial independence isn’t about a luxurious lifestyle, it’s basically the point where you can stop depending on earned income (your job) to survive at your current lifestyle.  So while 50k might not seem like enough, it’s past the point where you have to depend on a job to survive (at least most of us).

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So why isn’t this the end of the story?

Because of market volatility and other unpredictable variables could move your “financial independence” point below what it is currently.  For example, let’s say that you have stock in a stalwart company you thought was rock solid, but it was ended up having some kinks in it’s armor, so that suddenly, the stock price decreases in value by 50% or even more, and as a result, it axes it’s dividend entirely.  Well, that puts you in a bind because suddenly you could have an income stream that is much lower than the 50k you thought you would have.

So what is a closer representation of my “financial independence “point?

Well, while there is no set in stone answer, I’m personally shooting for a number that is 50% higher than my “old” financial independence number.  So instead of 50k, I’m shooting for income stream of $75,000.  So for hypothetical nest egg amount, instead of 1 million,  I should shoot for 1.5 million, but since there is also taxes to consider I actually bumped my number up to cool 2 million dollar.

The point of this post is that you should overshoot your mathematical “financial independence” point just to have a cushion for variables that are not currently predictable.

Bests,

Don

 

 

2 Responses to The Real Financial Independence Crossover Point

  1. Hi Don. I understand the thinking behind it and I’ve read similar things about making 4-5% on investments (MMM talks about having 25x your yearly spend invested, for example), but I’m concerned about what happens if there’s a melt-down. Stock markets are at all-time highs and some people are talking about a crash.

    Just out of interest, how close are you to your $2m goal?

    • Hi Myles,

      Yep, a potential market downturn is exactly what this article is about. By increasing your target balance by 50%, you drastically reduce a lot of the risk of a 40% downturn in the market, and you are still able to keep things intact. Sadly, I know a few individuals that cashed out at the bottom because of necessity during the great recession.

      I’m not close to two million, or really even 1 million for that matter (not counting 401k of course). Once 1 million is hit though, often it’s 10 years to 2 million… Once you have finance critical mass, it’s much easier I believe (and hope)…