Today we have the fourth part of our series on setting financial goals, based on Tony Robbins “Wealth Mastery”, and this is a pretty major milestone: financial independence.
I have heard many definitions of financial independence, but I think this is the clearest: You have achieved financial independence when you have accumulated a critical mass of capital that, invested at an 8% rate of return, provides you with enough cash to live the exact same quality of life you have today, without ever having to work again for the rest of your life.
What we are talking about here is becoming independent from work. It doesn’t necessarily mean retiring, or stopping work. In fact, most people who achieve financial independence continue to work in some form or other, often on something that is meaningful to them.
Wealth mastery actually has two more stages after financial independence:
Financial freedom involves accumulating enough capital to provide you with sufficient income to live the lifestyle you desire, without having to work again. And absolute financial freedom is when you feel certain that you can do virtually anything you want, whenever you want, wherever you want, with whomever you want, as much as you want.
What you are probably realising as you read this is that the goal here is income without having to work. It’s not about having enough money to just buy everything you want. A new car purchase can be broken down into monthly payments, as can a new home. Kids school fees are paid on a quarterly / annual basis. It’s much easier to break your ideal lifestyle down into monthly payments, rather than a list of what you want and what it costs. The income to cover your lifestyle of choice could come from investments, property, royalties, a pension, or any combination of these things.
The key is to work out what is the monthly income you would require, and from there calculate the critical mass amount you need to accumulate to cover this. Once you get there, you need to know how to generate that 8% return without taking too much risk.
What is the total amount of capital you would need to be independent from work?
4 thoughts on “Goal Setting Part 4 – Financial Independence”
8 percent!? Your kidding right?! I think you should go into much more detail on that number. It is not really sustainable. Also, it doesn’t take inflation into account. I’m sure it was just a typo!
Agreed I am simplifying here in order to focus on the goal itself. For me personally though, a net average return of 8% per year is a reasonable number. Note this is the average return per year over a period of time – no-one can just make 8% every single year. Achieving this requires more than just picking a couple of stock and bond funds. I would suggest reading through the section on Asset Allocation for more information. Finally, if you are not comfortable with 8% as a return target that’s absolutely fine – go with a number you think you can achieve.
Sorry it took so long to reply to your reply!
I understand that you want to simply things for people. Perhaps you could mention something about the 4% safe withdrawal. Or you could do an article about planing how long your money can last for.
I am really enjoying your blog. Please don’t take any of this as negative feedback! Just my thoughts!!
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Hi Michael – all feedback welcome and nothing negative about yours! Sure let’s look further into how long savings can last.