Did you know that:
- Less than 1% of fund managers and investors outperform the financial markets over 30 years
- Inflation will likely burn through your hard-earned nest-egg long before you’re ready to hang up your hat, unless you know about the 4% rule, and
- Not knowing your target retirement net-worth will leave you in danger of a dissatisfying and quite possibly very uncomfortable retirement?
In Winning Strategies yesterday we pulled back the veil of over-expectation and looked at the cold-hard truth about creating financial independence. Although some of it was slightly unnerving, it became clear that ignorance in this situation was definitely not going to be bliss for our future selves and it was possibly time to re-think the plan.
We went through a process of discovery and discussion which resulted in a shift in perspective and a revised pathway to financial independence for many Members.
I thought I would share some of the process and my top tips, so that you too can set a course to achieving a level of financial independence that will make your heart sing.
Firstly, a few questions:
(i) Do you know how much money your household requires each year to live comfortably and possibly even more enjoyably?
(ii) Do you know the number that you need to accumulate as your net worth to be able to realise this?
(iii) Does this take into account an extra 3% for inflation (compounding) each year?
Some invaluable info:
William Bengen calculated that because of the massive effect of inflation over time, to make your accumulated wealth last, you can only safelyspend 4% of your investment pot per annum. Therefore, any plans you had of being able to enjoy spending the 9-10%+ that you make on your investments could put you in financial hardship pretty rapidly. Yes, you might be doing better than that with Crypto, however those markets will settle down in time.
And lastly, my top tips to knowing your numbers and navigating your way through:
- Understand the effects of inflation: The 3% inflation rate can crush your funds over the long term and derail your plans if you haven’t factored it in (It might be less than 3% year on year, but using 3% makes sure you won’t get caught out)
- Know your numbers: Taking inflation into account and working with the 4% rule, you can calculate the size of investment fund that you will need to support your retirement or create financial independence, by multiplying your intended income by 25
- If you would like 250K per annum to enjoy in your first year, and you would like to enjoy the equivalent of that each year (allowing for inflation), and for your nest egg to last you at least 30 years, you will need circa 6.25M (250K x 25) in investments.
If you are feeling under pressure or deflated by this new perspective, or you haven’t started on this journey yet, remember that you don’t need more time, you just need more support, and belief. We are all sitting on a gold mine, having great businesses that we can build to support us in reaching our target, either from earnings or through the funds realised from a sale transaction.
This video by JL Collins shifted my perspective and confirmed my direction around this topic. I strongly recommend blocking out an hour to watch it.