Today we need some numbers to understand how to be financially independent.
Let’s start with a brief recap.You are financially independent if your assets make more than what you spend.
Let’s start by imagining how much you spend annually to maintain your standard of living. Let’s put 24,000 (without currency which does not change the reasoning so much).
24,000 a year is 2000 a month, does it come back to you?
Now the point is to understand how much capital you need to get 2,000 per month.
Let’s put your assets yielding an average of 4% per year (Not an exaggerated number, right?). Then 600,000 (of your currency) would be enough for you.
This is your FU number.
In fact it isn’t 😅
We said that on average your assets yield 4%, but what if a year they don’t?
What if they paid less for a few years?
What if they returned -3% first and then + 7%?
The average between these 2 returns is in fact more or less 4%, 3.79% to be exact.
But after the first year you had to withdraw your 4%, right?
Let’s take a closer look for a moment. For convenience, withdraw the money at the end of the year
You have 100 per year 0.
At the end of year 1 you have 97 and you have to withdraw 4 out of 100 to maintain your lifestyle.
Beginning of year 1 you are at 93.
End of year 1 you are at 99.51 and you have to withdraw the 4 again.
So you’re at 95.5
Now imagine more negative years and you could probably find yourself with a -20% on your assets which in theory may not allow you to maintain your lifestyle in the long run.
The withrawal rate comes to our rescue.
It is the percentage with which you are, with good foresight, sure of being able to withdraw, being able to sustain even negative years.
Let’s review the case above but with a 2% withdrawal
You have 100 at year 0. (as before)
At the end of year 1 you have 97 and you have to withdraw the * 2 out of 100 to maintain your lifestyle.
Beginning of year 1 you are at 95. (already a little better)
End of year 1 you are at 101.65 and you have to withdraw again i * 2.
So you’re at 99.65 (much better, we’re pretty much even)
Now you will say to me: “Ok, but with that I have to accumulate double the capital, because I can only withdraw half”
Unfortunately it is, my friend.
Oh by the way, I didn’t even calculate the taxes. 😕
Put a good 20% more on withdrawals.
But I’ll deal with this later, I just mention that remaining in Europe there are countries where some taxes on capital and dividends are nil.
After this bad news, you know what numbers you need to know to be financially independent.
It’s up to you to use them to the fullest
FU number ⋅ Withdrawal Rate = Annual withdrawals