Even if you never exercise that option, freedom is knowing that you can.
A better description of retirement is “Financial Independence”– meaning you no longer HAVE to work, because your money works for you.
It does not necessarily mean you quit working, but in retirement you choose the kind of work you want to do.
To get there, you need enough money that you live off the earnings of the money instead of spending the money you’ve invested.
How much money do you need — “What’s your Number?”
It’s hard to stay motivated saving for a non-specific goal. When you know your Number, saving and investing is a lot more interesting.
With an end goal, you know exactly how much closer you are to financial independence every time you put money away.
Variables like inflation, investment returns, health care costs and time in retirement can dramatically change your Number, so this is never exact, but it gets you close.
Here is a simple “back of the envelop” formula you can play with today.
- Estimate how much money you would need to live per month.
- Multiply that by 12.
- Divide the answer by .04.
For example, let’s assume you need $4,000 per month to live happily ever after. Multiply that by 12 to get an annual income of $48,000. Then divide that by .04. In this example you would need $1,200,000 invested to earn $4,000 per month for as long as you live.
It’s a rough estimate, but it gives you an idea of how much you need invested to theoretically live off the earnings without touching your original investment.
If this is helpful, take a look at the book, How to be Rich: The Couple’s Guide to a Rich Life Without Worrying About Money.