Financial independence

Financial independence gives you the integrity of choices. It can make work optional and allow you to choose your own flight path.

We are often asked how to work out what is needed to achieve financial independence. True financial independence is simply the financial choice not to have to work if you don’t want to. It means you can sustain your regular life and expenditure from your investments for a period of time, as opposed to solely relying on a job.

So what is the difference between financial independence and financial freedom? Financial freedom goes a bit further, meaning you can live completely the life you want, achieving your financial and lifestyle goals alongside the benefits of financial independence (not having to work unless you want to – or only doing the work you want to do).

A rough guide to calculating what is needed to achieve financial independence:

• Work out the annual expenditure you need to live on according to the minimal lifestyle you’re comfortable with.
• Subtract any current annual pension income, investment or guaranteed passive income you will be receiving each year.
• Multiply the balance by 20.*

For example, if you require $40,000 p/a before tax and are not receiving any other pension or investment income, you would need to invest a capital sum of $800,000.

*This assumes approx. drawings of 5%. Depletion time and remaining capital sum will depend on stock performance. The stock market has averaged returns of around 10% since 1900, so this analysis should provide for a conservative allowance, although does not allow for market shocks.

A rough guide to calculating what is needed to achieve financial freedom:

• Work out the annual expenditure you need to live on according to the minimal lifestyle you’re comfortable with.
• Subtract any current annual pension income, investment or guaranteed passive income you will be receiving each year.
• Add an additional annual amount to cover your ideal lifestyle (eg. annual overseas trip, upgrade car every 5 years).
• Multiply the balance by 20.*

For example, if you require $80,000 p/a before tax and are not receiving any other pension or investment income, you would need to invest a capital sum of $1,600,000.

This article is general in nature and should not be regarded as specific investment advice.