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What’s the goal that you are working toward? * For me, it is about financial independence, which is having enough that my wife and I can stop working if we wanted to, and still have enough to pay for our expenses (mortgage, bills, student loans, etc.) and still maintain a comparable lifestyle (going out to dinner occasionally and 1-2 trips a year). * But, what exactly is the number, number, that I am working towards. And how does one figure that out? (Let’s call this the “number”.) Step No. 1: work backwards first. do you have a budget, and how much do you spend annually? Also factor in future goals like buying a house, having kids, etc. but generally, you want to be as frugal as possible. Step No. 2: Use the 4% Rule (or multiply your annual budget x 25). This is now your number. What is the 4% Rule? * In 1998, a study conducted by researchers Philip Cooley, Carl Hubbard and Daniel Walz (professors at Trinity University), endeavored to determine what the “safe withdrawal rate” was for drawing down retirement portfolios. For those looking for add’l reading, it is titled “Retirement Savings: Choosing Withdrawal Rate That is Sustainable”. * It studied historical stock market performance from 1926 to 1995, so the data is somewhat outdated now, but the concept behind it is still very relevant today. * According to this study, a 4% withdrawal rates had the highest risk-adjusted probability of sustaining an account for a period of 30 years. * This is not a universally held rule or financial planning maxim. Think of it as a guideline for your financial planning. And obviously projecting everything out in the future is difficult to accomplish. * An alternative withdrawal guideline is 85% of your preretirement income, again very flexible to your circumstances. Voila, my number is $3,000,000. This is what we are jointly working towards. At that size, we can safely withdraw $120,000 a year, if needed, under the 4% rule, and our desired annual expenses for retirement. #longterm #moneymoves #financialfreedom #retire #FIRE
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