Ok, so there are no guarantees in life, especially with respect to financial independence.
One of the key ways to create and retain wealth is to invest your hard earned money. The trouble with investing is that it comes with strings attached, primarily the (reluctant) acceptance of risk. You’re basically trading peace of mind for that XX% in interest your investments are earning.
Investing your money is also a short cut to financial independence since it allows you to grow your nest egg at a faster pace than simply saving. Once it grows to the point that the interest earned covers your expenses, you can effectively claim your freedom.
But all of this involves accepting a certain amount of risk, and assumptions tied to (potential) future investment returns.
What if someone is looking for financial independence, and is unwilling to accept the types of risks associated with investing? What if the goal was guaranteed financial independence?
I wanted to run a simple analysis to quantify what that might look like, but let’s get a few points out of the way first…
Some Basic Assumptions
Obviously this scenario makes all sorts of assumptions. For one, it assumes that the intent is to draw down your money to zero. This means no inheritance for family members.
It also assumes that inflation won’t rear its ugly head throughout the range of years. I ignored inflation to keep things simple. One can lower their spending levels as they get older to compensate if necessary.
This is also not the most efficient way to achieve financial independence, however, it’s an often ignored option.
Cash is King
The most straightforward approach to solving this first world issue is to simply have cash on hand. The more cash one has, the more freedom (financial independence) years that cash buys them.
The amount of cash needed is also dependent on the number of years someone has left before they pass away (their age).
Another critical piece of the puzzle is understanding what the spending level or desired income needs to be during those precious freedom years. The difference between a bronze and platinum lifestyle can have a huge impact on how many dollar bills you need stuffed underneath your mattress.
I put together a very simple table to help me figure out how much cash is needed to guarantee financial independence, without worrying about investment risks.
The first column is the desired yearly (net) income, which ranges from $10K per year to $100K per year. If your desired income is higher than the range, you can simply factor up as needed. For example, if you wanted to spend $200K per year, just double the corresponding value in the $100K per year row.
You can analyze the chart using either the top guide for desired financial independence years, or the bottom guide using your current age. I’ve limited the age range to 20-75 years arbitrarily, although it should generally correspond to when someone starts working, and the average life expectancy of an individual.
As expected, the younger you are, the more cash you’ll need to survive. Of course if your spending habits are loose, you’ll also need to build up a bigger cash cushion.
I found the numbers to be a bit sobering in my case…
Max Your Freedom Household Analysis
Rather than look at one specific cash value, I have the luxury of “flexing” into a range of income levels.
In theory, I could cover my absolute minimum expenses at the $20K per year level. My preference however is to be at the $70K per year level in net income. That would buy me a fairly luxurious lifestyle, which would include indulging in slow travel experiences every year.
Since I intend on working for at least 5 more years, I chose the column corresponding to 35 financial freedom years. Here is my range…
The amount of cash I need ranges from an absolute minimum of $700K to a desired $2.5M.
If I include all my assets (excluding my home), I’m currently at about $1.2M in funds that could be available if needed. This is different from my net worth, since I’m excluding my home because I obviously live in it. I could always downgrade and use the extra money to build up my cash cushion, but that would skew my desired lifestyle.
Guaranteed Financial Independence
At my current $1.2M number, I could theoretically stop working today, as long as I was willing to live on $30K per year. I would effectively have a guaranteed financial independence of 40 years.
At my desired $70K spend level, it drops down to only 17 years of guaranteed financial independence.
I’m basically only half way to the necessary cash cushion for financial independence. That means that over the next 5 years, I would need to accumulate about $260K per year to reach the target. That’s a very challenging goal to meet!
I could probably breach the $2M cash cushion level over the next 5 years, which means I would need to lower my spend level expectations if I want to claim financial independence at 45.
It seems like whichever scenario I keep trying to play out inevitably leads me back to a range of $2-3M for financial independence.
This particular scenario is the “hard way” to get there, since it involves pure saving and no investment tailwind. It’s obvious that an individual would be better off investing their target number once reached to avoid reducing their principle, but this wasn’t the point of this particular exercise.
Clearly this approach is a very low risk and relatively bullet proof way to reach financial independence. However, I suspect that the reduced stress from avoiding investing all together would be countered by the equally stressful experience of watching your savings dwindle to zero.
I’m not sure which is more terrifying!
Readers, would you ever consider a cash only scenario for financial independence? What target number would you end with for this scenario? Do you think there’s such a thing as guaranteed financial independence? If so, what does it look like? Share your thoughts and comments below!