How Does a Couple Reach Financial Independence?
By Kevin Estes
The math is relatively straightforward:
Estimate annual expenses
Subtract expected income
Multiply shortfall by 25
Step 1: Estimate Annual Expenses
The first step is to estimate annual expenses.
Expenses often fall after leaving full-time employment:
Taxes - including Social Security - drop significantly
Transportation costs also tend to fall
Housing costs my trend down as interest costs decrease with mortgage balances
Healthcare costs might rise, though it’s worth exploring costs on the state-based exchanges.
A good starting point is HealthCare.gov.
Step 2: Subtract Expected Income
Next, subtract any expected after-tax income: pensions, Social Security, part-time work, royalties, or other non-portfolio earnings.
Let’s say a couple:
expects to spend $100,000 a year once reaching financial independence
anticipates $50,000 a year in Social Security benefits after tax, and
has a $50,000 shortfall
Step 3: Multiply Shortfall by 25
How much would the couple need to fund that $50,000 a year?
Some diligent people studied past investment returns and inflation carefully. They concluded that a well diversified portfolio could fund withdrawals of about 4% a year, adjusted for inflation, for up to 30 years.
Take how much spending is needed every year - here it’s $50,000 a year - and divide by 4%. That’s the same as multiplying by 25.
$50,000 times 25 is equal to $1.25 million.
A couple who expects to spend $100,000 a year and anticipates Social Security of $50,000 a year after tax would theoretically need $1.25 million in a balanced portfolio.
If you’re interested in a review of your specific situation…
Disclaimer
Unfortunately, past performance does not guarantee future results. Also, everyone’s situation is different. Personal finance is personal. I strongly suggest you work with a financial professional before making any major lifestyle changes.
In addition to the usual disclaimers, neither this post nor this image includes any financial, tax, or legal advice.
