Every time financial independence comes up in a conversation with somebody who is new to this idea, it is often received with skepticism. This is understandable. When I first heard about it, I was skeptic as well. After reading stories about early retirees, meeting some of them, and crunching the numbers myself, I realized that reaching financial independence long before you are 65 years old is actually possible!
At that time, spring of 2015, I didn’t have any significant sources of income as I was just about to begin grad school, and Elisa had been working for about one year. With just one income, we continue to grow our stash and today it stands close to $82,000. I have now graduated and will be starting my full-time job at an accounting firm soon. Taking into account my soon to be salary, I put together our 10-year plan to financial independence.
Financial independence is reached when your passive income exceeds your expenses. For us, this is projected to happen in the year 2025. Here is a snapshot of the spreadsheet I used. You can download a free copy to plan your own journey at the bottom of this post.
Combined income after taxes: this represents the part of our paychecks that actually belongs to us. Part of the gross figure belongs to Uncle Sam’s and therefore should not be included in this calculation.
Annual spend: includes everything we spend on a year. Click here for a breakdown of our 2015 expenses.
Annual savings and savings rate: these two are calculated automatically based on your income and expenses.
Rate of return of investments: Stocks have historically returned about 9% per year on average (7% when taking inflation into account). I decided to use 5.5% to be a bit more conservative.
Withdrawal rate: represents the amount you can withdraw each year from your portfolio without running out of money in retirement. A 4% withdrawal rate has a 95% probability of success (A.K.A. 95% chance of not depleting your portfolio during your lifetime). I used 3.75% to be slightly more conservative. Click here if you wish to learn more about withdrawal rates.
Investments: stocks, index funds, bonds, rental properties, REITs, and any other investments you own.
Reaching financial independence is not a competition so focus on your own journey and the things you can control. We are excited to continue our path to financial independence and will be posting updates on how results compare to the plan.
Download the spreadsheet I used and create your own plan. it is free!