What You Need To Know About Financial Independence Day

Why 425 and what is the significance of this number to Financial Freedom?

4 Percent Rule? William Bengen, a retired financial adviser first articulated 4% as a rule of thumb for withdrawal rates from retirement savings. He conducted a number of empirical simulations of historical market behavior and concluded that a person could withdraw, up to 4 percent annually from their portfolio without fear of outliving their money.

Rule of 25X

Based on the above 4 percent rule; we can reverse engineer how much we need to have saved before we can say we have achieved Financial Freedom and can live exclusively on our investments passively.

Criticism of the 4 percent rule 1. The initial studies were based on shorter retirement spans and not tested for early retirement type of scenarios where one needs to generate passive income from their portfolio for six to seven decades.

2. Stock markets by their nature are volatile and over a period of time while we do get average returns; often we would have wild swings one year to the next. This introduces “Sequence of Returns” risk which basically means that the order in which a retiree experiences up and down years is important.

While we may not agree with everything he says, there are nine decades of wisdom buried in Warren Buffett’s quotes.

3.  The studies were carried out based on US stock performance but similar results have not been tested in other markets around the world. 4.  The CAPE ratio when this study was carried out was lower than the current CAPE ratio. Some experts believe the current higher CAPE valuations would result in below average performance for the future.

Why am I celebrating Financial Independence Day? As we grow older, we realize that time is the most precious resource and no one can generate more time. The wealthiest person in the world or the poorest; has the same average life span. Of course, individuals might have different lifespans; but at an aggregate level we can all hope to live for around 100 years.

While we may think that even after we retire at the age of 65, we have plenty of time; that is simply not true. Humans are social animals and the most enjoyable time is spent in the companionship of others.

“When you look at that reality, you realize that despite not being at the end of your life, you may very well be nearing the end of your time with some of the most important people in your life. If I lay out the total days, I’ll ever spend with each of my parents—assuming I’m as lucky as can be—this becomes starkly clear”

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