Did you ever see those commercials where people walk around carrying a giant number under their arm? This is supposed to represent their magic retirement number, or how much money they need to have saved up in order to retire comfortably. Apparently, “comfortable” is a very relative term because the numbers these people were toting around seemed to vary by a couple of log orders.
I’m a fan of focusing on producing enough investment income to replace all of my expenses. So in effect, my magic financial independence number is however much money can reliably produce enough income to cover all of my expenses. I’m not particularly concerned if I have only $1 to my name, but it produces a 40,000% yield, or if I have $1 million dollars producing a 4% yield. The result is the same, I get $40,000 per year in income.
As a bit of a fun flight of fantasy, I thought I’d imagine what my magic financial independence number might look like and what I would do. Let’s assume that all the money is invested in companies with a consistent history of growing their dividends. Let’s further assume that these dividend increases match or exceed inflation. And to make the math easy, we’ll assume that I get a 4% per year dividend yield.
And since this is a thought experiment, let’s assume that the money drops out of the sky today, and not that I have to earn it over decades of saving and investing.
What I wouldn’t do
- Spend it. If it was a particularly large sum of money, I might be tempted to spend a bit on a few things that I really need, such as a new laptop computer. But there really isn’t a need to run out and buy a luxury car or a giant house.
- Tell people. Other than my awesome blog readers (yes, you guys and gals are all awesome) and maybe some close family and friends I wouldn’t tell anyone about the fact that I just came into a big chunk of money. Advertising just attracts vultures.
What I would do
$1 Million - This yields about $40,000 per year, which is enough money to finance a modest but unencumbered life. Declare financial independence achieved. Break out the champagne. But otherwise keep on living life as is. While this does make me financially independent, almost all of it will go to covering my expenses, so I’d still need a job to pay for the fun stuff. I’d probably try to grow this up to $2 million as quickly as possible.
$2 Million -This yields about $80,000 per year, which is a very nice middle class income. I’d only keep working if I liked my job, as I would no longer have any reason to work for any reason other than pure intellectual, psychological, and emotional satisfaction. If I didn’t like the job, I would give my employer the finger and walk off. But I’m a nice guy, so I’d still give a two or three week notice. I would probably save less money than I do currently and start spending more, particularly on travel. I would also get a maid. I really want a maid. I love living in a clean apartment but hate having to clean up.
$3 Million - This yields about $120,000 per year, which is almost the entirety of my current base salary and bonus. At this point the only reason to keep working is if I loved my job. This is a line of money where I could easily buy tons more than I buy now and still save 20% per year. I think I would hire a personal trainer. I’ve always wanted to have one, but they’re really expensive. I think I would also take a sabbatical and go to cooking school.
$4 Million (plus) -This yields about $160,000 per year. Now we have reached the point where working doesn’t even make sense any more. We’ve also reached the point where my imagination starts to run out. I realize that this is probably not that much for people living in the middle of New York City or San Francisco, but for someone who likes to stick to mid-sized towns and suburbs, this magnitude of income is something akin to royalty. I think I would quit my job and take very prolonged vacations, moving around the country and maybe the world to a new place every season or so. Don’t worry Southern Hemisphere, I’d be down there too. Basically this is just an excuse to dodge Winter. I hate Winter.
Readers: What is your magic financial independence number? What would you do when you hit it? What would you do if you exceeded it?