How much do you need to be financially free & will your retirement fund outlast you?
Financial freedom, I guess this is almost everyone’s dream. You are free to make choices and never worry about financial. You travel wherever you want, and for however long you wish. You buy that dream car of yours without worrying about the payment. But before I share on what I learnt through Tony Robbins’s book, “Money Master The Game”, which is my latest favorite book, I would like to share that all your dreams are possible and achievable, and it could take less money than what you think to achieve that!
Often when people ask, how much money do you think you need to retired in a comfortable way? People simply pluck a number out of thin air, not knowing exactly how much they need and how to get there. I’m one of those until I read Tony’s book. I have no idea how to calculate because there are so many unpredictable variables such as inflation etc. And after reading chapter 3.1: What’s the price of your dreams? I finally got my answer.
There are total 5 plans in his book, which are financial security, financial vitality, financial independence, financial freedom and absolute financial freedom. After reading this chapter and make some calculation based on what Tony teaches, I have a clarity on my short term goal, medium term goal, long term goal and my dream life.
Besides that, I finally know how can I achieve all these plans and ensure my retirement fund will outlast me. The idea to achieve these plans is simple, we need a certain amount of capital to generate return every year. And this return will be our pocket money for either security, vitality, independence or freedom plan.
Money make from Return on investment (ROI) = Pocket money
As the return comes yearly, as long as capital remains the same, you are generating the same return percentage each year, your retirement fund will outlast you. So now, there are only two questions here to achieve that: how much capital do you need? And how much return do you need to generate with the capital? I made an excel template and summarized this 4 plans into a table. I do not include absolute freedom plan because I am still exploring what I want for the moment. Grab yours here if you want a free copy. Below is the screenshot of the example:
Basically this is how to use the template, each column represents a plan: short, medium, long and dream plan. What you need to do is only fill in numbers or description in orange boxes. The first column which is Financial Security, this means that one you hit this goal, you will never need to worry of your house mortgage or rental, your food paid forever, the utilities to keep everything running, your transportation, your insurance and emergency fund for the rest of your life. Fill in the number based on monthly expenses. How about ROI? For me, I invested in stocks and traded options. I had a minimum return of 15% each year, so I filled in 15% in the ROI box. If you are unsure of how much return should you fill in because you are either not yet started in investing or still exploring on what to invest, fill in the return of fixed deposit in your country, for example in Malaysia 2% each year. This is the safest way to calculate as there is zero risk to place your money in fixed deposit. Of course I would suggest you to learn investing along the way to increase your return and speed up your process, this is just to get you started and calculate what’s the worst case scenario. Once you started investing, you should expect a minimum of 7–8% each year if you are not the aggressive type of investor.
After filling in the number for your monthly expenses of house, food and household, utilities , transport, insurance and emergency fund, you should have your total monthly and yearly expenses calculated automatically in the template. Fill in your ROI, then you will know exactly how much capital you need! This capital which I described as Money Machine needs to remain the same amount every year. As mentioned earlier, when your capital remains the same, you use this same amount of capital to generate the same amount of return each year, in my case 15% each year which is equal to my yearly expenses. I will have my pocket money every year without having to work again. My only work here is to generate 15% ROI each year!
After you calculated how much you need to be financially secured, it’s time to add on some entertainments = Financial Vitality. This is simple, fill in what entertainment would you like to have, for example shopping, massaging, travelling, golf club membership, calculate a monthly budget and divide by 2. We are here to add on half of your entertainment cost into your plan. Fill in the ROI and taa daa, your capital is calculated automatically! Same concept, remain the same capital each year, generate the same return each year, and your money machine will provide your yearly pocket money without having you to work anymore.
The third plan which is the long term plan, Financial Independence. It may seems like a big figure, but remember we are here to figure out what we actually want and need, what is the figure that we should have in our Money Machine, clarity is power, when our brain knows a real number, our conscious mind will figure out a way to get there! The calculation is simple, calculate how much is your current spending each month. Some spend within their paycheck, for example your income is RM5,000 per month and your current spending is RM4000 per month, then use RM4,000 for calculation. Some spend more than their income using credit card, for example total income of RM5,000 and current spending is RM7,000 per month, then you will use RM7,000 for calculation. Fill in your figure under Financial Independence column. For ROI, just to be extremely safe because I would change my portfolio to a less risk and less volatile environment when I grow older, I would divide my current ROI to half = 7% each year. For those using fixed deposit rate to do calculation, remain the same rate as there are no risk in these plans. After you key in your current monthly spending and ROI per year, the capital needed for you to be Financial Independence is automatically calculated. Basically this amount is to cover 20 times of your current monthly spending.
Our last plan which is also our dream plan is Financial Freedom. Now you are financially independence, what about adding 2–3 luxuries items in your plan? A fishing boat? A dream house? A few luxury vacation for whole family? An island? A private jet? A huge contribution to your church or donation to charity? What is the capital needed to hit this goal? Figure out the cost of the luxury items you desired and fill it in. Maintain the same ROI as your Financial Independence Plan. Your capital to hit this goal will be automatically calculated.
After you completed all the calculations, now you finally have a clear figure on your 4 Ultimate Plans in a single excel table. You know how much capital you need in your Money Machine. You know how much ROI you need to generate each year. You know exactly how much you will have as your monthly pocket money once you hit the goal. Now go out and work until you hit the capital of your plan. Work on maximizing your return on investment.
I hope this article will help some of you out there, if you like my sharing, do comment below and like this post. Feel free to like my Facebook Page: Money Machine Builder if you want to read more of related sharing. Talk to you soon, bye for now!
