The goal of financial independent is to save > 25 times your annual expenses. It is thought that once you have this amount saved you can begin to withdraw from your investment accounts to cover your expenses. At this point you would be considered “Financial Independent” and no longer need to work for money.
How much should you invest?
In the previous article (you can read it here), we touch on savings rate which is the percentage of your income you are saving or investing. As a rule, we aim for a savings rate of 50% and above. This is to achieve early financial independence when you are young. Aiming for a 50% saving rate is one reason the Financial Independence Retire Early community is unique. We work together to share tips and encouragement to support this lifestyle.
Broad Based Low Cost Index Funds
There are many studies which show that an actively managed mutual funds struggle to match and underperform the indexes. This is mainly due to the higher fees that are associated with managed funds as compared to index funds.
An actively managed fund that charges 2% per year would need to outperform the index by additional 2% just to match what you could earn in the index. This is extremely difficult to achieve over the long term.
We invest in low fee Vanguard Total World Stock Index Fund VT using low fee brokerage like Interactive Brokers. A Total World Stock Fund will track the stock market as a whole. If you would like to add bonds in your portfolio, you can consider total bond fund such as Vanguard’s Total World Bond Fund BNDW.
The 4% Rule of Thumb
In 1998, there was a Trinity study that looked at what percentage of investments a retiree could reliably draw throughout all investing timelines without running out of money. The study concluded that 4$ was a safe withdrawal rate with a 95% rate of success. There is much well-founded criticism of this study. This further complicates if we increase 30 years retirement to 60 years retirement timeline for early retirees. If the stock market goes into a prolonged depression, delivering subpar returns after the age of exuberance, this will affect the withdrawal rate to maintain the success rate.