You can afford to stop working when you’ve hit this number

If you’re nearing retirement or trying to imagine life on your own terms, your daydreams may be filled with beaches and paradise landscapes.

Many Americans are stuck in a job they hate because they have bills to pay. Many of us dream of doing something else, but we are trapped in our industry and don’t know how or if there is a way out.

What if I told you there was a magic number that allows you to live life how you imagine it, without living solely to work. A number, that If you meet it, will enable you to quit your job while keeping the same standard of living. 

Instead of hoping to win the lottery or find out we had a rich uncle no one knew about (and left us the inheritance), we should strive to reach the unique number that gives us freedom and financial independence.

What is a financial freedom number?

Each of us has a certain financial number we can hit that allows us to work for pleasure or stimulation rather than out of necessity. This number is the total amount of money we need that generates enough passive income to maintain our desired lifestyle. If you are currently contributing to an employer-sponsored retirement plan, you contribute to your financial freedom number.

Investments, such as retirement plans, generate a certain amount of passive income each year. If we generate enough passive income through assets such as shares in the stock market, rental properties, or a small business, we can rely solely on our passive income to fulfill our needs. 

When your passive income matches or exceeds the amount you need for your bills, you have reached financial independence and can work for pleasure rather than need. 

How to calculate your financial freedom number

To determine how much passive income you need to generate on an annual or monthly basis, you need to calculate how much your minimum expenses are. By looking at your past 12 months of expenses we can total these purchases and divide them by 12. Things to consider are:

  • Mortgage or rent payments
  • Grocery bills
  • Debt payments
  • Necessary living expenses such as
    • Utilities
    • Clothing
    • Transportation costs
    • Medical costs

Most of us spend more money than we need to survive, so totaling our primary needs is a good starting point. If you complete a monthly budget, this exercise is much easier because you should have a good idea of how much you spend every month.

When you have your average monthly expense number, it’s time to look at how your investments are doing.

Determining how much passive income you need in retirement

To keep it simple, let’s assume your only passive income is from an employer-sponsored retirement account. To determine how much money you need to invest, determine the minimum annual salary you need or want to live off of. 

A conservative estimate is to use the four percent rule to avoid running out of money in retirement. So if your desired salary is $50,000 for the rest of your life, a conservative figure would be to multiply $50,000 by 25 to get the minimum you need to invest in the stock market.

For this exercise, $50,000 X 25 = $1,250,000. Or in other words, $1,250,000 X .04 = $50,000. So if you want to retire and make $50,000 a year from your investments, you need 1.25 million invested to safely draw four percent ($50,000) from it each year.

You probably need less than you realize

If the above scenario doused your optimism, realize that most people need less money in retirement than they do during their working years. Hopefully, your home will be paid off as well as your vehicles. By focusing on paying off your largest assets now, you can reap the benefits later. 

If you pay off these large items, you may be able to enjoy a comfortable retirement on much less than $50,000 a year if you have only minimal bills. 

Spend your working years knocking out these items which are keeping you from the life you desire. Buy used cars instead of new ones and stop using your credit card to make the banks rich. Avoid tapping into your home’s equity and start paying down your outstanding debts.