If there is a rule you need to know in financial freedom theory, it's the 4% rule. It looks very simple, but the implications can be huge. Even just recently saw this rule in a new light.
How much assets you need
If your assets are generating enough capital to cover your expenses, then you should not ever run out of money.
This is where the 4% rule comes handy. This means you only need 25 times your expenses. For example, here are my current expenses. Note that I don't have any housing (rent) costs, which can be a huge sums for some people having to pay rent.
|Current expenses monthly||Monthly||Yearly|
|Car (gas, maintenance)||$500.00||$6,000.00|
|Restaurants/ going out||$500.00||$6,000.00|
There, I spend about 26k$ per year. This means, I need about 660k$ in assets (26.4k$*25) to support my spending habits. I don't have to wait I am retired to start living with my assets. In fact, the sooner you understand this concept, the easier it will be to:
- Achieve it
- Make sure you don't run out of money
Running out of the money during retirement can be very painful and stressful. You can increase this ratio from (4% or 25 to 2% or 50) if you want to be safer.