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A financial Independence day challenge

July 4th, 2019 at 10:16 am

I just did the following exercise for myself, and I challenge you to do the same. Let me know if you did!

1. Check the total balances in your retirement accounts (401ks, 403bs, 457s if you have them, IRAs in all their forms (traditional, Roth, SIMPLE, SEP), and IF you have more than 100,000 in taxable brokerage accounts and bank accounts include that too (leave aside 100k for cash liquidity/emergency).

2. Pull your December 2018 statements on these accounts and look in each statement to find the *interest and dividends* paid for the year Many statements have these, both in the monthly or quarterly statements AND as a Year-to-Date total. Some only give you a monthly or quarterly amount and you have to pull all the statement and add the income up. ALSO, not every bit of "income (interest and dividends) is labeled as such. I have TIAA accounts where the dividends are titled "credits" and you can tell they are dividends because there are a lot of them AND you have both a positive number and a negative number offsetting it on the statement--this means a dividend was received AND the negative means that it was reinvested into the account.

3. From this you can get a very rough ballpark of how much you might expect pre-tax if you were to retire today. TOtal return on investments is split between income (interest and dividends) and capital appreciation (increases in value of the underlying investments), and the split is roughly even. If you figure a 6% real return (above inflation) on investments, take the first figure and multiply it by 3% as an estimate of the capital appreciation you could expect for a year, and then take the second figure and add the numbers up to get the total income.

Also know that while the capital appreciation varies each year and generally will go down one in every five years (about 20% of the time) if you have a 60/40 balanced portfolio (and about one year in four if you were 100% in equities), you will definitely have INCOME (the second number) each year and that number will be more stable.

Hopefully the sum of these two numbers shows a satisfying balance. This is a very rough proxy for your financial independence.

So for me, I have about half a million in investable assets, so if I multiply that by 3%, that's 15k in capital appreciation. Then I figured out the income generated by my portfolio by pulling all the statemets. That was about 30k in income. So that's about 45k a year that my portfolio generates.

However, once you start drawing down the money, that total is eventually going to go down. If you take a look at retirement projections, you acually see balances in retirement accounts continuing to increase for several years because the growth in the portfolio (the amount that you just calculated) exceeds the amount drawn from it. Eventually, however, the draws exceed the net income and appreciation, and the balance begins to decrease. The key is to defer that point as long as possible.

The portfolio is your "goose who lays the golden eggs" and you don't want to kill the goose by taking outsized withdrawals too early!

4 Responses to “A financial Independence day challenge”

  1. Dido Says:

    By the way, the Dow, S&P 500, & NASDAQ all closed at record highs yesterday so the chances are that your balances are at a record high as well if you are in the accumulation years!

  2. Creditcardfree Says:

    Will have to pull up details later, but I don know we did hit a high as well as a milestone yesterday!! More later on my blog.

  3. Jenn Says:

    I hit a milestone this week as well! I like your analogy with the golden eggs Dido. I will check out my dividends as you suggest. You've got me curious.

  4. rob62521 Says:

    I didn't pull stuff like you suggested, but I keep a spreadsheet where I update every so often and then figure out my net worth.

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