As we saw in the article What is the Rat Race and how to Run from It there is a clear relation between our expenses and the Money that we will need to retire. Even taking in consideration inflation we can reach a number. Although this number can not be written in stone, it is by far the best aproach to the calculation we can make.
The trinity study, also called the 4% withraw rate is a study conducted by three professor at the Trinity University. The main idea was to calculate how much Money would someone has to have in a mixed portfolio of bonds and stocks in order to sustain them for 30 years. They found out that with a reasonable certanty if they kept the withraw rate between 3 and 4% that at the end of the 30 years they will have no depleted the portofolio and in many cases they even get a smal fortune.
Lets take the calculations to our exemple: we have in expenses around 18400€, that means that if we want to know how much Money we need to reach Financial Independece we just has to put 18400€ x 25 Years and we get an 460000€ Portofolio. So this should be our target.
When we reach this half a million we can stop working if we want to do so. You should be asking? It is not that to risky? We believe it is not. We even run some simulations and we come out with these 2 options:
1. After a few years (10 is a very interesting predictor of you are going to succed or not) we see our portfollio get depleted to almost 25% (the minimum before we go back to work). If this is to happen we would get back to work until we reach the 100% according with our expenses at that time.
2. After the same number of years your portfolio doubled and we get very confortable about our decision and keep dedicating time to the most important to us in live, our family.
Some considerations to on this aproach, taxes, always have been there and always will. In our case we have to pay 28% in taxes on stocks and dividends sale. This means we have to increase our portofolio in 28% meaning in truth we have to have in our portofolio 588800€.
With all this in mind we still have some margin of safety, first we are paying for a car that is going to end in three years, this means we will reduce our expenses. And we are not taking in any cosiderations our home value and its expected apreciation in time.
If you want to play around with the numbers you should visit this site: https://engaging-data.com/visualizing-4-rule/