How much is necessary to join? How to calculate the magic number? It basically is a function of two variables: the level ofreal interest and personal expenses. The first is exogenous to the investor. He has no control. However, the second is a function of the chosen standard of living. It’s a personal decision.
If the investor is more conservative, wanting to consume only the income and not the principal equity needed to ensure financial independence is given by:
This way, the investor has an average monthly expenditure of $10,000 and the expected real interest rates are 3%, the equity necessary to ensure the independence will be $ 4 million (U.S. $ 10,000 x 12 / 0.03) . This equation is very sensitive to changes in interest rates. If they are 4%, the equity would be25% lower – $ 3 million. This shows the importance to seek more profitable investments.
This heritage should consider only the assets that generate some income. Not worth taking into account the property used as residence or vacation.
If you are having some difficult to understand the formula, ask for me, because the picture is in portuguese.