This piece is inspired by some recent conversations. These conversations have got me thinking about Financial Independence. It also reminded me how much I love conversations with other people – how the words that other say can have such meaning and depth to them, it’s quite a thing! Thanks too to the recent iTunes Review-leavers – such positive words of recommendation and encouragement, thanks!

Financial Independence

Last week we had a conversation with George Kinder about Life Planning. The first of his renowned ‘3 Questions’ is: “Imagine that you now have all the money you will ever need for the rest of your life, what would you do? How would you live your life? Imagine a life that is wholly yours, what would that look like?”.

If you haven’t then I encourage you to take a pen and paper, give yourself even 5-10 minutes to consider your own answer to that question. It can be quite inspiring. Granted, you may be left wondering how to achieve such a life, but it can really get you thinking!

In tandem with this, I recently had a conversation with a couple who said that they created their business in order to generate enough money to do whatever they want to do, to be financially independent. They hadn’t previously realised it themselves, but they had already reached that point! How fantastic is that for them. That question from George Kinder now has very real relevance for them, and it’s something I am keen to help them explore and figure out – only then should we begin to determine the optimum investment approach for their financial assets.

When I ask people that question about what they would do if they won the proverbial lotto – quite often there is no clarity at all, they have not considered it in any meaningful way. This is a great opportunity for us to get clarity, to determine what is most important to them. That, and the aspects of the answer determine how and when and when of their financial assets. Their priorities should wag the investment strategy tail, not the other way round. That is living deliberately. Or to put it another way, No Plan, No Portfolio.

I met a friend for a cuppa last week, he’s a bit of a whiz in the pension industry, works with a big firm. In his own words he’s become institutionalised, and is not feeling great about that fact. He has been pondering the question ‘How much money do I need to comfortably walk away from work forever?’.

Over tea he put that question to me! I had to think, I didn’t have a figure at the forefront of my head. As I have shared here before, I have a plan to be financially independent, to have total choice about how and what I do within 10 years or so. If I all-of-a-sudden had all the financial resources that I’d ever need, in reality, I wouldn’t change much at all about my current life. This fills me with gratitude, really. It reminds me of how fortunate we have been for the opportunities we have been given, and the ones we have created for ourselves. For that reason I guess I’ve never pondered the question for myself.

But back to the question. On reflection I suggested to my mate that I would need €1.5m right now to feel I had a level of basic Financial Independence. I was thinking we’d need €60,000 Income per year for the next 60 years, to 100 years of age, to cover most of our financial commitments. If you do the mental arithmetic €60k for 60 years, even before allowing for inflation-proofing, equals an awful lot more than €1.5m! It will sound even odder if you apply the 4% rule, drawing 4% per year from €1.5m should theoretically only last for 30 years or so, not 60! I was reasonably confident about my figure – but I wasn’t convinced….

So when I got home after the chat I did a piece of analysis for myself. I analysed a well diversified and smart portfolio of 90% Small Cap, Developed Market and Emerging Market Equity and 10% Government and Corporate Bonds, paying a fee of 1% per year. I would draw €60k per year from the portfolio, increasing with inflation. I continue to draw that inflation-linked income even when the State Pension kicks-in, so we’d have additional income in the final 20-odd years.

My figures has an historical 81% success rate.

The worst case scenario was had I begun this strategy in Feb 1929, I would have run out after 26 years, having pulled a total income of €1.5m – essentially breaking-even over the full duration. In 10% of periods I would have run out of money by 78years of age, drawing a total income of €2.3m.

The average outcome over all periods saw me drawing the €3.6m life-time income needed to 100, AND leaving a legacy of over €5m to my children and charities. Financial Independence, thanks to a simple, smart and effective bucketful of Global Equities (and a light dusting of Bonds!). This is dependant on sticking to the strategy, not making any alterations to the portfolio over that entire period, no attempt to time the market, move between funds or in and out based on what the media say is going on – doing absolutely nothing. Simple but not easy of course.

Oh, if 81% isn’t a high enough probability to give one confidence, by only taking an annual increase in line with inflation in years where the portfolio had a positive return the previous year, the probability of it delivering the income for 60 years was 96%!! Cumulative withdrawal was over €2.2m in the Median outcome, and leaving over €9m of a legacy! Not much wrong with at.

Have You Reached Financial Independence?

I have yet to reach Financial Independence in this regards, and as for the reasons mentioned earlier, I’m perfectly fine with that. But maybe you have!?

If you were to note all of your assets, be that a business, property, pensions, savings or other assets, what is the total net value, and/or monthly income potential? You might discover that you have a long way to go to generate the monthly income you need, or perhaps you will see, in black and white, that you are where you need to be.

So, if you discover that you have a high probability of having enough income for the rest of your life, what is stopping you from living the life that you wrote down to the earlier Kinder question??

Paddy Delaney