Summary
In a previous post, I discussed the futility of working when your net worth is declining. During a stock market crash or recession, your Return on Effort (ROE) for working drops significantly. This post will help you identify the minimum investment threshold to aim for.
When you reach this investment threshold, the annual return from your investments has a high chance of equaling or exceeding your annual salary. Once your investments can regularly match or exceed your annual gross income, you are free to change jobs, take a sabbatical, or potentially retire early.
I want you to achieve financial goals without overly-compromising your desired lifestyle. There’s no point in retiring early only to live near poverty. When you decide to step away from work, you should be able to maintain or even improve your quality of life.
If you are able to survive off a $40,000 a year salary and not touch principal, you only need $400,000 invested in stocks. However, since you decided to switch your career at 38 years old with $1.1 million in stocks, you have a $700,000 investment buffer. As a result, you might feel incredibly rich and free in your new lifestyle.
Real estate is tangible, provides shelter, generates income, and is less volatile than stocks. Bonds are boring and simply don't provide enough upside. The key is to own rental properties that generate strong cash flow.
When combined with ~4% annual real estate appreciation, you’re likely to earn enough to make work optional. Fortunately, rental yields are usually much higher than stock dividend yields.
Once you reach the investment threshold, you should have the courage to change your life for the better. Changing your life means you’re no longer financially dependent on someone else. You also no longer have an excuse not to pursue your dreams, whatever they might be.
I use 20X your gross annual income to determine true financial independence. Expenses can be easily manipulated to make your financial independence number easier to achieve. As you earn more, you’re forced to save and invest an equal or greater amount.
Retiring early with $3,000,000 – $4,000,.000 invested seemed like enough. But in 2017, our son was born, followed by our daughter in 2019. To live a middle-class lifestyle in an expensive coastal city now requires closer to a $350,000 annual household income.
With interest rates heading down, pent-up demand for real estate may be unleashed. Since real estate has lagged behind stocks since 2022, I expect its performance to catch up over time.
