Whenever I feel financially insecure I do some calculations based on my monthly expenses and see how much money do I need for my financial freedom, in other word, retirement.
I know it is too early for me to think about retirement, but I do think what will happen if I quit my job today, a month from now, a year from now or three years from now.
Please note that your financial situation will be different than mine. But, I could give you some ideas so you can do your own calculation to estimate your financial situation.
Also, I have included some resources at the end of this post, and they may help you to achieve your financial goals much earlier than you think.
Let’s see my financial situations – income, expenses, investments, debts, etc.
I am a married guy and father of a 2 months old baby. I graduated from a Canadian university in 2011 with over $50 000 student loans, and am working in Toronto for little above $50 00 per year salary. Yearly after tax salary is around $40 000.
To get to my work, I drive few kilometers from home, park my car and take bus (five days a week).
My wife worked before, but now in maternity leave and may not return to work for next few years.
Yes, we are one of the low-middle class families in the expensive Toronto area, but we manage to live within our income.
I bought a small townhouse in the Oshawa area last year, and paying around $965 per month mortgage.
Last few months, I did budget my expenses and figured out that our monthly expenses are around $3000 with mortgage and student loan payments.
Here are details in number:
Fixed expenses| Mortgage | $965 |
| Utilities (gas, electric, and water) | $200 |
| Bus pass | $140 |
| Insurance (car, home, life) | $175 |
| Telephones, cell phones & internet | $150 |
| Property tax estimated | $225 |
| Student loan | $295 |
| Total | $2150 |
Variable Expenses
| Groceries (food, household items, diapers, etc) | $400 |
| Other expenses (miscellaneous, work related expenses, unexpected expenses) | $250 |
| Gas | $200 |
| Total | $850 |
All numbers above are the average estimate from my last 6 month budgets.
So, I need $3000 per month or $36000 per year income to manage my expenses.
O.K, now let’s see how much money I need for financial freedom (retire) with the following assumptions:
- Mortgage, student loan and other debts are paid off So, I could subtract $1260 from my expenses ($965 mortgage + $295 student loan)
- If I don’t need to go for work, then I don’t need bus pass Subtract $140 from bus pass expenses
- I don’t need to do park and ride (less gas expensive) Subtract $50 per month
- No more work related expenses (average $50 per month) Another $50 per month less
- I will receive child tax credit as I become a low income family ($500 per month 😀 ) for 18 years. Yes, low income families will receive more than $500 per month as child tax credits in Canada.
Now let’s put them into number:
| Total estimated per month | $3000 |
| subtract mortgage expenses | -$965 |
| subtract student loan payment | -$295 |
| subtract bus pass expenses | -$140 |
| less gas expenses | -$50 |
| less work related expenses | -$50 |
| money needed for a month | $1500 |
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With child tax benefits of $500 per month, I just need $1000 per month to achieve financial freedom with paid off house and no other debts.
We are in Ontario, and covered by Ontario health care plan and Ontario Trillium benefits for prescription drugs.
Yes, the child tax benefits will end in 18 years, and I didn’t take inflation into this calculation for simplicity purpose. However, if I build an investment portfolio with high quality dividend paying stocks, then capital gains and dividend growth will take care these things pretty easily in long-run.
You could clearly see that I just need around $1000 per month with paid off house and no debts. As of May 2015, my estimated dividend income is $5110 per year, almost $425 per month. Thus, I just need additional $575 per month to live the lifestyle that I have now.
So, in order to achieve my financial freedom, I just need to pay down my debts and build investments assets that should generate around $1000 per month. That’s it.
Even without the child tax benefits, I just need $1500 per month to cover our expenses which is less than 36 percentage of my current income.
Some financial advisors and experts suggest that you will need to replace 80% of your pre-retirement income to have a similar life style, and they will keep you at work until 65 or more. Why do you need 80% of your income if you don’t have mortgage or debts payments? Think about it.
Again, your financial situation is different than mine.
If you do your own calculation, you would see that you just need much less than your pre-retirement income as low tax, no mortgage/debt payment, and no need to save for retirement as you will be retired by the time.
Here are some resources you can use to make the accurate calculation, and take advantage of the promotion offer right now!
Hey, Life is short make it sweet!
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How Much Money Do I Need to Retire? (60 Minute Financial Solutions Book 5)
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Disclosure: This post contains affiliate links. I will earn a commission if you decide to make a purchase (at no additional cost to you).
I think that it is important to take into account that you are going to be much younger than 65 when you retire, therefore you would need to make sure that your money would suffice for a much longer time.
People who plan to retire at 65 usually plan to have enough money to live until they’re 85 or 90 which is 20 or 25 years. I don’t know how old you are but if you plan to retire when you’re 35 (just guessing) you need to plan to have enough money for 55 years (assuming you calculate estimating you would live 90 years).
Taking inflation into account and lowering risk tolerance as you get older, you should expect that when you get to be 60 years old or around that age your risk tolerance would be too low to allow real growth and the best you could do would be to keep the real value of your money, therefore, if you consider $1M to be enough for retirement according to your needs (disregarding the fact that you plan to retire young) since you’ll need the money to suffice for 55 years instead of 25 years you would need at least $2M, unless you assume that your risk tolerance would never change, which is unlikely.
You seem to be very knowledgeable about investments and I assume that everything I wrote here is already known to you, please share your thoughts with me and explain to me how do you think $1M in 8 years from now would be enough for you to live from for the rest of your life, please show we what I’m missing.
Hello Alan,
Thank you for stopping by,
I totally agree with you. Inflation is a key factor everyone must consider when retire.
However, I invest in dividend growth stocks. And, majority of the stocks increase their dividend payments at least once a year. Thus, my income will be keeping up with inflation.
As per above calculation, I just need less than $2000 per month with paid-off home – in other word, I just need less than $24 000 per year. $1M well-diversified portfolio with high quality dividend stocks could easily generate more $24K per year.
For me, financial freedom is not about stop working and do nothing. It means I don’t need to work for money.
Again, everyone financial situation is different than mine.
Best Regards
I really like reading your blog.
I’m starting to invest and I’m copying (some) of your investment strategy.
Thanks. Hope you don’t mind.
Hello Dinah,
Thank you for stopping by,
I so glad you like my blog. My investment strategy may works for me, but it may not suitable for you. I would strongly recommend you to do your own reach before make any financial decision. Learn as much as you can from this blog and other financial blogs. Read lots of books about investing. And, make your own decision. DO NOT blindly follow someone. This is my kind advise!
Cheers,
Great idea, I have two kids in age 3 & 6. I guess I can get more than $12000 / year if I have less income. I’ve never thought about it.
I am complicating my life by working 75 hrs per week in two jobs and paying more taxes. Man I have no time to spend with my kids.
Thanks
Hello Steve C,
Thank you for stopping by,
Hey, kids are wonderful. I would suggest take advantage of new government child tax program and enjoy your life with just one work.
I am so glad you find my blog so useful.
Cheers,
Hello,
Great idea, still you are missing few expenses in your retirement calcuation. Anyways good starting point for those looking for financial freedom.
I had a chance to read one of the book you mention, You Can Retire Sooner Than You Think. It is absolutely great book for those about to retire in few years.
thanks
Thank you Michele for stopping by,
I totally agree with you. I am missing some expenses in general; however, the calculations based on my financial situation, but your will be different.
Cheers,