Are you in a point, where you are starting to think about the future? If that’s the case, follow this guide to see how to make a financial freedom/retirement plan.
Now, I really don’t like the word retirement. It kind of sounds like you are past your use-by date. That’s why I prefer to use financial freedom instead. Which in turn is a bit too long, but enough first world problems.
Let’s get into making a plan, so we can be free from our jobs as soon as possible. I will form this as a step-by-step guide, so it woul be easier for you to follow.
1. Decide Where do You Want to Live
Let’s start with that. You want to eventually be financially free. But an important question you need to ask yourself is where do you want to live.
Because living in London and living in Middlesbrough come with a totally different costs of living. And even living in the UK or living in Poland also come with different costs of living.
So I want you to start from here. Where do you see yourself living once you don’t need to work every day? This is the base of your whole plan. Depending on where you want to live is going to depend on how much you need and how to achieve it. Which brings me to our next point.
2. Decide How Much do You Need
Once you know where to live you can start planning on how much money do you actually need. What I advice you to do is be conservative. Better having to work a year extra, than having to go back to work in your 60s. At least that’s my point of view.
Let’s see how can we do this calculation? Well, if you have worked for some time you can kind of see how much money you spend in a year and work out how much would you like to spend. Let’s say you make £30,000 a year. If you manage to save £10,000 a year that means you are living on £20,000.
That means you will need to eventually make more than that in passive income. Of course you need your income to be beating inflation. You might have heard about the 4% rule in financial independence. You only withdraw 4% of your portfolio every year and you live happily ever after.
On one hand that is okay in most cases, but if we have a big recession that can be a problem if you are about to retire. If you want to take a look here is my idea for passive income. In other words- dividends. It is easier to calculate, it is easier to control and it is easier to sleep better at night.
You don’t need to count on the markets, you just need to have your dividends coming in and growing steadily. Of course there are many other options, but more about that in a minute.
3. Decide on a Timeframe
Now you know how much you need and know where you want to live. The next step is to make a plan on how long would you need. So, let’s say your goal is those £20,000 a year. That means you would need a portfolio of £400,000 with a dividend yield of 5%. At first this seems like a lot.
But don’t forget you have the power of compounding and the power of dividend growth on your side.
Now, even when we don’t take dividend growth into account we need 17 years at 8% growth(average for the markets) to achieve £400,000 in portfolio value. Not that bad right? And honestly if you take dividend growth into account it might even be quicker. But as I said it’s better to take it conservatively.
And actually here is where it gets interesting. Let’s say you decide to work for 3 more years. This brings your net worth to almost £550,000, or £543,390 to be exact.
This is because, again, the power of compounding. The higher your portfolio gets the more money you will make. In the first 3 years you would make around £46,000. After the 17th year you will make around £130,000 for those same 3 years.
If you want to make those calculations yourself you can hop on over to the compound interest calculator. Now let’s go to the next point
4. Decide on a Way to Get There
There are a couple of ways to financial freedom. Those include of course stock market investing, but also real estate investing, a mix of both or starting a business that can generate a passive income.
If you want to read more about those you can head over to the guide I make on how to achieve financial freedom.
Now- there is not a right or wrong answer here. In face a mixture of all of them might be the best answer. This way you can reach financial freedom faster and also diversify yourself.
5. Enjoy
This is of course the best part of it all. This is why you go through all this- to be able to escape the need to go to work every day in order to survive. Don’t get me wrong- no one is stopping you from going to work once you are financially free.
In fact my plan is to still work something even after I retire. But this is completelly up to you. If you like your job or your project- no doubt, carry on. But the point is that you are now going to be independent from your need for salary. You can work only if you want to.
Summary
Overall the plan itself is not that complicated. You decide where you want to live, you decide how much money you need and you crack on. What is hard is that it takes quite a bit of discipline to be achieved.
After all you need years of methodically following your plan. The good news is that it gets really satisfying once you start and see how you are getting closer and closer to your goal. Also the more your passive income grows the more motivated you will get.
That will be all for today, thank you all for reading and hope you can now make a financial freedom plan of your own.