Wednesday, February 7

Crossover Point

Your Money or Your Life is a great book for those seeking to drop out of the rat race and one of the concepts that I really like in the book is the "crossover point". This is the point at which your investments bring in enough each month to cover your expenses. (A major focus in the book is to reduce your expenses as much as possible to make this point easier to reach.)

I have estimated my monthly needs (with some not very extreme cost-cutting) to be about $2,000 plus mortgage, in after tax income. Since I am hoping that my rental suite will be covering my mortgage I am going to exclude that from the calculations.

I currently have about $275,000 in investments, mostly equity mutual funds. I also have $35,000 in a savings account that ought to be invested, so I will count $25,000 from there for the nice round total of $300,000. At a 4% withdrawal rate, which is universally considered "safe", this amount would provide my with $1,000 per month. I have seen the original author of the 4% calculations quoted as saying that 4.5% or even 5% may be quite reasonable for some cases. In the 5% case, I would have $1,250 per month. I also have about $150 per month in income from my higher risk mortgage portfolio.

By my reckoning that leaves me only $600 per month short of a crossover point. At the 5% withdrawal rate that is $144,000 in investments. With an 8% return I will make half of that in investment gain in 3 years, and the remainder is quite a modest savings target if I continue to work. The outside date for hitting my crossover point is therefore about 3 years. Of course, I think that I could hit it much sooner, but I also know that I have been a bit aggressive in the assumptions on this calculation so I probably need a bit more money as well. The net effect is that I think 3 years to Financial Independence is quite reasonable.

Today's billable hours: 3.5
Today's contracted hours: 1.5