Achieving Financial Independence

Kody Berman shared his journey into financial independence, noting that he reached this milestone just before turning 26. At that time, he had about $500,000 invested in the Total Stock Market Index Fund and owned 11 rental properties, bought with a $200,000 down payment. He explained that after paying off his mortgage and reserving some funds, he enjoys a cash flow between $3,000 and $3,500 monthly. His expenses ranged from $2,500 to $3,000 each month.

Quick Notes

• The Vanguard Total Stock Market ETF (VTI) has produced a 26% return over the past year and 9% year-to-date, bolstering long-term growth for index fund portfolios. The Real Estate Income (O) provides a monthly yield of 5.2%, equal to $0.2705 per share. To match a monthly income of $3,500 through real estate, one would need around 12,938 shares, which amounts to over $803,000.
• Achieving true financial independence isn’t solely about reaching net worth targets. It also demands careful spending and preparing for potential rental vacancies and market declines.
• Everyone faces the question: are you on track for retirement? There are free tools available that can connect you with a financial advisor to help clarify that.

For anyone considering adopting this model, claiming financial independence before having the necessary financial cushion can lead to unmet expectations. Factors like the variability of returns, risks, and maintenance costs must come first.

Verdict: Lean FI Over Classic FI

The traditional financial independence (FI) benchmark comes from the Trinity study, which suggests that you can withdraw 4% of your retirement savings annually. Multiply your yearly expenses by 25 to find your target FI number. Portfolios of that size have been shown to withstand three decades of various market conditions.

Have you assessed your retirement status? You can use free tools to find out more about your financial picture. Getting connected with a financial advisor can help clarify your situation.

Crunching the numbers reveals that Cody’s $500,000 stock portfolio would allow for a $20,000 annual withdrawal at a 4% rate. Furthermore, the rental cash flow of $3,500 monthly translates to $42,000 yearly, which comfortably exceeds his base annual expenses of $30,000 to $36,000. However, increasing his spending to $5,000 a month would tip the balance significantly.

Many may miscalculate their figures. Cody’s $3,500 estimation is somewhat atypical because it’s already accounted for deductions. For an average landlord, a total rent of $3,500 for 11 units would likely result in a net earnings range of approximately $1,750 to $2,275 after factoring in all costs. The 50% rule in real estate suggests that operating expenses (excluding the mortgage) may account for about half of the total rent. If you implement this model without the required rigor, your supposed “passive income” may vanish once unexpected costs arise.

Understanding the Key Factor: Expenses

If you annually spend $30,000, you’ll need $750,000 to be truly financially independent without rental income. Cody navigates this effectively by utilizing his rental cash flow, allowing his $500,000 investment to grow uninterrupted.

For higher annual expenses, say $60,000, your FI target skyrockets to $1.5 million. Combine a rent income of $42,000 with a $500,000 portfolio, and you’d generate around $62,000 in total income. That barely meets expenses, leaving little room for setbacks—essentially turning it into a job rather than true independence.

Thus, the mindset matters more than just the net worth. Cody noted, “The best side hustle isn’t the one that brings in the most money quickly. It’s the one that remains viable for years.” Persistence compounds over time. Investing in the Vanguard Total Stock Market ETF, which has risen about 9% year-to-date and 26% over the past year, means leaving your portfolio intact can shift you from Lean FI to Full FI effortlessly.

Comparing Real Estate Income

If managing 11 properties feels overwhelming, exploring passive options could prove worthwhile. Investment in Real Estate Income (O) currently offers monthly payments of $0.2705 per share, generating a 5.2% yield—around $62. To achieve recurring monthly dividends of $3,500, you would need roughly 12,938 shares, a significant investment compared to a $500,000 portfolio. This discrepancy highlights the true cost of pursuing a passive income approach, which influenced Cody’s choice of real estate investment.

What to Do This Week

1. Accurately calculate your rental yield. Total your rent and reduce it by your vacancy rate, which might be about 8%, and deduct maintenance, management, and insurance costs.
2. Multiply your yearly expenses by 25 to find your portfolio-only FI number.
3. Subtract your reliable cash flow (from rent, dividends, or pensions) from your annual expenses, then multiply by 25. This gives you a blended FI figure that incorporates additional income.
4. Perform a stress test for scenarios including a year without rent income and a 20% market dip. If you still come out okay, you might be financially independent; if not, consider options like Coast FI or Lean FI.

Ultimately, achieving financial independence is about the numbers. Don’t settle for assumptions before making major life changes.