Do You Want To Reach Financial Orbit?

Jim Rohn said: "If you are not financially independent by the time you are 40 or 50, it doesn’t mean that you are living in the wrong country or at the wrong time. It simply means that you have the wrong plan."

You might be wondering "How much money do I need to retire?"

Instead of ‘retiring’ I prefer to describe it as ‘reaching financial orbit.’ That’s when your passive cash flow pays all your living expenses to sustain your lifestyle for the rest of your life. At that time you may work for pleasure only.

I love what I do. Therefore, at age 54, I have no intention to retire anytime soon. But I do enjoy having the 'freedom to live life on my terms.' Perhaps that could be one of your goals too.

Freedom to live life on your terms requires 1) energy, 2) time, and 3) money.

1. Energy is a function of a) good health, and b) motivation. You can nurture, replenish and sustain these into old age. But the older we get, energy will eventually diminish.
2. Time is your most precious commodity because it is non-renewable. You can not replicate it. Every moment passes and is gone forever. Be mindful not to waste it. Break down your time into a) productive live time, where you create and contribute to improve your life and your world. And there is dead time, when you blame external circumstances for your shortcomings without taking the responsibility and initiative to change. - Many of us spend too much dead time. We wallow with excusitis where fear and procrastination rules.
3. Money is the only resource out of the three that with the right plan you can earn, accumulate and multiply. You can perpetuate cash-flow. And, money can be an excellent tool to a) restore your waning energy, and b) free up precious time to pursue what is most important to you.

Our responsibility in life is to 'make the best with what we got'  regardless where we are. That applies to every aspect in our life, including the three factors above. 

How do we reach financial orbit?

Ask yourself “How much passive cash flow would I like to have to enjoy the lifestyle I desire when I don’t want to work anymore.” Defining your desired passive cash flow is the important first step before establishing the market value of the underlying asset that produces the cash flow.

Your desired cash flow number could be a bit of a moving target subject to future inflation. Don't get intimidated and delay. Start with what you got. Don't just 'want,' instead you 'must commit.' You can always fine-tune along your journey.

Establish a simple system that is easy to implement. Focus on a smaller goal:

“Create a passive cash flow duplicating your current working income.”

Creating a passive cash flow requires investing into income producing assets. That could be stocks, real estate, a lucrative business, or other investments.

Warren Buffett said: “Don't save what is left after spending; spend what is left after saving.” Your focus must be on saving and investing. 

If you consistently save 10% of your annual working income and invest it at 6% yearly return, after 34 years, your investment will generate a passive income stream equal to your working income. This basic formula holds true if your annual salary is $50K, $100K or $500K.

The chart below shows six hypothetical scenarios with $100K working income at 10%, 20% and 30% savings rates invested at 6% or 10% annually. The column towards the left shows 10% invested at 6% duplicating your working income by year 34. (10-6-34). The column to the right shows 30% invested at 10% duplicating your working income by year 12. (30-10-12). Depending on how much of your income you consistently dedicate towards saving either at 6% or 10% will determine if it takes 34, 27, 23, 18, 15 or as little as 12 years to duplicate your salary. - How quickly would you like to get there?

Save 10% - invest @ 6% - get there in 34 years, vs. save 30% - invest @10% - get there in 12 years

How long it takes to get there depends on a) the percentage of your working income you consistently dedicate to investing, and b) the rate of investment return.

While past performance is not a guarantee for future returns, long-term data from 1950 through 2009 (59 years) for the broad-based S&P 500 index shows an average annual return of 7%. You might expect similar returns by owning a broadly diversified U.S. index fund with low expenses, e.g., the popular Vanguard Total Stock Market mutual fund or its ETF equivalent.

The biggest challenge is a) getting started early, and b) sticking with it. Talk is cheap. You have to do it. Start today and automate the process with setting up regular automatic drafts from your paycheck or bank account.

Income producing real estate could produce returns in excess of 10%. See related article here.

Once you reach your initial goal of establishing a passive income stream duplicating your working income, then fine-tune your ultimate goal to generate a passive income stream that supports your ideal lifestyle for the rest of your life. Congratulations! You have reached financial orbit. Your passive income pays all your living expenses in perpetuity.

May you live well and prosper. ~ Mahalo & Aloha

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