Opinion – From Grain to Grain: Find out what equity is necessary for you to achieve financial independence

When planning any journey, it is essential to know two points: the starting point and the final objective. We all know our current financial situation. So the challenge is to determine where we want to go. Today I will help you define this goal.

Most of the time, we plan more carefully for our next vacation than how we are going to live during our retirement. The planning of this moment is usually postponed until it becomes unfeasible due to the short space remaining.

Take a moment to reflect on how you would like to enjoy your retirement. What income would you like to live on? Or even better, would you like to build a heritage that will provide an income for you to retire before the time set by the government?

If your answer is yes, it’s no use thinking that “want is power”. In this case, “doing is power”. If you’ve been following the articles so far, congratulations. But we need to start getting our hands dirty.

To calculate your goal of financial assets to live on income, three data are needed: the return on the period of usufruct of the equity income, the amount you want to have monthly income and the term you want to live on income.

In the previous article, you learned how to estimate your rate of return over the period of income enjoyment. For the period you want to live on income, be cautious and consider living at least until age 95. To define this period, you also need to define the moment you want to start receiving income. The target timeframe is the difference between 95 and the age you want to achieve financial independence.

It remains only to select the amount you would like to receive monthly. Be realistic and at the same time conservative. Consider, at first, an amount 20% greater than your monthly expenses at this time. Remember, the plan will be revised in the future. So, if your monthly expenses are $10,000, consider a target income of $12,000.

To arrive at the objective value, let’s use a financial calculator. If you type the word “HP 12 C emulator” into internet search engines, you will find a number of alternatives. I usually use the one available at the link.

Let’s go through the steps on the calculator:

Step 1: Put the income value 12000 and press the CHS key and then PMT. The first key just changes the sign. The next key represents Payments in English, that is, what your equity would pay you monthly as income. Observe in the figure below. The blue arrow shows the key PMT.

Step 2: Put the term in months. For example, if you want to retire at age 55, then it will be 480 months until you reach age 95. In this way, type in the calculator 480 and press the key n. This key represents the number of periods. See the figure below. The blue arrow shows the key n.

Step 3: Enter the monthly rate of return you expect to obtain. For example, if you considered a return of 5% per year above inflation, type 0.41 in the display and press the key i. This key represents interest rate in English. Pay attention to the figure below. The blue arrow shows the key i.

Step 4: To find out the assets needed to reach your financial independence press PV. This key represents Present Value in English. Observe in the figure below. The blue arrow shows the key PV.

If you did it right, you found a value of R$ 2,516,196.89. This would be the assets needed to live for 40 years a year, receiving BRL 12,000 a month and considering that investments are valued at 5% above the IPCA.

The necessary equity is at today’s values, as we made all calculations considering only real interest rates above inflation. Thus, your income of BRL 12,000 would supposedly be corrected by the IPCA in this plan.

Now that you’ve learned how to get to the wealth you need to achieve financial independence, simulate a few different scenarios.

For example, change the rate of return up and down and evaluate the consequence on required equity. This simulation is important for you to be sensitive about the effect if market conditions change.

We get to the target that needs to be aimed. Next, let’s understand how to build the path there.

Michael Viriato is an investment advisor and founding partner of Investor House.

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Book: The Journey to Financial Independence

summary

Introduction
Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence

Chapter 1 Construction of the plan
The first step in building the blueprint for financial independence
How to define the rate of return in your plan for independence?
Find out what assets you need to achieve your financial independence