Opinion – From Grain to Grain: Learn to calculate the plan for your financial independence

Building any plan for a journey must start with a starting point and an end goal. The best path between these two points depends on three other variables: the real rate of return in this period, the desired period to reach independence and periodic contributions. These factors have already been addressed in recent articles. Today, we’re just going to list these five factors and show you how you can simulate them with a financial calculator.

In previous articles, we focused on how to best estimate each of the five parameters. In fact, one of them, your current financial worth is the only one that is already given and you cannot change it. Today, we’re going to focus on learning to simulate your optimal route to financial independence.

Consider that you want to retire with a monthly income of R$ 10,000 at today’s prices. We have already seen the steps to calculate the necessary equity. It would be necessary to have a net worth of R$ 2.0 million just before retiring, if we consider a period of 35 years of receipt of income and a real interest rate of 5% per year.

To define the path to your retirement, four factors are necessary: ​​starting point, rate of return, monthly contributions and period until retirement.

The starting point is not all of your current financial assets. But, only the financial value you have in financial investments intended for retirement. Note the restriction.

Don’t make assumptions that are difficult to fulfill. For example, not all of your financial assets are possibly earmarked for retirement. Part of its equity is used for other intermediate purposes. So only consider what you believe is goal-directed.

Unlike the other factors, the initial equity is already fixed, as it is restricted to what you have today.

In our example, let’s assume you have $50,000 now earmarked for retirement as your starting point.

All factors have some sort of choice limitation. Another factor that has a more rigid restriction is the rate of return on investments. As we discussed in the past, it needs to be chosen according to your investment profile.

Therefore, if you are a conservative investor, there is no point in considering a rate of return that is very different from what you get on federal public bonds. In fact, the most recommended thing would be to give a discount on the current rate.

Likewise, even if you are an aggressive investor, it is not recommended to consider a rate of return greater than twice the rate of a long-term government bond. For example, in the US, the S&P 500 over the past 20 years has not yielded even 50% more than a 20-year US government bond.

Over the past 20 years, the S&P 500 has yielded the equivalent of 8.5% a year and the ETF which represents 20-year government bonds yielded 6.25% per annum.

Thus, it is recommended to choose a return between 75% and 150% of the return on the interest rate of a federal government bond referenced to the IPCA.

Let’s assume you are a conservative investor. Thus, the rate of return to be used may be 5% per year above inflation. This is equivalent to a yield of 0.41% per month above the IPCA. You should always use real rates, i.e. above inflation in these simulations.

The other two factors can be simulated, as they can vary according to your desire or your characteristics. For example, if you are young, you can choose longer timeframes for starting retirement.

You may also wish to arrive at retirement wealth sooner. Understand that reaching retirement wealth doesn’t mean you need to stop working, but you have freedom of choice to do what you like.

Let’s say you’re 30 years old and want to achieve a peaceful retirement age of 60. Therefore, the investment period would be 30 years, or 360 months.

Now we need to find out, considering all the other variables, what would be the amount of monthly contribution needed.

For this, we will 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: Enter the starting equity value (50,000) and press PV. This key represents Present Value in English. Observe in the figure below. The blue arrow shows the key PV.

Step 2: Enter the final value of 2,000,000 and press the key CHS and then the key FV. The key CHS represents sign change and FV means future value. See the figure below. The blue arrow shows the keys CHS and FV.

The final value must be in a negative sign, as it represents an amount that you would redeem at the end of the term.

Step 3: Put the rate of 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: Enter the period of 360 months and press the key n. This key represents the number of periods. See the figure below. The blue arrow shows the key n.

Step 5: To find out the value of the monthly contributions, click on the button PMT. This key represents the amount of periodic payments. Note the figure below. The blue arrow shows the key PMT.

When you click on the PMT key, you will find that the amount in monthly contributions is R$ 2,172.89. This is the volume of monthly savings you must make for 30 years, with an equivalent income of 5% per year, to live for 35 years with an income of R$ 10,000 per month.

Will you have the courage to tell me that this effort is not worth it?

Realize that you can do the same steps, but change the variable of interest, that is, the last one.

For example, in Step 4 you can change the value of the monthly contributions that you support and in Step 5 click on n and find out the period in months until reaching the target equity.

You can choose your own path by changing the term, the real interest rate or periodic contributions.

With the plan in place, you must put it into practice immediately, as each month you postpone is a month lost and must be compensated for either with a greater contribution effort or with a higher retirement age.

If you properly plan and implement this route, you will reach independence with ease and enjoy several years of income. The effort pays off, I assure you.

In the following articles, we will discuss investments and how to build a portfolio for each profile that is capable of meeting the projected return objective.

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

Part 1 Construction of the plan

Chapter 1 The first step in building the blueprint for financial independence
Chapter 2 How do you define the rate of return in your plan for independence?
Chapter 3 Find out what equity you need to achieve your financial independence
Chapter 4 On your journey to independence, don’t overlook the importance of this factor
Chapter 5 Understand the two ways I applied to increase my saving capacity
Chapter 6 If You Double This Factor, Your Equity Can Multiply Much More
Chapter 7 Learn to Calculate the Plan for Your Financial Independence

Part 2 Assembling the portfolio to lead you to financial independence

Chapter 8 Before making any investment, define these two factors