When presenting my current financial situation or giving quantitative examples about financial problems (whether as thought experiments or actual experiences) regular readers will have probably noted that I typically always try and talk in percentage terms rather than absolute numbers. Why do I do this?
Firstly, let me demonstrate what I’m talking about with a simple example. Let’s say in Early Retirement I have calculated that my spending will be £20,000 per annum before tax and I've decided that I will drawdown on my wealth at the rate of 2.5%. Running the maths tells me that I’ll need to accrue £20,000 / 2.5% = £800,000 of wealth before I'm financially independent and can take an early retirement that doesn't require any extra earnings other than those that come from the portfolio in the form of dividends, interest or capital gains. I’m still a bit short of the target at the moment having only £500,000 stashed away in various asset classes. There would be two ways I could present these facts:
Firstly, let me demonstrate what I’m talking about with a simple example. Let’s say in Early Retirement I have calculated that my spending will be £20,000 per annum before tax and I've decided that I will drawdown on my wealth at the rate of 2.5%. Running the maths tells me that I’ll need to accrue £20,000 / 2.5% = £800,000 of wealth before I'm financially independent and can take an early retirement that doesn't require any extra earnings other than those that come from the portfolio in the form of dividends, interest or capital gains. I’m still a bit short of the target at the moment having only £500,000 stashed away in various asset classes. There would be two ways I could present these facts:
- Simply state that I’m going to draw down at 2.5%, will therefore need £800,000 and have currently amassed £500,000; or
- State that I have now accrued 62.5% of the wealth I need to Retire Early which requires a little more work. The calculation is simply £500,000 / £800,000 = 62.5%. I choose to present this way.