How much money do you really need?



I have previously written about the 4% rule that can be used to find out how much money machine you need. But can you think differently?

I think the 4% rule is great for estimating how much capital you need

I think the 4% rule is great for estimating how much capital you need

Before you can call yourself financially independent and not being dependent on an earned income. In short, the 4% rule means you can take 4% of your capital each year without risking it disappearing.

In other words, the money machine will be able to support you for the rest of your life. To know how much capital you need to be able to apply the 4% rule, you take your annual expenses and multiply by 25. Eg. if we have monthly expenses of USD 20,000, ie USD 240,000 per year, we need 6 million (USD 240,000 x 25).

Benefits of the 4% rule

Benefits of the 4% rule

As I said, the 4% rule is a very good way to get a feel for how much money you need before you can call yourself financially independent. It is easy to use and there are many studies that show that it works.

The studies are based on historical stock market data and show that the method works even if you start withdrawing money at a stock market peak eg. Some think the rule is conservative and some think it is too aggressive so my view is that it is highly relevant to use as a signpost.

Since the 4% rule assumes that you do not need to work anymore and that you will not receive any additional income, it does not become so true in all situations.

Disadvantages of the 4% rule

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Firstly, all of us who have worked during our lives have made pension payments (or rather our employers) that we will get to know later in life. Both public pension and occupational pension (check that you have a collective agreement!). You can start taking out a general pension at the age of 61, and occupational pension is usually already from the age of 55. However, I think these guidelines may have to change before we reach that age. Since the politicians decide, I dare not trust that it will be the same age limits forever.

The 4% rule also does not include any extra income. Say you have become financially independent and start running a business based on a hobby or interest. Then you may withdraw a few thousand dollars a month (or much more ??). If we are now going to take in any possible “extra income” then maybe some of us will get a legacy sometime in the future. However, nothing I think you should count on in your calculation as it can be difficult to know if and when you will get something.

Alternative ways of thinking

The great thing about the 4% rule is that you get the amount you need and that you can use as a target when you save and invest your money. But I think and think that we will not save up for the whole sum before we make changes in our lives. There are so many different scenarios between working 100% and working 0%.