How big of an investment portfolio should I have to be financially free or start feeling free? This is one of the most common questions people starting on their financial independence journey ask.
Sometimes telling them they should accumulate at least 25X their annual expenses or 20X their annual gross income may seem too daunting. As a result, they may get discouraged and not even start.
Therefore, to boost motivation and momentum, I’ve come up with the minimum investment portfolio amount for financial freedom seekers to shoot for. That amount is $300,000. Once you have accumulated $300,000, you will start to feel financially free.
Let me explain by sharing some key investment portfolio levels based on our personal accounts. Never let a financial review go to waste.
Starting The Financial Freedom Journey Early
One of the interesting things about having kids is that you get to start over financially. As a forward-thinking parent, I’m certain my adult children will have wanted me to build an investment portfolio for them while they were young. After all, compound returns are some of the most powerful forces in finance. The sooner we can start investing the better.
The main way we can help our children build an investment portfolio is by opening up a custodial brokerage account and/or a custodial Roth IRA. If you expect your estate to be above the estate tax threshold when you die, gifting the maximum gift exemption limit each year may be a smart idea.
The custodial Roth IRA is especially attractive if you have a business because:
- Your contribution serves as a business expense
- The income by the child is earned tax-free if it is below the standard deduction threshold
- The investments get to compound tax-free
- Withdrawals are also tax-free
- Your child develops a work ethic
- Your child will better appreciate the value of money
You don’t need a business to open up a custodial Roth IRA. Your child just needs to have earned income.
When Your Investment Portfolio Is Too Small To Matter Yet
Below is my son’s Roth IRA portfolio. It was up a respectable 25.49% with names such as VTI, TWTR, TSLA, NFLX. VTI slightly underperformed, TWTR and NFLX underperformed, and TSLA drastically outperformed the S&P 500.
Most of us would be pleased with a 25.49% annual return given it is about 15% higher than the historical return average for the S&P 500. However, in this portfolio’s case, a 25.49% return amounted to only $2,682.44.
For an adolescent, the absolute dollar amount returned is good. However, for an adult, $2,682.44 doesn’t really move the needle. It could pay for a month’s worth of living expenses for a frugal individual, but that’s about it.
There is no feeling financially free with only a five-digit investment portfolio balance. Therefore, the only thing to do is to keep contributing. Hopefully, the taste of sweet returns keeps an investor hooked.
When Your Investment Portfolio Amount Begins To Matter
Any amount of money in your investment portfolio matters. However, the idea is to figure out the target investment portfolio amount to shoot for so that you can start to feel more free. The more money you have, the greater your ability to fund your retirement and generate passive income.
After my early retirement honeymoon period was over, between 2013 – 2017, I decided to do some freelance consulting for several fintech startups. I also gave over 500 Uber rides and coached high school tennis for three years. It was a great time for exploration before I became a father in 2017.
During this time period, I maximized contributions to a Solo 401(k) (aka KEOGH 401(k)). As a sole proprietor, you can contribute the maximum employee portion plus a percentage of your operating profits as the employer portion.
Since inception, I have contributed $146,321 to my Solo 401(k). But I have not contributed for over three years.
My Solo 401(k) returned 36.42% in 2021, or $82,232.70 to $317,383. The returns were brought up by TSLA, HUT, and AAPL and dragged down by Alibaba, BIDU, and UBER. $82,232.70 is real money that can cover a typical American family’s expenses for one year given the median household income is around $70,000.
However, a 36.42% return is abnormal. A more normal return would be between 8% – 12%, or $18,062 – $27,093, based on my beginning balance of $225,778. This return amount still feels relatively significant, given a part of it is greater than the current maximum 401(k) contribution limit of $20,500.
Therefore, starting around $200,000 is where your returns might sometimes match or surpass the maximum contribution level. However, a return of $18,000 – $27,000 a year based on a $225,000 balance is not quite enough to feel financially free yet.
The Minimum Investment Portfolio Target Amount To Shoot For: $300,000
Based on historical returns, expected returns, and normal individual living expenses, if you want to feel more financially free, the minimum investment portfolio amount to shoot for is $300,000.
With a $300,000 portfolio, you have the potential to return an annual average of $30,000. Once your portfolio has the high potential of returning greater than the maximum contribution amount, psychologically, you feel like you no longer have to work as hard to contribute as much.
Further, most individuals can live off $30,000 if they really want to. Sure, there might be some years where your portfolio loses money. But then there might be some years where it returns 35%.
If your $300,000 portfolio is in a taxable brokerage account, you can always draw down principal interest and penalty-free to pay for some of your living expenses as well. A 2% – 5% withdrawal rate equals $6,000 – $15,000. However, I would draw down principal only if absolutely necessary. You want to give your portfolio as much time as possible to compound into the millions.
Coast FIRE Also Means $300,000 Minimum
Personally, I would have gladly kept working in finance for five more years if I could have worked 20 hours less a week for 30% less pay. Working 40 hours a week versus 60 hours a week would have been a walk in the park. But back then, there was not as much work / life flexibility as there is now. I was burned out.
Nobody retires early from a job they like or love. This is one of my key points in my now classic post, The Dark Side Of Early Retirement. Some wandering souls simply haven’t found the ideal job yet. But instead of keeping the search for meaningful work alive, they give up early.
I’ve determined a $300,000 portfolio is also the minimum amount necessary to consider yourself Coast FIRE. Coast FIRE is where you no longer have to contribute to your retirement portfolios because they may grow large enough to fund a traditional retirement.
In other words, let’s say you have $300,000 at age 30 and traditional retirement is considered age 65. At a reasonable 6% compound annual return, in 35 years, your portfolio will have grown to $2,305,000 without any contributions. Despite inflation, $2,305,000 along with inflation-adjusted social security should be enough to provide for a reasonable lifestyle.
Given your portfolio’s potential growth, at age 30, you might decide to quit a stressful high-paying job for a fun job that pays just enough to cover your living expenses. You won’t have much excess cash flow to save. However, you won’t need to if your investment portfolios continue to grow.
The main risk with Coast FIRE is that you trick yourself into complacency. The term was made up to give financial independence seekers motivation to feel good about still being so far away. So much about money is psychological. Just make sure you’re not ignoring the root of your frustrations.
The Next Investment Portfolio Target: $1+ Million
Once you reach an investment portfolio balance of $300,000, the next logical goal to shoot for is $1 million. Suddenly, striving for a $1 million investment portfolio no longer feels as daunting.
Your $300,000 portfolio will get to $1 million if it grows by 8.4% a year for 15 years without contributions. But if you regularly contribute $20,500 a year while earning a 8.4% annual return, your portfolio will get to $1 million in just 10 years. The mountain to climb just turned into a hill, especially if you enjoy your job.
Below is my 401(k) balance, which I rolled over to an IRA in 2012. In 2012, the balance was about $350,000. I haven’t contributed a penny to my rollover IRA since 2012 because I can’t. Therefore, the compound annual return over nine years is about 13.5%.
The rollover IRA started 2021 at $859,468 and closed the year up $256,362 to $1,115,830 for a 30% return. $256,326 is enough to pay for a year or more of living expenses for a family. Shooting for a $1+ million retirement investment portfolio balance gets easier over time.
Your Investment Risk Tolerance May Not Be Dependent On Age
As I get older, what I’m noticing about my risk tolerance is that it hasn’t declined as much as I thought. Instead, my risk tolerance is more closely associated with my earning power.
On January 31, 2020, my rollover IRA above had a balance of $675,219. Then, the pandemic hit and the balance fell to $546,194, or a 19% decline. A large structured note investment helped dampen the fall given the S&P 500 had declined about 32% during this time.
I remember being bummed out about losing a lot of money back then. So much financial progress got wiped out in such a quick amount of time. However, I have let the portfolio with a 95%+ equity allocation ride since the March 2020 meltdown.
The main reason why is because I can’t tap the portfolio without penalty until 2037. It’s easier to take more risk when you have a longer time horizon. But the other reason for maintaining a high equity weighting is because my active income grew. After my daughter was born in December 2019 I decided to become more entrepreneurial for two years.
As my active income grew, so did my risk tolerance. Based on my Financial SEER formula, the time it took to make up for any potential losses declined as earnings grew. Therefore, I kept risk on and continued to invest most of my cash flow into stocks and real estate.
If you want to increase your investing courage, make more money. The other way to increase your courage is to have stacks of cash. But in this inflationary environment, the cash should be strategically deployed.
Supreme Focus To Get To $300,000
If you are just starting out on your financial independence journey, please focus on saving and investing as much as possible until you get to $300,000. The same goes for those of you who have not yet built a $300,000 investment portfolio.
Make it your mission to max out all tax-advantaged retirement accounts and invest at least 20% of your cash flow in taxable brokerage accounts. Along the way, you can also build your real estate exposure online and eventually own your primary residence.
For those of you starting with zero, I’m confident you will be able to accumulate $300,000+ worth of investments within 10 years. You will be surprised by what time can do. Once you get there, you will feel this lightness in your step as you do more of the things you want. No longer will you be as driven to work for money.
The freedom to choose is a priceless feeling. And to achieve this priceless feeling for only $300,000 is a damn bargain! Get to it!
Retire Earlier By Tracking Your Finances
Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your money. After you link all your accounts, use their Retirement Planning calculator to help plan for your retirement.
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Readers, any of you just starting off on your financial independence journey? If so, what are some challenges you face? At what investment portfolio threshold did you start feeling more financially free? What do you think is the minimum investment portfolio amount where you start feeling that lightness?
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The Minimum Investment Portfolio Balance To Start Feeling Free is written by Financial Samurai for www.financialsamurai.com