4th Quarter Calculations

It's not much of a math but it's quite amusing to think how it affects your future.

This backup plan taught in financial planning falls under portfolio income generation. It's basically for people who want to become employees for the rest of their lives! This is why I always consider it a backup, something to fall back on as an option just in case.

Remember the formula for Financial Freedom where your portfolio income is a function of.  And that is: 

FF= (Passive Income + Portfolio Income)/ lifestyle expenses, 

where FF must be greater than 1. Very simple!

Calculations are done using my 2-step question method (naks I call it the Derek Method) as follows:

1. How much income I need without working in my retirement? and,
2. How to save for it?

Now to calculate for that desired retirement income from your portfolio/ paper assets, the first consideration in my opinion is: it must be enough to cover your lifestyle during retirement with or without a passive income source.

This is because in any case I'd prefer to be in the safer position because during retirement, I won't be this quick, powerful, and in-demand due to old age. In other words, give me a break I'm ageing!!!!

Deciding for the monthly income you require in your retirement is crucial because it determines the amount of the fund needed to generate the same. Your monthly income is usually 10% of this fund you are going to build in your working years. In financial planning, we call this fund: critical mass.

So how much monthly income do you want? And how much money you need to retire today?

When you decide for the amount, multiply it by 12 for the annual equivalent, and multiply it again by 10 to determine your present critical mass equivalent.

It can be expressed as follows:

Critical Mass present equivalent= desired income x12 x10

So for instance, you want a PhP50k monthly income in your retirement, multiply by 12 then 10, you'll find a critical mass equal to PhP 6M. This amount invested to generate at least 10% growth will generate your PhP50k monthly income today.

So what is the problem?

The problem is, we don't have 6 millions of pesos today, unless you 've been a highly paid OFW for quite some time, you inherited this much cash from your rich dad, or just busted the local bank.  In any case, we assume we're not that lucky or evil, and we need to do it the self-made millionaire's way via savings and investments.

This brings us to Step No. 2: How do I save for it?

to be continued..