If you have been reading the blog for a while you may remember that I used to track my monthly investment income. The idea was that once I got my monthly investment income to $1000 a month I would have enough money to be financially independent. This was hypothetical investment income and I decided the numbers didn’t accurately reflect how close I was to being financially independent so I discontinued tracking my monthly investment income. If I had continued tracking I would have seen my income go way down due to various factors that resulted in me withdrawing money from my investments.
I’m now at a point where I am able to contribute to my investments. For now, my investments consist of the dividend stocks in my broker account and my Roth IRA which is currently invested in a TIPS fund. I have decided on a new way to track my progress towards financial independence. I will be tracking my safe withdrawal rate. The way I will be doing this is by tracking my trailing 12 months expenses divided by the amount of my investments.* For this first calculation I am going to take last months expenses time 12 to determine my trailing 12 months expenses. This is because I don’t think my expenses in the previous months accurately reflect my current spending since my living situation has changed dramatically this year. Eventually, the 12 months trailing expenses will be based on my actual expenses.
The generally accepted rule is that you need to get your safe withdrawal rate down to 4% in order to be able to safely retire. I am setting that as my goal. In order to reduce my safe withdrawal rate I can increase the amount I put in my investments and/or reduce my living expenses. The return on my investments will also be a factor, but if I am contributing 50% or more of my income each month it should not be that much of a factor.
My November 2012 safe withdrawal rate is 86.22%. That is obviously not a safe withdrawal rate at all. On the plus side, starting with such a big number should allow me to see measurable progress quickly.
*I’m not 100% sure this is the correct way to determine my safe withdrawal rate. If the calculation should be different, please let me know.