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Vancouver, BC (April 2,
2001): The concept of attaining financial
independence has been around for some time. Although
it should be important to all investors, it may
not be fully understood by everyone.
Adrian Mastracci, fee-only
investment counsel and president of Vancouver
based KCM Wealth Management, comments,
"I place a very high significance on financial
independence. Consequently, it becomes an initial
topic of conversation with every client."
"You have achieved financial independence
when you work because you want to, not because
you have to," says Mastracci, "Simply stated,
financial independence is the accumulation of
sufficient investment assets to provide your desired
level of income for your lifetime."
Having reached financial independence
you may, at your option, begin to draw an income
stream from your accumulated portfolio to provide
for your lifestyle needs. These accumulated assets
typically consist of a portfolio of stocks, mutual
funds, bonds, savings accounts, income producing
real estate, royalties and family businesses.
Mastracci poses this question to
all clients, "When do you wish to achieve your
unique financial independence level and what is
the required income in today's dollars?"
Many clients strive to achieve financial
independence between age 50 to 60, preferably
before "formal retirement" from their vocation.
Once financial independence is achieved, the clients
typically reduce their work time in favour of
more leisure activities or other pursuits, such
as working an average of two to three days per
week.
"The financial independence analysis
for each client captures the personal financial
wish list and estimates the value of assets required
to provide for the stated goals," comments Mastracci,
"More importantly, I also calculate the client's
rate of return to achieve this capital value."
Mastracci highlights the importance
of the financial independence analysis with these
observations:
- Consider a man age 47 wishing to achieve
financial independence at age 60 with $75,000
of before-tax annual income in today's terms
for the rest of his life. He needs an investment
portfolio approximating $2,000,000 by age 60
assuming inflation at 3% per year. A woman of
the same age needs about $2,200,000 simply because
she lives longer.
- Next, consider a man age 30 wishing to achieve
financial independence at age 50 with $75,000
of before-tax annual income in today's terms
for the rest of his life. He needs nearly $3,000,000
by age 50 assuming inflation at 3%. Similarly,
a woman of the same age needs about $3,200,000
because of longer life expectancy.
- However, the most critical part of this exercise
is, "What investment rate of return do you need
to achieve your unique financial independence
target?"
- Some benchmarks of evaluating investment success
are touted to be the TSE 300, the Canada Saving
Bond rate, the Dow 30, or the best performing
mutual funds. However, in my view, none of these
are relevant.
- The only relevant benchmark is your personal
rate of return required to reach your unique
financial independence goal. I calculate this
rate primarily by knowing the client's current
assets particulars and the estimated annual
savings capacity available for investment.
- Your unique personal rate of return becomes
your "minimum investment benchmark" for your
long-term asset allocation game plan. Is yours
2%, 5%, 10%, 15%, or have you reached your goal?
- Once you know your personal rate of return,
you do not have to incur any more investment
risk than necessary. Without that calculation
you likely do not know how much risk you are
sustaining. This is especially important to
investors who have reached their financial independence
goal.
"My premise is that aspirations
of financial independence have extremely important
implications on every client investment portfolio,"
summarizes Mastracci, "The answers provide essential
elements for the strategy and structure of the
client's long-term asset allocation plan."
"I relate all client portfolio review
discussions to the client's own personal rate
of return. Nothing else matters," concludes Mastracci.
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