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In this article I explore he notion of financial independence. The idea being that if you have enough money invested in some asset then the income derived from that asset should be enough to fund a modest lifestyle perpetually. The last point, on perpetuity, is the underpinning notion of independence: no reliance on any outside source of finance. I outline one particular strategy here, but it makes the naive assumption that you have the money to begin (or a plan for getting the money).

It is my naive opinion that people who win the lottery should never have to be poor again. The income derived from investments would be more than enough to fund a good lifestyle, yet many squander the money because they have no idea how to manage it. The unwise spend the money (all of it), the wise understand that they don't know how to manage it and seek help, while the smart figure out how to manage it themselves.

While I could discuss various ways to achieve the target portfolio values in this article I intend to omit that here and focus solely on what to do once you have the money. I also expound that winning the lottery is not necessary either, at least it is not necessary to win millions or even a single million.

There are two ways to achieve the goal: one is to assume a lump sum which is divided up and then paid out in even installments (e.g. annuity), or two as an investment in various products of which the income (e.g. dividends) is paid out. This can be considered as a simple way of calculating a threshold value for retirement.

Key Targets

£13,000 (Approx UK annual minimum wage, full-time)

£30,000 (Approx average UK wage, full-time)

£50,000 (Comfortable UK wage)

The first is presented as an absolute minimum, and one which would provide for basic subsistence. A more acceptable wage (income) target is 30,000 which is just above the UK average wage. This would provide a comfortable enough living for a single person in most parts of the UK but arguably not enough for living in London. The value of £50,000 would be able to support two people quite easily plus kids in any part of the UK, but perhaps just enough for a couple living in London.

At these income values it would be possible to retire if they was a fair guarantee of their re-occurrence: i.e. an income stream from investments or an annuity.

My own personal preference is for an equity strategy, with a consideration of bonds, over annuities. Although I grant that it is situation dependent.

Equities strategy

The basic strategy is to buy shares in companies, or to buy into a fund which buys shares in companies. Investing into an "income" styled fund ought to give a higher yield than a fund which is aiming for growth. A 4% yield on equities is considered high for a pure-equity although not impossible if investing in the current UK market. Once the money is invested it should stay invested: buy, hold, don't forget to hold. The portfolio should be sufficiently diversified and "boring".

The yield is the percentage of the income (dividends) paid out divided by the portfolio value. Even if the yield value was, naively, fixed for all time the nominal value of the income will crease when the stock market increase. In other words, if the stock market increases then dividends will also increase (they do follow each other). If we take our target values as the amount of income in the first year, e.g. £30,000, then it is reasonable to assume that this value will increase year-on-year.

If the assumed yield is 4% then to generate income of £30,000 per annum requires a portfolio value of £750,000. This is rather large and would take a long time to save in the first place. Investments, by their nature, will grow themselves over-time and if all income is invested then the target can be reached within one's lifetime with a modest salary.

Those people who are fortunate enough to receive a lump sum of comparable size would be able to retire to live from the income received. A yield of 5% would greater reduce this portfolio value to £600,000.

Quick summary of calculations

Investments at the 4% yield level

£13,000 income requires a portfolio of £325,000

£30,000 income requires a portfolio of £750,000

£50,000 income requires a portfolio of £1,250,000

Investments at the 5% yield level

£13,000 income requires a portfolio of £260,000

£30,000 income requires a portfolio of £600,000

£50,000 income requires a portfolio of £1,000,000

Disclaimer: this article does not provide investment advice. It is only an opinion. Qualified professionals should be consulted.