Friday, April 20, 2012

Financial Samurai's Financial Freedom Fund

What would you do if you were free to do whatever you wanted every single day for the rest of your life and working really was a choice? Would you travel? Do more volunteer work? Keep working and not change anything? Do you have a Financial Freedom Fund?

Warning that this is a super long post in response and reflection to the Financial Samurai's super long post about his passive income allocation.

The Financial Freedom Fund is commonly used to refer to savings and assets that have grown as such that the returns (income) from them are self sustaining and you can survive on the passive income without having to work. That is, you can retire and become a self funded retiree if you wish to. The premises underlying a Freedom Fund is building passive, multiple income streams to fund your 'retirement' and 'freedom'.

The Financial Samurai and His Freedom Fund

The Financial Samurai (FS) Sam,  has a very interesting post about his Freedom Fund, 'Achieving Financial Freedom One Slice At A Time'. His investment methodology is logical and methodical which reasonates with me. More importantly, when it relates to investment or financial advice, I like reading material from authors and bloggers who practice what they preach.

The FS recently posted about his Freedom Fund and retirement and it's a VERY long article chocked full of numbers if you like that sort of stuff. From the personal details he's divulged in his posts, he's probably in his late 30s to early 40s, so anyone in their 20s, 30s or 40s should easily relate. I like his investment style and the proportions of his diversification across the asset classes (CDs/Stocks/Property/RE funds etc).

My thoughts are that he has a balanced(agressive and defensive) investment portfolio/Freedom Fund which is what anyone in their 20s/30s/40s should be looking at. Folks in their 50s/60s and beyond need more defensive and less volatile assets as they get older.

My own investments are structured similarly to how FS has structured his, albeit I have a LOT less in my funds than he has lol. From reading FS blog for about 2 or 3 years, he probably has $3million plus in assets and capital. He only provided his monthly passive income- I'll work backwards to arrive at his approximate capitalisation amount:

1.CD Interest Income $2800/month, 33600pa and at an average return of 4% (see his blog)= $840k capital
2.Dividend Income $1200/month, 14400pa and at an average yield of 5% (that's an avg yield for me on the pessimistic side since he didn't provide a yield)= $288k capital
3.Rental Property Income $2500/month= yield not mentioned so can't work out the capital on that
4.Private Equity Venture = $100k capital (he mentions 6 figures so that's on the pessimistic end)
5.Real Estate Fund = $110k capital (factoring in $50k returning 120%)

Total Capital $1,338,000

San Francisco principal place of residence
Investment Property
Blogging income/savings from FS Blog and Yakezie

That's pretty impressive, very well diversified and is a well balanced portfolio from the extent that he has divulged and broken down for the public to see. A wise man indeed.
How Much Do You Need In Your Freedom Fund?

How much you need in your Freedom Fund = Retirement Fund needs. It's a topic I haven't really covered comprehensively because retirement is decades and decades away, plus my own retirement fund returns SUCK majorly and I can't wait to one day run my own SMSF/retirement funds. Need $200k plus in there for sufficient critical mass to justify the fees of running an SMSF.

There are heaps of calculators on the net that will crunch those numbers for you. I'm not going to do it because there are way too many variables involved, tons of rule-of-thumbs theory and for me not to mislead you, I'd have to write a book. Roughly, you'll need to think about:

*What lifestyle you like (Eg: Comfortable, dining out, some holidays per year)

*How much will it cost to fund that lifestyle (Eg: $1000 per week)

*What amount of capital or savings you'll need to save up and invest to generate that income to fund that lifestyle. (Eg: To fund the lifestyle examples above, if $1000 per week is generated from 5%pa bank interest, you'll need to save $1,040,000**)

The funds saved is commonly referred to as the 'Freedom Fund' in the blogosphere. It's freedom because it allows you to pursue your hobbies and interests and not be a slave to work. The essense of a Freedom Fund that is fully funded is that you don't have to work at all. You could bum around for the rest of your life doing nothing if you wish to because the passive income from your Freedom Fund sufficiently supports your lifestyle.

Many of us enjoy working but there are no guarantees that 35 years later we'll be keen on what we do now. Personally, I would never retire early if I had a choice- I love working and it ensures the mind is active and doesn't degenerate. Secondly- imagine being the only retired one in your friendship circle- who else would you hang out with if they're all busy working?

Recently, plenty of retirees find out that a) they haven't saved enough, b) a financial crisis can cause their portfolio to plummet and dividend income to be cut, c) unexpected costs and health problems can quickly erode income and capital, d) trying to find work when you're a lot older can be very difficult so while you're younger and can work- work as much as you can. Some were caught out by REITs that were 'frozen' and unable to pay out investors who wanted to exit the REIT because they had liquidity problems.

Anyway- this article isn't focused on retirees but the younger crowd who wishes to escape the daily grind, or build capital and investments that will allow them to create choices in their life. I have no-where near the amount that the $3million that Sam the Financial Samurai has.  It will take me years to build $78,000-$117,600pa in passive income like the Samurai. You gotta start somewhere, right?!

That's it folks and have a great weekend yo!


** This is using flat interest with plenty of assumptions built in to avoid boring the general public to death. For those interested:

_ You need to factor in inflation (that the $1000 used in my example above, buys less and less every single year into the future)
_ 5% interest return can be too high (In the US the interest is 1% and even less. There is no guarantees that you can even earn 5% on your funds)
_ 5% return can be too modest (If you invest outside the bank into property or shares, you have the potential to earn significantly more than 5% pa)
_ Compounding is ignored (You can factor that into your returns if you're mathematically inclined)
_ Taxation is ignored (You can factor that into your returns if you're mathematically inclined)


  1. Hi Mate,

    Nice post analysis. To reiterate your point, it will take you years, just as it has taken me about 13 years to build this passive income portfolio. How long have you been going at it?

    The rental property capital base is easy to calculate, and the 5% dividend yield is too aggressive as the S&P 500 only yields about 2% right now.

    Most everybody has focused on the passive income, which is what I want.

    Tell me something though, why were you surprised with my numbers?



  2. Hi Sam. I know it's going to take years and years to build that type of passive income. Oops, I think I've overstated your age by about 5years unless you were a late starter...

    2% yield from the S&P500 would apply if you invested the lot in S&P500 index funds but surely the yield would be be better if you invested some of the $720k (revised #) into individual stocks directly? 5% is on the pessimistic side for my stocks which is why I used that rate. My yields are net 7% plus but our economy hasn't been in recession like the rest of the world.

    Why was I surprised? All other bloggers on my RSS Feed is nowhere near your #s and you've never really provided your #s before so it's astounding to actually see that you're working with over $3m in net assets.