How Big Should Your Investment Portfolio Be to Feel Financially Free?
A common question for those starting their journey to financial independence is: “How big should my investment portfolio be to feel financially free?” Having written about financial independence since 2009, I understand the intimidation people feel when told they need to accumulate 25 times their annual expenses to achieve financial freedom. This target can seem daunting and discourage many from even starting.
To combat this, I suggest an initial goal: an investment portfolio of $300,000. Hitting this number can give you a taste of financial freedom, or that “rich feeling.” Once you’ve accumulated $300,000, the potential returns from your investments might consistently surpass your annual contributions, giving you a significant psychological boost.
Starting the Journey to Financial Freedom
For those with children, starting to build an investment portfolio early can be incredibly beneficial, thanks to the power of compound returns. One effective strategy is to open a custodial brokerage account or a custodial Roth IRA for your kids. This is particularly advantageous if you run a business, as contributions can count as business expenses, and gains grow tax-free under your child’s name.
When Your Portfolio Feels Insignificant
My son’s Roth IRA, for example, showed a 25.49% increase in one year, with diverse investments in stocks like Tesla, which outperformed the S&P 500 significantly. While impressive, the actual dollar increase was just over $2,600—substantial for a young person but less impactful for an adult. It’s clear that a five-digit investment portfolio isn’t enough to make you feel financially free, but it’s a start.
When Your Portfolio Starts to Matter
Every dollar saved is significant, but how do you know when your portfolio really starts to make a difference? From my experience, once your portfolio hits around $200,000, you might see annual returns that begin to match or exceed what you can contribute annually. While a 36.42% return on my Solo 401(k) brought in over $82,000 in one year, this isn’t ordinary. More typical returns (8-12%) would still bring significant, though less spectacular, growth.
The Magic Number: $300,000
Why $300,000? With this amount, you could potentially generate an average return of $30,000 annually, depending on market conditions. This level of return can start to cover living expenses, reducing the pressure to work intensively and allowing some financial breathing room. Additionally, if your $300,000 is invested in a Roth IRA, you have the flexibility to draw down principal interest and penalty-free if absolutely necessary.
What Does ‘Coast FIRE’ Mean?
Coast FIRE is a concept where you no longer need to actively contribute to your retirement because your existing savings are sufficient to grow into a robust retirement fund by traditional retirement age. For example, $300,000 at age 30 could grow to over $2 million by age 65 without additional contributions, assuming a conservative average annual return.
From $300,000 to $1 Million and Beyond
Once you reach $300,000, the next logical milestone is $1 million. This might seem less daunting as your initial investments grow. My own experience saw my 401(k) grow from $350,000 to $1 million over nine years without new contributions, thanks to robust market returns. And for those looking to live a “Fat FIRE” lifestyle, aiming for an investment portfolio of $3 million per person might be your goal, offering significant annual returns and a high degree of financial freedom.
Your Investment Risk Tolerance
Interestingly, I’ve found that my risk tolerance hasn’t decreased with age as much as it’s adjusted in line with my earning power. Despite market fluctuations, my high equity allocation has remained unchanged because I can’t access my rollover IRA without penalty until 2037, giving my investments a long time horizon to recover and grow.
Conclusion: Aim for $300,000 to Start Feeling Financially Free
For those just starting, focus intensely on saving and investing to reach that first $300,000. This milestone is achievable within 10 years for most people and will make the journey to financial independence feel more tangible and less stressful. Once there, you’ll likely find the motivation to push further, enhancing your financial freedom and life satisfaction.
