Retiring early to leave the corporate world and enjoy personal passions or pursuits is a dream considered by many Generation X and Millennial individuals. Whether one wants to change professions or pursue an independent project, a certain amount of financial cushion is needed to bridge the gap. With a large enough cushion and the right investments, never returning to the corporate world is possible. The math isn't that complicated, but critical to having confidence in choosing early retirement.
The key to a sustainable retirement is earning a return on investments that are greater than your costs plus inflation, such that you aren't spending the equity of your portfolio. So, you will need a sizeable portfolio to begin with, such that the earnings on that portfolio cover all of your expenses and grows faster than inflation.
So starting with a $1 million portfolio, and annual expenses of $50,000 ($4167/month) you would need to earn on average a 7% return to cover a 2% inflation rate. The federal reserve usually targets about a 2% inflation rate. Inflation is a tricky number to estimate, so it is important to understand how you think prices for your most expensive expenses will increase. A 7% return means your portfolio must increase by at least $70,000, so minus your $50K expenses, you'll have $1.02M at the end of year 1. If you can generate extra income that will help cover costs or potentially allow investing in less risky investments.
Probably the two biggest threats to this financial model is unexpected costs or poor investment returns. So, insurance that can cover large bills or negative returns, will go a long way towards financial independence. Unfortunately, that can mean higher monthly costs or lower average investment returns, respectively.
