I couldn't find any good answer on internet regarding how much money is needed to retire peacefully or become financially independent. Being financially independent means you don't need to be dependent on salary any more because the interest earned on your total wealth is so much that it covers all your expenses.
When I used the calculations given by others for financial independence into an excel sheet, the total amount of money became zero after some years. For example, someone said that have so much corpus that the interest earned on corpus is double the amount of your expense. But this goes negative after some years as the inflation is not considered in calculation. So I decided to calculate it myself.
Expectation: Total corpus shouldn't start decreasing ever.
Assumption: Interest earned on corpus is always more than the inflation.
In order to make sure that the total money never starts decreasing, we need to make sure that for any particular year's corpus to expense ratio is always equal or more than previous year's.
min_initial_corpus = Minimum amount of money required to retire or achieve financially freedom
monthly_exp = Current monthly expense
inflation = Expected inflation percent each year.
interest = Expected interest percent gain on corpus each year
Formula to calculate minimum amount to retire:
min_initial_corpus = (monthly_exp * 1200) / (interest - inflation)
Proof
first_year_exp = monthly_exp * 12
saved_first_year = (min_initial_corpus* interest * 0.01) - first_year_exp
sec_year_corp = saved_first_year + min_initial_corpus
sec_year_exp = (first_year_exp * inflation * 0.01 + first_year_exp)
We have to make sure that "Corpus to Expense” ratio is equal or more than previous year.
sec_year_corp / sec_year_exp = min_initial_corpus/ first_year_exp
((min_initial_corpus * interest * 0.01) - first_year_exp + min_initial_corpus) / (first_year_exp * inflation * 0.01 + first_year_exp) = min_initial_corpus/ first_year_exp
first_year_exp * ((min_initial_corpus * interest * 0.01) - first_year_exp + x) = (first_year_exp * inflation * 0.01 + first_year_exp) * min_initial_corpus
min_initial_corpus * first_year_exp * interest * 0.01 - first_year_exp ^ 2 + min_initial_corpus * first_year_exp = min_initial_corpus * first_year_exp * inflation * 0.01 + min_initial_corpus* first_year_exp
min_initial_corpus * first_year_exp * interest * 0.01 - first_year_exp ^ 2 = min_initial_corpus * first_yearly * inflation * 0.01
min_initial_corpus * first_year_exp * interest * 0.01 - min_initial_corpus* first_year_exp * inflation * 0.01 = first_year_exp ^ 2
min_initial_corpus= (first_year_exp ^ 2) / (first_year_exp * interest * 0.01 - first_year_exp * inflation * 0.01 )
min_initial_corpus = (first_year_exp * 100) / (interest - inflation)
min_initial_corpus = (monthly_exp * 1200) / (interest - inflation)
Example
Monthly expense = 50,000
Expected interest = 10 %
Expected inflation = 8 %
Minimum corpus required = (50,000 * 1200) / (10 - 8) = 30,000,000
When I used the calculations given by others for financial independence into an excel sheet, the total amount of money became zero after some years. For example, someone said that have so much corpus that the interest earned on corpus is double the amount of your expense. But this goes negative after some years as the inflation is not considered in calculation. So I decided to calculate it myself.
Expectation: Total corpus shouldn't start decreasing ever.
Assumption: Interest earned on corpus is always more than the inflation.
In order to make sure that the total money never starts decreasing, we need to make sure that for any particular year's corpus to expense ratio is always equal or more than previous year's.
min_initial_corpus = Minimum amount of money required to retire or achieve financially freedom
monthly_exp = Current monthly expense
inflation = Expected inflation percent each year.
interest = Expected interest percent gain on corpus each year
Formula to calculate minimum amount to retire:
min_initial_corpus = (monthly_exp * 1200) / (interest - inflation)
Proof
first_year_exp = monthly_exp * 12
saved_first_year = (min_initial_corpus* interest * 0.01) - first_year_exp
sec_year_corp = saved_first_year + min_initial_corpus
sec_year_exp = (first_year_exp * inflation * 0.01 + first_year_exp)
We have to make sure that "Corpus to Expense” ratio is equal or more than previous year.
sec_year_corp / sec_year_exp = min_initial_corpus/ first_year_exp
((min_initial_corpus * interest * 0.01) - first_year_exp + min_initial_corpus) / (first_year_exp * inflation * 0.01 + first_year_exp) = min_initial_corpus/ first_year_exp
first_year_exp * ((min_initial_corpus * interest * 0.01) - first_year_exp + x) = (first_year_exp * inflation * 0.01 + first_year_exp) * min_initial_corpus
min_initial_corpus * first_year_exp * interest * 0.01 - first_year_exp ^ 2 + min_initial_corpus * first_year_exp = min_initial_corpus * first_year_exp * inflation * 0.01 + min_initial_corpus* first_year_exp
min_initial_corpus * first_year_exp * interest * 0.01 - first_year_exp ^ 2 = min_initial_corpus * first_yearly * inflation * 0.01
min_initial_corpus * first_year_exp * interest * 0.01 - min_initial_corpus* first_year_exp * inflation * 0.01 = first_year_exp ^ 2
min_initial_corpus= (first_year_exp ^ 2) / (first_year_exp * interest * 0.01 - first_year_exp * inflation * 0.01 )
min_initial_corpus = (first_year_exp * 100) / (interest - inflation)
min_initial_corpus = (monthly_exp * 1200) / (interest - inflation)
Example
Monthly expense = 50,000
Expected interest = 10 %
Expected inflation = 8 %
Minimum corpus required = (50,000 * 1200) / (10 - 8) = 30,000,000
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