The standard of wealth freedom
First of all, we have to figure out what is the basic meaning of wealth freedom, because too many people have misunderstandings about wealth freedom. If your understanding of wealth freedom is still stuck in the ability to not work and spend whatever you want without worrying, then I can only say that this is not called wealth freedom, which is the standard for becoming a rich generation.
A more scientific standard of wealth freedom is that a person can rely on other means of income (passive-oriented) to maintain a normal or luxury life for himself and his family, rather than through a 9-5 job to receive a salary to maintain life, so that we can be free from the constraints of time and space.
Achieving wealth freedom frees us from the limitations of space, those high paying jobs are piled up in big cities, whether you are in New York, Beijing, Shanghai, London, Hong Kong or San Francisco, the only way to live in these big cities is to have big companies and thus better job opportunities. But from the other side, living in big cities we have to bear other corresponding costs, such as high housing prices, high rents polluted air, traffic jams dense crowds, etc., thus reducing the happiness of our lives brings unnecessary pressure.
At the same time the time of wealth freedom is to continue until the end of the person’s life. If a person can live until the age of ninety, from the age of forty on the early retirement, wealth freedom, then his other ways of income or the principal of his pension should be able to maintain the person or the family for fifty years without working life expenses.
How to calculate the standard of wealth freedom: the 4% rule
Knowing the scientific definition of wealth freedom, then we have to invite the famous four percent rule, of course, this is just a theory invented by the academic circle to lead the way, patient friends please continue to read on.
In 1994, William, a scholar at the Massachusetts Institute of Technology, analyzed the stock market data and retirement cases over the past 75 years and found that if a person withdraws no more than four percent of the principal from his pension, and then adjusts it dynamically each year according to the inflation rate, he can realize that his pension will not be used up until he dies, which is the famous four percent rule.
When expressed in mathematical terms, this is the monthly expenses of your expected ideal retirement multiplied by twelve months divided by four percent. Let’s take a more practical example. If a single person’s monthly expenses are $2,000, multiply that by twelve months divided by four percent and their target retirement is $600,000; for a family of two, their monthly expenses are $5,500 multiplied by twelve divided by four percent and their target retirement is $1.5 million; for a family of four, their monthly expenses are $10,000 multiplied by If a family of four has monthly expenses of 10,000 times twelve divided by four percent, their target retirement principal would be three million. Of course, this is a very rough estimate because we have to take into account the occurrence of various irresistible events. The Chinese version of the wealth freedom standard is almost finished with the theory of the retirement and wealth freedom part of the basic wealth planning, but there are obvious flaws in using this theory directly to calculate how much money you need to be wealth free in China.
This set of x% theory is basically based on mature developed economies and living standards, living in mainland China there are several major differences we must take into account.
1.China’s bond market is still at a very early stage, and there is a big gap with the United States in terms of scale, quality and regulation. The fact that most Chinese companies are still in the development stage compared to those in mature economies means that there is a greater potential default risk in Chinese corporate bonds. If bonds are used as the main part of a portfolio when calculating passive income from retirement principal, then this income may not be stable and there is no point in talking about wealth freedom.
2.Whether homeownership is considered an asset or a liability in China is an issue that must be carefully calculated. In the U.S., a home that has been paid off is basically considered a net asset, and many people retire with a larger home in exchange for a smaller home in a more comfortable area, thus further increasing their financial assets to generate passive income. The situation in China is very different, there is a structural irreversible gap between urban and rural areas in China, even if you retire, it is difficult to accept to go to the countryside or move from the north to the third or fourth tier cities where the advantages of resources are concentrated, just an absolute gulf in medical conditions discourages most people, there may be a mecca for retirement like Hainan, but the choice of areas is very limited, which is bound to become a scarce resource. Then you may have to spend more expensive than the value of your home (if not a first-tier city) to buy a retirement home, then your home is not an asset for you, but a liability.
3. The social welfare system and culture are different, resulting in the Chinese having to set aside enough of a budget to cover unexpected events. In China you have to consider the medical insurance and expenses needed for major illnesses in retirement, and then some people need to consider the expenses needed for their parents’ retirement, which further raises the standard threshold of wealth freedom for Chinese people and increases the uncertainty. To sum up, I think that if you live in China, maybe the x% rule mentioned above is not fully applicable, but this can be taken as the minimum standard of your wealth freedom, and then according to different situations of families, regions and individuals, add or subtract the expenses you think you need or don’t need on the basis of this figure, and then calculate a standard of your wealth freedom.
I believe that the new generation will also be able to find their own investment portfolio to achieve a stable income so that the passive income after retirement allows you to gain freedom.
