How big of an investment portfolio should I have to be financially free or start feeling free? This is one of the most common questions people starting on their financial independence journey ask.
Sometimes telling people they should accumulate at least 25X their annual expenses or 10-20X their annual gross income may seem too daunting. As a result, they may get discouraged and not even start.
Therefore, to boost motivation and momentum, I’ve come up with the minimum investment portfolio amount for financial freedom seekers to shoot for. That amount is $300,000. Once you have accumulated $300,000, you will start to feel financially free or that rich feeling.
Let me explain by sharing some key investment portfolio levels based on our personal accounts. Once you accumulate about $300,000 in invested capital, your potential returns might be consistently greater than your annual contributions.
Starting The Financial Freedom Journey Early
One of the interesting things about having kids is that you get to start over financially. As a forward-thinking parent, I’m certain my adult children will have wanted me to build an investment portfolio for them while they were young. After all, compound returns are some of the most powerful forces in finance. The sooner we can start investing the better.
The main way we can help our children build an investment portfolio is by opening up a custodial brokerage account and/or a custodial Roth IRA. If you expect your estate to be above the estate tax threshold when you die, gifting the maximum gift exemption limit each year may be a smart idea.
The custodial Roth IRA is especially attractive if you have a business because:
- Your contribution serves as a business expense
- The income by the child is earned tax-free if it is below the standard deduction threshold
- The investments get to compound tax-free
- Withdrawals are also tax-free
- Your child develops a work ethic
- Your child will better appreciate the value of money
You don’t need a business to open up a custodial Roth IRA. Your child just needs to have earned income.
When Your Investment Portfolio Is Too Small To Matter Yet
Below is my son’s Roth IRA portfolio. It was up a respectable 25.49% with names such as VTI, TWTR, TSLA, NFLX. VTI slightly underperformed, TWTR and NFLX underperformed, and TSLA drastically outperformed the S&P 500.
Most of us would be pleased with a 25.49% annual return given it is about 15% higher than the historical return average for the S&P 500. However, in this portfolio’s case, a 25.49% return amounted to only $2,682.44.
For an adolescent, the absolute dollar amount returned is good. However, for an adult, $2,682.44 doesn’t really move the needle. It could pay for a month’s worth of living expenses for a frugal individual, but that’s about it.
There is no feeling financially free with only a five-digit investment portfolio balance. Therefore, the only thing to do is to keep contributing. Hopefully, the taste of sweet returns keeps an investor hooked.
When Your Investment Portfolio Amount Begins To Matter
Any amount of money in your investment portfolio matters. However, the idea is to figure out the target investment portfolio amount to shoot for so that you can start to feel more free. The more money you have, the greater your ability to fund your retirement and generate passive income.
After my early retirement honeymoon period was over, between 2013 – 2017, I decided to do some freelance consulting for several fintech startups. I also gave over 500 Uber rides and coached high school tennis for three years. It was a great time for exploration before I became a father in 2017.
During this time period, I maximized contributions to a Solo 401(k) (aka KEOGH 401(k)). As a sole proprietor, you can contribute the maximum employee portion plus a percentage of your operating profits as the employer portion.
Since inception, I have contributed $146,321 to my Solo 401(k). But I have not contributed for over three years.
Solo 401(k) Performance Snapshot
My Solo 401(k) returned 36.42% in 2021, or $82,232.70 to $317,383. The returns were brought up by TSLA, HUT, and AAPL and dragged down by Alibaba, BIDU, and UBER. $82,232.70 is real money that can cover a typical American family’s expenses for one year given the median household income is around $70,000.
However, a 36.42% return is abnormal. A more normal return would be between 8% – 12%, or $18,062 – $27,093, based on my beginning balance of $225,778. This return amount still feels relatively significant, given a part of it is greater than the current maximum 401(k) contribution limit of $20,500.
Therefore, starting around $200,000 is where your returns might sometimes match or surpass the maximum contribution level. However, a return of $18,000 – $27,000 a year based on a $225,000 balance is not quite enough to feel financially free yet.
The Minimum Investment Portfolio Target Amount To Shoot For: $300,000
Based on historical returns, expected returns, and normal individual living expenses, if you want to feel more financially free, the minimum investment portfolio amount to shoot for is $300,000.
With a $300,000 portfolio, you have the potential to return an annual average of $30,000. Once your portfolio has the high potential of returning greater than the maximum contribution amount, psychologically, you feel like you no longer have to work as hard to contribute as much.
Further, most individuals can live off $30,000 if they really want to. Sure, there might be some years where your portfolio loses money. But then there might be some years where it returns 35%.
If your $300,000 portfolio is in a taxable brokerage account, you can always draw down principal interest and penalty-free to pay for some of your living expenses as well. A 2% – 5% withdrawal rate equals $6,000 – $15,000. However, I would draw down principal only if absolutely necessary.
You want to give your portfolio as much time as possible to compound into the millions. Once you have a liquid net worth equal to $300,000, you’ll start feeling financially free. You’ll get motivated to make more money.
Coast FIRE Also Means $300,000 Minimum
Personally, I would have gladly kept working in finance for five more years if I could have worked 20 hours less a week for 30% less pay. Working 40 hours a week versus 60 hours a week would have been a walk in the park. But back then, there was not as much work / life flexibility as there is now. I was burned out.
Nobody retires early from a job they like or love. This is one of my key points in my now classic post, The Dark Side Of Early Retirement. Some wandering souls simply haven’t found the ideal job yet. But instead of keeping the search for meaningful work alive, they give up early.
I’ve determined a $300,000 portfolio is also the minimum amount necessary to consider yourself Coast FIRE. Coast FIRE is where you no longer have to contribute to your retirement portfolios because they may grow large enough to fund a traditional retirement.
Coast FIRE Example
Let’s say you have $300,000 at age 30 and traditional retirement is considered age 65. At a reasonable 6% compound annual return, in 35 years, your portfolio will have grown to $2,305,000 without any contributions. Despite inflation, $2,305,000 along with inflation-adjusted social security should be enough to provide for a reasonable lifestyle.
Given your portfolio’s potential growth, at age 30, you might decide to quit a stressful high-paying job for a fun job that pays just enough to cover your living expenses. You won’t have much excess cash flow to save. However, you won’t need to if your investment portfolios continue to grow.
The main risk with Coast FIRE is that you trick yourself into complacency. The term was made up to give financial independence seekers motivation to feel good about still being so far away. So much about money is psychological. Just make sure you’re not ignoring the root of your frustrations.
The Next Investment Portfolio Target: $1+ Million
Once you reach an investment portfolio balance of $300,000, the next logical goal to shoot for is $1 million. Suddenly, striving for a $1 million investment portfolio no longer feels as daunting.
Your $300,000 portfolio will get to $1 million if it grows by 8.4% a year for 15 years without contributions. But if you regularly contribute $20,500 a year while earning a 8.4% annual return, your portfolio will get to $1 million in just 10 years. The mountain to climb just turned into a hill, especially if you enjoy your job.
My 401(k) balance is currently about $1 million. I rolled over to an IRA in 2012. In 2012, the balance was about $350,000. I haven’t contributed a penny to my rollover IRA since 2012 because I can’t. Therefore, the compound annual return over nine years is about 13.5%.
The rollover IRA started 2021 at $859,468 and closed the year up $256,362 to $1,115,830 for a 30% return. $256,326 is enough to pay for a year or more of living expenses for a family.
Shooting for a $1+ million retirement investment portfolio balance gets easier over time. With this portfolio amount, you will really begin to feel free.
If you’re afraid of society no longer rewarding you based on merit, once you achieve a net worth of $1 million per person, you won’t stress as much. Ideally, you’ll get to a net worth of $3 million per person, which I consider F you money.
Your Investment Risk Tolerance May Not Be Dependent On Age
As I get older, what I’m noticing about my risk tolerance is that it hasn’t declined as much as I thought. Instead, my risk tolerance is more closely associated with my earning power.
On January 31, 2020, my rollover IRA above had a balance of $675,219. Then, the pandemic hit and the balance fell to $546,194, or a 19% decline. A large structured note investment helped dampen the fall given the S&P 500 had declined about 32% during this time.
I remember being bummed out about losing a lot of money back then. So much financial progress got wiped out in such a quick amount of time. However, I have let the portfolio with a 95%+ equity allocation ride since the March 2020 meltdown.
The main reason why is because I can’t tap the portfolio without penalty until 2037. It’s easier to take more risk when you have a longer time horizon. But the other reason for maintaining a high equity weighting is because my active income grew. After my daughter was born in December 2019 I decided to become more entrepreneurial for two years.
As my active income grew, so did my risk tolerance. Based on my Financial SEER formula, the time it took to make up for any potential losses declined as earnings grew. Therefore, I kept risk on and continued to invest most of my cash flow into stocks and real estate.
If you want to increase your investing courage, make more money. The other way to increase your courage is to have stacks of cash. But in this inflationary environment, the cash should be strategically deployed.
Supreme Focus To Get To $300,000
If you are just starting out on your financial independence journey, please focus on saving and investing as much as possible until you get to $300,000. The same goes for those of you who have not yet built a $300,000 investment portfolio.
Make it your mission to max out all tax-advantaged retirement accounts and invest at least 20% of your cash flow in taxable brokerage accounts. Along the way, you can also build your real estate exposure online and eventually own your primary residence. Because achieving financial freedom is much easier once you have stabilized your housing costs by owning real estate. My favorite real estate investing platform is Fundrise.
For those of you starting with zero, I’m confident you will be able to accumulate $300,000+ worth of investments within 10 years. You will be surprised by what time can do. Once you get there, you will feel this lightness in your step as you do more of the things you want. No longer will you be as driven to work for money.
The freedom to choose is a priceless feeling. And to achieve this priceless feeling for only $300,000 is a damn bargain! Get to it!
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Readers, any of you just starting off on your financial independence journey? If so, what are some challenges you face? At what investment portfolio threshold did you start feeling more financially free? What do you think is the minimum investment portfolio amount where you start feeling that lightness?
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Great article Sam! Long time reader here. I’ve learned so much with your posts and readers comments afterwards. I agree, around $300k, you feel a little lighter. But to achieve this you need to be somewhat savvy on your retirement acct funds. I’ve been on a deep dive for over a year trying to decide what funds I want in my 401k to achieve FI. After reading all the different strategies and plugging away at portfolio optimizers, I now have information overload and can’t decide which funds to incorporate into my retirement account. I’ve mainly relied on VOO and target date funds to achieve what I currently have now. Do you have an article on portfolio funds that I don’t see and if not, is that something you would write on? I know this is a complex topic, but your articles resonate well with me and know you have a background in the market.
Currently sitting at 2.3M net worth as a 33 year old female. I was lucky to have lived at home with my parents until I built my first house at 25yo and used cash savings and equity to acquire 4 rental properties over the subsequent years. Lived very frugally during this time which gave me a real appreciation for the importance of saving and how small daily habits and discipline can make a huge difference over a relatively short space of time. I’m in Australia and fortunately since purchasing my properties the housing market has gone nuts seeing most properties in my state more than double in value over the last 5 years to catch up with values in the rest of the country which has largely contributed to my position now so you could say there was a lot of luck involved particularly given the sentiment at the time was that the low cost areas I bought my rentals in weren’t going to show much capital growth. Am finding your articles really insightful since deciding to dabble into stocks/index funds last year and I’m doing a lot of reading to learn as much as I can – obviously our superannuation system is much different but have been piling some extra money into that as a tax advantage. The ironic thing I find is that the more financially independent I become the less I realise I need in life to be content. I’m only really concerned with having a nice home in a good suburb on a good size chunk of land as I’m a big homebody, but I really couldn’t care less about cars, boats, jewellery etc and I actually enjoy consuming less and giving up the idea of always having to have more and more. I did always LOATHE working full time not having any time to myself during the week and spending weekends drinking wine to numb the pain of the working week doing housework and catching up with people I didn’t have a chance to do during the week. I remember my first day of full-time work in an office and finishing the day feeling so depressed thinking that going to be the rest of my life. This is what propelled me to start saving at a young age, if I was going to be stuck staring at a screen in an overly air-conditioned room then I had better make it count for something. I made the decision to work only part-time a few years ago which I find is an ideal balance between having time for hobbies and focusing on personal growth while also feeling purposeful having a job and getting out of the house. Am hoping to achieve a stage of earning enough passive income in the next 5-10 years so that my husband and I can fully retire and live part time in US/Canada however given I’m still fairly young I’m honestly a bit daunted by the options that await…… Thanks for your articles and keep up the good work!
$300k is right around the threshold that I also felt a psychological shift. I didn’t feel financially free and am still a long way away from FIRE but I felt less pressure. Less of a nagging feeling that I was spinning my wheels in financial mud and feeling that I could more easily take risk with my career.
I initially found it odd that my increased wealth led me to feel more risk loving as this is the opposite of many articles I have read and opposite of the potential complacency you warn of. For me, seeing the progress and having less pressure gave me the confidence to aim for a lifestyle I didn’t think I could previously support.
This threshold gave me the inspiration to write about my journey towards FIRE now that I feel sufficiently far along in the journey to comment on where I’m at. By chance, I published the article (caliboyfinance.com/fire-on-an-imperfect-timeline/) on the exact same day you published this one.
Hi Sam, thanks for this great piece. It resonates with me, and coincidentally I also picked a $1M investment portfolio as a notable personal milestone.
Up until recently I did not have an investment portfolio since I was focused on buying a modest primary residence. I accomplished that goal a little over five years ago, but then it felt daunting to start an investment portfolio when equity prices seemed so high and I had very little investible cash with a mortgage. Between a bit of timing luck, new job, and salary growth I was able to get to over $300k in cash savings shortly before the pandemic.
I had a high risk tolerance but felt very timid on investing any of the cash savings. The main catalyst for me was a personal decision to live off my salary and ensure RSU shares I receive stay in the market. So with this strategy, I finally felt comfortable starting to build a portfolio by selling portions of RSU shares to diversify into a 3-fund ETF portfolio. It was really a 2-fund ETF portfolio – I didn’t care to include bonds since I was aiming for max risk/reward.
When the pandemic hit, the shock to the markets was the event I needed to motivate me to more substantially invest. I channeled Warren Buffet’s advice to be greedy when others are fearful. I also felt I had nothing to lose due to substantial income replacement and made the case to myself that I was getting a large discounts to 2017 prices. Some days it felt unsettling to see unrealized losses of 10k and still deciding to slowly buy more. But with this strategy to diversify RSUs and more willingly invest cash, I invested over 200k in equity markets in 2019 and ended up a 16% return at year end. I became hooked during 2021, willing to invest more cash when markets heavily pulled back in addition to making regular steady investments. I figured I was kind of playing with house money and also felt more risk-tolerant since the FED was helping financial markets. Also maxed 401k, learned I had access to megaback door roth, and started a 529 during the pandemic, deciding to contribute the 15k max spread out over the year with a similar high-risk strategy 2-fund ETF portfolio strategy. Debated superfunding but opted for growing the investment portfolio.
Between RSUs and finally moving cash off the sidelines, I’ve managed to get to over 800k and I’m really trying to get to $1M this year. 2021 was a great year for RSU and equity growth but now I’m back to feeling that equity prices are too high to invest. So my path to $1M is now diversifying RSU and cash savings into bonds, and relying on dividend reinvestments. If equity markets pull back significantly maybe I’ll try deploying more cash but I’m in a wait and see mode for 2022, at least until I start to get a better sense of rake hike / inflation implications and trends.
Financial Samurai says
Hi Josh – Nice job coming up with a strategy and taking action! I’ve met lots of people who ended up hoarding lots of cash on the sidelines for years (60%+ cash in their portfolio) because they were unsure of what to do. Maxing out the tax-advantaged accounts is the minimum no-brainer.. .and if people can then save and invest at least 20% or more after, even better.
It sure feels like we could now easily experience a 10%+ pullback as we did in 4Q2018 when the Fed was hiking rates. I’d leg into corrections and not be in any hurry.
How were you able to set up custodian Roth IRA for your child, does your child work?
Financial Samurai says
Yes, a child needs to have earned income to be able to contribute to a Roth IRA. Do your children not work? If not, I would encourage them to find part-time jobs because the work ethic they develop will help them tremendously over the years.
I’ll never forget my time working at McDonald’s for $4/hour. Every time I feel too lazy to do something today, I think back to when I had to stand for 8 hours in front of a hot stove every day and realize how much easier life is today.
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