I really like the concept of ‘Financial Nirvana’ from Christopher Ng’s second book, Harvesting the Fruits of Prosperity.
Financial Nirvana Defined
He defined it as a point in time where your non-work-related income exceeds your expenses and this is a significant milestone in your life because…
“This means that you can now live on passive income and would not need to depend on your salary to survive.”
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In particular, this non-work-related income refers to the dividends from stocks. This is Christopher’s area of forte and he did describe his methodology to qualify the stocks for his portfolio in the book.
After Financial Nirvana, then what?
Assuming you have achieved your Financial Nirvana, there are 2 things you can do.
#1 – Continue Working
Most people would expect the Mighty You can sack the boss! But Chris doesn’t want you to rest on your laurels.
“The battle is far from over after dedicating your assets; experts recommend a 4% drawdown if you wish to maintain the value of your investment portfolio. Continue working, saving and investing until your portfolio exceeds the assets gathered at crossover point by about 50%. At this stage, you can choose to leave the rat race completely.”
He touched on two important points here. First, he mentioned about the four percent rule, a rule of thumb used by financial planners. A retiree can afford to withdraw 4% of their assets each year, and continue to live off their investments till they pass on. It is important to note that the four percent is a rough gauge and may be different depending on your investment returns and the number of years to live. Second, he suggested to create a buffer for your investment income, as much as 50% beyond Financial Nirvana. This would give you enough breathing space when the stock market takes a thump.
Hence, he recommends you to continue working as he believes employment is one of the best ways to increase your investment capital. The irony is, you may perform better in your job than ever before because the fear of losing your job no longer exists. You may find your job more fulfilling because of the psychological change.
“Sometimes, personal freedom is enough for people who are content with their day jobs. Who knows, perhaps your performance may even improve because you’re no longer so worried about your future all the time.”
#2 – Boost your returns
Some school of thoughts would suggest you take more risks to grow your capital. Once you reach a critical mass, you can afford to take less risks. Chris thinks otherwise. The basics should be taken care of and your passive investment income secured before taking on more risks.
“After reaching your Financial Nirvana, you may need to adjust your asset allocation to match passive and portfolio income against expenses. Subsequent investments can now reflect higher risk because the basics have been taken care of.”
Allocate some play money
Let’s not be so extreme. It is not about working, saving and investing. Life is too much to waste in such a way. Chris suggests you allocate part of your income to enjoy life once in a while.
“[Y]ou may develop a tendency to be tight-fisted with your money which can affect your personal relationships. Make it a priority to reserve 10% of your take-home pay for frivolous purposes to enhance your personal relationships with others.”
You may ask what constitute frivolous expenses. It was covered in his previous book and I recommend you to read this article.