Reaching critical mass gives you the financial freedom to retire or work at a job for the love of the work rather than the money. First, lets define what it means.
"Critical mass" in physics refers to the amount of fissile material needed to sustain a nuclear chain reaction which will generate power or, under the proper conditions, explode (such as an Atomic Bomb). Wiki says for a bare sphere of fissile material, that the critical mass is about 50 kg for uranium-235 and 10 kg for plutonium 239. One needs to take what you read at Wiki with a "grain of Plutonium" as it is not always accurate.
"Critical mass" is also enough bike riders on the Streets of San Francisco to shut the city down. The group that does this calls themselves "Critical Mass."
Critical Mass for Investors
For investors, your investments are said to have reached "critical mass" when your investment portfolio can generate enough growth and income to meet your lifestyle needs and protect you against the ravages of inflation without you having to work. It is a term made popular by Bob Brinker
For example, if you need $50,000 a year to live on, then using the "4% safe withdrawal rate" rule-of-thumb, you need $1,250,000 to retire. ($50,000 divided by 0.04)
Generally, a good critical mass portfolio has between fifty and sixty percent of assets in a well diversified basket of equities with perhaps ten to twenty five percent of that in international funds and the remainder in something like a total bond fund, CD ladders or United States Treasuries or GNMAs. The article "The Retirement Advisor: Information and model portfolios to help you enjoy the retired life" gives three fairly conservative portfolios.
Rule of Thumb:
A good rule of thumb is, with regular rebalancing, you can take 4% a year out of a "balanced portfolio" that has 50% of assets in the total stock market and 50% in the total bond fund at Vanguard or Fidelity. Both fund families offer very low cost index funds. If you go elsewhere, then the amount you can "safely" take out of your portfolio will be reduced by the higher expenses for the index funds.
What is meant by "safely?"
A "safe withdrawal rate" means there is a 90% or greater chance you will not out live your money by removing that amount at the start of each year.
DISCLAIMERS:
1. I own and recommend some of the mutual funds discussed in this article.
2. Answers & my words are general in nature, are not meant as specific investment advice, and do not necessarily represent the opinion of anyone but Kirk Lindstrom. Individuals should consult with their own advisors for specific investment advice.
Kirk Lindstrom - With my writing, I hope to help you too reach AND MAINTAIN critical mass where your investments earn enough money that you don't have to ...
