The most useful financial-freedom number may not be the one that lets you quit working forever. It could be the number that lets you stop taking every job because you need the paycheque.
Maybe that means four-day weeks, or you switch careers, or turn down a promotion that comes with considerably more money and considerably less life.
The portfolio needed to create that freedom could be smaller than a traditional retirement target.
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Find your gap
The Financial Consumer Agency of Canada recommends building retirement plans around expected expenses, income, savings, and the lifestyle you want. The same thinking works years before retirement.
Say you spend $60,000 annually but would happily keep earning part of it. Using an illustrative 4% annual portfolio withdrawal, the numbers could look like this.
| ANNUAL WORK INCOME | PORTFOLIO INCOME NEEDED | ILLUSTRATIVE PORTFOLIO |
|---|---|---|
| $50,000 | $10,000 | $250,000 |
| $40,000 | $20,000 | $500,000 |
| $30,000 | $30,000 | $750,000 |
| $20,000 | $40,000 | $1,000,000 |
The 4% figure isn’t a promise, of course. Returns, taxes, inflation, spending, and the number of years the money needs to last are all important points to consider. That said, it does show something useful. Someone earning $30,000 doing work they enjoy doesn’t necessarily need investments capable of replacing a $60,000 lifestyle. They need the portfolio to cover the other $30,000.
Build the engine
Before taking withdrawals, I’d want years of compound growth doing as much work as possible. A $250,000 portfolio growing at an illustrative 7% produces $17,500 of investment growth in an average year. At $500,000, that’s $35,000.
Markets won’t provide 7% on command. Some years will be ugly, of course. The point is that once the portfolio becomes large enough, your salary stops being its only meaningful source of growth.
Holding long-term investments inside a Tax-Free Savings Account (TFSA) when contribution room exists can add flexibility because eligible withdrawals generally remain tax-free. Then I want a business capable of reinvesting capital for me.
CSU
Constellation Software (TSX: CSU) owns and operates hundreds of specialized software businesses serving industries where customers depend on the software to keep operating. Its strategy is simple to describe and difficult to copy. Acquire niche software companies, keep them decentralized, generate cash, then use that cash to buy more businesses.
The capital-allocation machine remains the centre of the investment case, and the latest results show it remains busy. Second-quarter revenue increased 17% year over year to US$3.3 billion. Cash flow from operations climbed 10% to US$477 million.
Constellation also completed acquisitions representing US$893 million of total consideration during the quarter. That’s the engine. More businesses create more cash that can fund more acquisitions. For investors building a portfolio of Canadian growth stocks, few companies have demonstrated that reinvestment model for as long as Constellation.
Considerations
There is a catch to becoming enormous. Constellation must find increasingly large numbers of attractive acquisitions to keep growth moving. Organic revenue growth was only 3% during the second quarter, so acquisitions remain crucial. Paying too much, accepting lower-quality businesses, or struggling to deploy growing amounts of capital could reduce future returns.
Artificial intelligence (AI) creates another risk if cheaper software weakens the switching costs protecting some of Constellation’s businesses. The valuation has become easier to consider after the stock’s decline. CSU trades at around $2,785 at writing, well below its 52-week high above $4,200. That doesn’t make the shares automatically cheap, but it gives long-term investors a better starting price than they had near the peak.
Bottom line
The number that lets you work on your own terms isn’t necessarily $1 million. If enjoyable work covers most of your expenses, $250,000 or $500,000 invested could eventually create meaningful flexibility. A larger portfolio buys more.
That’s the part of financial independence I find useful. The goal doesn’t have to be never working again. It can be reaching the point where money loses its vote over what kind of work you do next.
