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Investor Policy Statement | Ep 189

An investor policy statement lays out your investment plan. It’s a tool to use when times get tough and your emotions have the potential to interfere with your long term investment strategy. It is to be created when you have a clear head and are not under stress. You make your plan as to what your asset allocation is and when you will sell–and when you won’t sell.

Related: How To Create An Investor Policy Statement

Finding Your Financial Independence Number

To find your FI number take your average monthly living costs and multiply it by 12, to get your annual expenses. You are considered FI if your investments are earning enough to cover your living expenses. General recommendations are that you can withdraw 4% of your balance each year without ever touching the principal–creating a perpetual money machine.

If you are assuming a 4% withdrawal rate, you can multiply your annual expenses by 25 to get your FI number.

Example: Monthly expenses of $5,000 per month equal annual expenses of $60,000 per year. $60,000 x 25 gives us a Financial Independence number of $1.5 million. This person would be considered FI, assuming a 4% withdrawal rate.

However, the 4% withdrawal rate is contested. The original study didn’t take the early retiree into account. Does the formula work for a 30-year retirement? If you’d like to be conservative in your estimates you can use a 3% withdrawal rate, as suggested by Big ERN.

At a 3% withdrawal rate, someone with $5,000 per month in expenses would need a nest egg of $2 million to be considered FI.


Your emergency fund is an important part of your investment plan. Jonathan keeps three months of expenses is in a high yield savings account at CIT Bank.

He keeps the rest of his emergency fund he keeps invested and has in his investor policy statement that he is allowed to sell enough of his investments to fill his high yield savings account to a full six months of expenses. He has given himself permission to sell that amount out of panic.

His retirement accounts are in 100% equities and all in index funds. His taxable investment are with M1 Finance.

Jonathan’s taxable investments are allocated as such:

  • 75% in VTI (VTI is the ETF version of VTSAX)
  • 15% Paul Merriman’s Ultimate Buy And Hold Portfolio
  • 10% is in individual stocks

M1 Finance is commission-free and automatically keeps your 10% allocation in place. Any new money deposited into the account will go towards rebalancing your portfolio.

Here’s a full review of M1 Finance.

Choose FI has partnered with CardRatings for our coverage of credit card products. Choose FI and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. American Express is a ChooseFI advertiser. Disclosures.
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