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How to Calculate Your Financial Independence Number and When You Can Retire

Reaching financial independence may be challenging but not impossible. It also sounds complicated, but with just a straightforward calculation, you can estimate how much money you'll need to be financially independent.


Achieving financial independence may seem daunting, but it’s achievable with the right approach.

Defining Financial Independence

Financial independence means having sufficient income to cover your living expenses without needing to work. FI doesn’t mean quitting work. It can mean making work optional.

Calculating Your Financial Independence Number

It might sound complex, but with a simple calculation, you can estimate how much money you need to sustain yourself indefinitely without relying on active income.

The formula helps you find the total sum required to cover your living expenses indefinitely.

Formula: Financial Independence Number = Yearly Spending / Safe Withdrawal Rate

Determining this number provides you with a concrete target for achieving financial independence.


Steps to Calculate Your Number to Financial Independence

Now, let’s figure out what your FI Number is.

Step 1: List Your Monthly Expenses

Begin by listing your total yearly expenses. Learn how to list your expenses.

CategoryExpense DetailsMonthly Cost ($)
HousingRent/Mortgage1,200
Utilities (electric, gas)150
Internet/Phone100
TransportationCar payment300
Gasoline150
Insurance100
Maintenance50
FoodGroceries400
Dining Out150
InsuranceHealth Insurance250
Life Insurance50
Health & WellnessGym Membership40
Medications30
EntertainmentStreaming Services30
Hobbies75
Personal CareHaircuts/Beauty Services60
Clothing100
Savings & InvestmentsRetirement Savings200
Emergency Fund Contribution200
MiscellaneousGifts50
Donations30
Total3,515

Step 2: Calculate Your Annual Expenses

Multiply your monthly budget by 12 to get your base annual cost.

Remember to include periodic expenses like annual insurance premiums and quarterly bills, along with ongoing contributions to accounts such as emergency funds, vacation savings, and vehicle maintenance.

CategoryMonthly Cost ($)Annual Cost ($)
Housing
Rent/Mortgage1,20014,400
Utilities1501,800
Internet/Phone1001,200
Transportation
Car payment3003,600
Gasoline1501,800
Insurance1001,200
Maintenance50600
Food
Groceries4004,800
Dining Out1501,800
Insurance
Health Insurance2503,000
Life Insurance50600
Health & Wellness
Gym Membership40480
Medications30360
Entertainment
Streaming Services30360
Hobbies75900
Personal Care
Haircuts/Beauty Services60720
Clothing1001,200
Savings & Investments
Retirement Savings2002,400
Emergency Fund Contribution2002,400
Miscellaneous
Gifts50600
Donations30360
Total3,51542,180

After calculating your annual expenses, you can make adjustments if you believe certain expenses would be reduced or eliminated. By lowering your expenses, you lower the amount of money you’ll need to invest.

Step 3: Calculate Your Financial Independence Number

First, you’ll need to understand SWR or the Safe Withdrawal Rate. The SWR is a guideline used by retirees to ensure they don’t exhaust their funds. It suggests withdrawing a small percentage of your investment portfolio annually to cover living expenses without depleting your principal.

Based on the Trinity Study, a common guideline is the 4% rule, which has been shown to withstand various market conditions. Withdrawing no more than 4% annually should help preserve your capital over time.

To determine how much you need to achieve financial independence, divide your total annual expenses by your chosen SWR.

Financial Independence Number = Yearly Spending / SWR

Example: If your annual expenses are $40,000 and your SWR is 4%, your calculation would be:

$40,000 / 0.04 = $1,000,000

Based on this example, you must accumulate $1,000,000 in your portfolio to reach financial independence. Your portfolio can include retirement accounts, investable assets (brokerages, stocks, etc.), pensions, rental properties, business ownership stakes, etc.

Reaching financial independence may be challenging but not impossible. It also sounds complicated, but with just a straightforward calculation, you can estimate how much money you’ll need to be financially independent.


How Long Will It Take to Reach Financial Independence

Now that you’ve calculated your FI number, you might wonder how long it would take to reach it. Follow the steps below to determine when you will be financially independent:

Step 1: Your Financial Independence Number

The financial independence number is the total amount of money required to provide sufficient income to cover your living expenses for the rest of your life.

Again, it’s expressed with the following equation:

Financial Independence Number (FI Number) = Yearly Spending / Safe Withdrawal Rate

Yearly Spending is your total annual expenses, which include housing, food, transportation, and discretionary spending. The Safe Withdrawal Rate (SWR) is a conservative method that retirees use to determine how much money can be withdrawn from accounts each year without running out of money for the rest of their lives.

Step 2: Calculate Years to Financial Independence

Use your FI Number to figure out how many years it will take to reach FI:

Years to FI = (FI Number  – Existing Portfolio Amount) / Yearly Saving

Existing Portfolio Amounts = the total amount of money already saved, including retirement accounts, investable accounts (brokerage, stocks, etc.), pensions, and other savings accounts.

Yearly Savings = the amount of money you save and invest per month multiplied by 12 months.

Let’s calculate your Years to FI.

For example:

  • FI Number: $1,000,000
  • Existing Portfolio Amount: $250,000
  • Yearly Saving: $25,000

Years to FI = (FI Number  – Existing Portfolio Amount) / Yearly Saving

($1,000,000 – $250,000) / $25,000 = 30 Years to FI

If your FI number is $1,000,000 and you’ve already saved $250,000, then all you’ll need is $750,000.

Also, if you save $25,000 per year, it will take 30 years to reach your FI number.

This calculation is a simplified way of estimating the time it will take and doesn’t factor in the growth of your investments (capital appreciation or compounding).

If your savings were invested in an index fund following the S&P 500 with a historical return of 10.5%, the time it would take to reach your FI number is reduced to around 12 years.

In summary, setting a goal of achieving financial independence is worthy. It will take effort and planning. You can learn how to do just that by reading the article on achieving financial independence.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

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