Want to stop working because you have to and start working only if you want to? Your Financial Independence (FI) number is the target net worth that can fund your lifestyle indefinitely. It’s the cornerstone of the FIRE (Financial Independence, Retire Early) movement—and you don’t need a finance degree to figure it out. Follow these five practical steps to calculate your FI number, see how close you are today, and map the fastest route to get there.
What Is a Financial Independence Number?
Your FI number is the amount of invested assets needed so you can live off portfolio withdrawals (and any passive income) without running out of money. It’s usually based on a “safe withdrawal rate” (SWR)—a percentage of your portfolio you can withdraw in the first year of retirement, then increase that amount for inflation each year.
Step 1: Define Your Target Annual Spending
Start with the costs of the life you actually want in financial independence—not just today’s bills.
- List current annual expenses by category: housing, food, transportation, insurance, healthcare, childcare, debt, subscriptions, travel, hobbies, giving, and one-off “lumpy” costs.
- Remove work-related costs you’ll drop (commuting, dry cleaning, certain childcare, extra meals out).
- Add costs you’ll add (more travel, hobbies, health insurance if you’ll retire before Medicare, home projects).
- Decide if you’ll have a mortgage or be mortgage-free. If you’ll rent, include rent plus inflation.
- Add a cushion (10–15%) to cover surprises and lifestyle creep.
Example: If your current spending is $60,000, you expect to cut $8,000 of work costs, add $6,000 for travel and healthcare, and add a 10% cushion, your target might be around $63,800 a year.
Step 2: Account for Taxes and Other Income
Your FI number is about cash you can actually spend. That means adjusting for where your money comes from and how it’s taxed.
- Taxes: Withdrawals from pre-tax accounts (401k/Traditional IRA) are taxable. Roth withdrawals (qualified) are tax-free. Taxable brokerage accounts may trigger capital gains. If most of your portfolio is pre-tax, plan for a higher gross withdrawal to net your target spending.
- Other income: Subtract reliable annual income from pensions, rental net income, Social Security (if you’ll claim during FI), or part-time passion projects.
- Health coverage: If you’ll use ACA marketplace plans, estimate premiums and out-of-pocket costs net of subsidies based on your expected taxable income.
Quick rule: Calculate your target net spending first, then adjust upward if needed for estimated taxes. Alternatively, subtract other income from your target spending before calculating your FI number.
Step 3: Choose a Safe Withdrawal Rate (SWR)
The classic 4% rule (from the Trinity Study) suggests withdrawing 4% in year one, then adjusting for inflation each year, had a high historical success rate over 30-year retirements in the U.S. But if you want a longer horizon or extra safety, consider a slightly lower SWR.
Common options:
- 4.0% SWR = 25x your annual spending
- 3.5% SWR = ~28.6x your annual spending
- 3.0% SWR = ~33.3x your annual spending
Formula: FI number = Target annual spending / SWR
Example: If you need $60,000 per year:
- At 4.0%: $60,000 × 25 = $1.5 million
- At 3.5%: $60,000 × 28.6 ≈ $1.716 million
- At 3.0%: $60,000 × 33.3 ≈ $1.998 million
Tip: If you’ll have meaningful guaranteed income later (e.g., Social Security), you can calculate two stages: a higher FI number for early years, then a lower required portfolio once benefits start.
Step 4: Adjust for Inflation and Timing
If you plan to reach FI in the future, inflation will increase your target spending. Adjust your annual spending to “future dollars.”
Future annual spending = Today’s spending × (1 + inflation rate)^(years to FI)
- Use 2–3% as a planning estimate for long-term inflation.
- Recalculate your FI number using the inflated spending amount.
Example: You project you’ll need $45,000 today. You want to reach FI in 12 years and assume 3% inflation.
- Future spending ≈ $45,000 × (1.03)^12 ≈ $64,200
- Using a 3.5% SWR, FI number ≈ $64,200 ÷ 0.035 ≈ $1.83 million
Step 5: Map Your Path From Here to There
Now figure out how long it could take to hit your FI number and which levers move you faster.
Key levers:
- Savings rate: The higher your savings rate, the sooner you reach FI. Track your percent of income saved.
- Investment returns: A diversified portfolio historically returns 6–10% nominal over long periods. For planning, consider 5–7% nominal (about 3–5% real after 2% inflation).
- Expenses: Every $1 of permanent annual spending you cut reduces your FI number by $25–$33, depending on your SWR.
Worked example:
- Current investable assets: $250,000
- Monthly investing: $3,000
- Target future annual spending in 12 years (inflation adjusted): $64,200
- SWR: 3.5% → FI number ≈ $1.83 million
- Expected nominal return: 6%
Projection:
- Future value of current $250,000 at 6% for 12 years ≈ $250,000 × (1.06)^12 ≈ $503,000
- Future value of monthly $3,000 contributions at 6% for 12 years ≈ $630,000
- Total projected in 12 years ≈ $1.13 million
Result: You’d be short of $1.83 million.
Options:
- Increase savings to $5,000/month (adds roughly another $420,000 over 12 years at 6%), bringing you closer.
- Extend the timeline a few years.
- Reduce the target lifestyle cost (e.g., geoarbitrage, paying off the mortgage).
- Add reliable income streams (rentals, small business, part-time work) and subtract them from your spending need.
What Counts Toward Your FI Number?
- Investable assets that can produce cash flow: brokerage, 401k/IRA, HSA (for qualified expenses), cash, bonds, rental equity that throws off net income.
- Typically not counted: Your primary home’s equity (unless you downsize or house-hack), cars, illiquid collectibles. These don’t reliably fund spending.
Optimize and De-Risk Your Plan
- Diversify: Mix stocks, bonds, and possibly real assets to manage volatility.
- Sequence-of-returns risk: The first 5–10 years after retiring matter most. Consider a 2–3 years cash/bond “buffer,” flexible spending rules, or a slightly lower initial withdrawal rate.
- Taxes: Use tax-efficient asset location, Roth conversions in low-income years, and capital gains harvesting.
- Healthcare: Price it carefully, especially if retiring before Medicare. Use HSAs and explore ACA subsidies.
- Revisit annually: Update for life changes, markets, and goals.
Common Mistakes That Inflate Your FI Timeline
- Ignoring healthcare and taxes in your annual spending number
- Treating the 4% rule as a guarantee rather than a guideline
- Forgetting to adjust for inflation when FI is years away
- Counting your primary residence as investable assets
- Not reducing spending assumptions for other reliable income
Quick FAQ
- Do I need exactly 25x my expenses? No. 25x assumes a 4% SWR and typical retirement length. If you want more safety or expect a very long retirement, use 28–33x.
- Should I subtract Social Security or pensions? Yes. Subtract reliable annual amounts from your future spending before calculating your FI number.
- What if markets do poorly early in retirement? Use flexible withdrawal strategies, hold a cash/bond buffer, or consider a lower initial SWR (e.g., 3.5%).
Your Next Steps
- Write down your target lifestyle and annual spending.
- Pick a conservative SWR (3–4%) and compute your FI number.
- Adjust for inflation based on your timeline.
- Project your path with your current savings rate and returns—and tweak the levers.
- Revisit yearly and adapt as your life, goals, and markets change.
Bottom line: Your Financial Independence number isn’t just a figure—it’s a roadmap. Define the life you want, run the math with a margin of safety, and take consistent steps. Small, smart moves compounded over time will get you there faster than you think.
