Knowing your Financial Independence number is one of the first steps on the journey to Financial Independence Retire Early (FIRE). Most people who achieve Financial Independence (FI) do so by carefully planning their finances years.
This is why they are successful and are even more prepared for surprises along the way.
What Is Your Financial Independence Number?
Your Financial Independence number is equal to 25 times your annual expenses. For example, if your annual spending is $40,000 a year then your Financial Independence number would be $1 million. This is assuming you will be using a 4% withdrawal strategy.
The formula looks like this:
Financial Independence Number = (Annual Expenses) x 25
Once you have your FI number you can calculate how much time it will take to reach financial independence. This is based on your savings rate and the growth of your investments.
I recommend using Personal Capital to help track your yearly expenses. It’s also a great tool for tracking your net worth.
I first started my Financial Independence Journey by using Personal Capital. This made it easy for me to see that I spend about $35,000 a year.
Financial Independence Number Calculator
Using a Financial Independence Number calculator is easy once you know your annual expenses. You simply plug in your annual expense into the formula.
FI Number = 25 x (Annual Expenses)
So, calculating my Financial Independence number would look like this ($35,000) x 25 = $875,000.
To make it easier, I created a Financial Independence Calculator that displays the potential growth of all your investments. It helps to determine exactly when you will reach financial independence and how much money you will have in each account. It’s completely free and all you have to do is plug in your numbers.
I believe it can be an amazing tool. What makes this calculator different is how it takes into account your money from different accounts. This helps you plan for a better withdrawal strategy once you reach financial independence.
Best FIRE Calculator
I believe this is one of the best FIRE Calculators because it gives you a breakdown of all your accounts. Each account likely has a different set of rules dictating when and how you can withdraw funds. Since you can’t treat your Health Savings Account (HSA) money the same as your Roth money, it’s important to know how much you will have of each.
As another example, you might be contributing to both your 401k & 457 plan. However, they have very different rules when it comes to withdrawals.
Using my FIRE calculator gives you exactly how much money will be in each account and that helps you plan your withdrawal strategy. Planning your withdrawal strategy helps you pay fewer taxes and avoid penalties during your early retirement. These also help you keep more of your money throughout your Financial Independence journey.
Calculate Your Financial Independence Number
The Financial Independence calculator gives you several key pieces of information:
- Financial Independence Number
- Financial Independence Date
- Account Balances
If you are planning for financial independence and know that your yearly expenses are $35,000/ year. You can calculate your Financial Independence number: ($35,000) x 25 = $875,000
This is based on a withdrawal rate of 4% ($875,000 x 0.04) = $35,000
This calculator will also estimate a Financial Independence date by showing you how long it will take your portfolio to grow to this amount.
This is how it looks:
You can see we reach our Financial Independence Number of $875,000 in 10 years. Based on a 4% safe withdrawal rate, that gives us $35,000/year to cover expenses.
The calculator also gives a breakdown of how much is in each account. You can later strategize accessing those funds efficiently while paying the fewest amount of taxes possible.
This breakdown is a huge help when using different early retirement tools.
This example gives you a much more accurate and responsible calculation of Financial Independence.
As mentioned earlier, I highly recommend using Personal Capital to keep track of your accounts in real-time.
How To Calculate Financial Independence
The last part is making sure you calculate your Financial Independence and make sure it will last throughout retirement. Since we are planning an early retirement, our money needs to last us a long time! Luckily, I found the best Post-Retirement Calculator. It’s a simulator that tells you how safe your withdrawal strategy is, based on the stock market’s past performance.
This is the final tool for calculating your Financial Independence from start to finish. With the Post-Retirement Calculator, you can affirm your money will last you well into retirement.
The simulator assumes you retire with your nest egg and never make or receive money for the rest of your life. I believe this is unlikely. It is almost a certainty that along the way you will make more money, either through a passion project, windfall, or social security benefits. So, I like to think of this as a worst-case scenario.
To use the post-retirement calculator, simply input your savings of $875,000 and your annual spending of $35,000, which is 4% of $875,000 (total nest egg).
I ran a scenario for illustration. The assumptions are:
- Withdrawals Start At Age 45
- 25% Flexibility During Bear Markets
- 10% Average Tax Rate
This is what it looks like:
This scenario accounts for all 60 year periods in the stock market from 1871 through 2016. The results show we have a 99% success rate!
Best Way To Calculate Financial Independence
Without earning any money after the age of 45, there is a 99% chance this person will still have money at age 100.
“Compound interest is the 8th wonder of the world.” – Albert Einstein
Having these simulations test your financial independence number allows you to have peace of mind. Knowing your portfolio has a 99% chance of success helps you focus on enjoying early retirement to the fullest.
To conclude, this activity helped me visualize my early retirement plan and thoroughly evaluate my withdrawal strategy so I know it can do the same for you!
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