How to Calculate Your Financial Independence Number
How to Calculate Your Financial Independence Number
Financial independence (FI) means your investments generate enough income to cover your living expenses indefinitely — without needing to work. You may choose to keep working, but you don't have to.
Calculating your FI number is one of the most useful financial exercises you can do. It gives you a concrete target, helps you understand how close (or far) you are, and often reveals that financial freedom is achievable sooner than you think.
The Math Behind Financial Independence
The core calculation rests on the 4% rule, derived from the Trinity Study (1998) and subsequent research.
The rule: if you withdraw 4% of your portfolio per year, your portfolio has historically survived 30+ years with a high probability (historically ~95%+) across most market conditions.
Therefore:
FI Number = Annual Expenses × 25
The 25x multiplier is the inverse of 4% (1 ÷ 0.04 = 25).
Example:
- Annual living expenses: $50,000
- FI number: $50,000 × 25 = $1,250,000
When you have $1,250,000 invested, you can withdraw $50,000/year and historically sustain your portfolio for decades.
Step 1: Calculate Your Annual Expenses
This is the most important input. There are two approaches:
Use current spending: Add up everything you actually spend in a year — housing, food, transportation, insurance, entertainment, healthcare, travel, etc. If you track your spending with a budgeting app, this is easy. If not, bank statements work.
Use projected retirement spending: Your expenses in retirement may differ from today. You might spend less on commuting and work clothes, but more on healthcare and travel. Project honestly.
The more accurate this number, the more useful your FI calculation.
Step 2: Choose Your Withdrawal Rate
The 4% rule is a useful starting point, but it has limitations:
Arguments for a lower rate (3–3.5%):
- If you plan for a 40–50 year retirement (retiring in your 30s or 40s), 4% has less historical evidence
- Current market valuations are higher than historical averages
- Adds a buffer against bad timing
Arguments for a higher rate (4.5–5%):
- If you have additional income sources (Social Security, rental income, part-time work)
- If you can cut spending somewhat in down markets ("flexible withdrawals")
- If you retire later (55+) with a shorter expected withdrawal period
For a conservative first calculation, use 4% (25x multiplier). Stress-test later with 3.5% (28.6x multiplier).
Step 3: Factor in Additional Income Sources
Social Security, rental income, a pension, or a part-time business can all reduce your required portfolio size.
Formula with additional income:
Required Portfolio = (Annual Expenses − Annual Additional Income) × 25
Example:
- Annual expenses: $60,000
- Expected Social Security: $18,000/year at 67
- Remaining to cover from portfolio: $42,000
- FI number: $42,000 × 25 = $1,050,000
That's $200,000 less than without Social Security — a meaningful difference in both the target and how long it takes to reach it.
Quick Reference: FI Numbers by Spending Level
| Annual Spending | FI Number (4%) | FI Number (3.5%) |
|---|---|---|
| $30,000 | $750,000 | $857,000 |
| $40,000 | $1,000,000 | $1,143,000 |
| $50,000 | $1,250,000 | $1,429,000 |
| $60,000 | $1,500,000 | $1,714,000 |
| $80,000 | $2,000,000 | $2,286,000 |
| $100,000 | $2,500,000 | $2,857,000 |
How Far Are You? The FI Percentage
Your FI percentage tells you how far along the path you are:
FI % = (Current Investable Assets ÷ FI Number) × 100
Example:
- FI number: $1,250,000
- Current investable assets: $250,000
- FI %: ($250,000 ÷ $1,250,000) × 100 = 20%
You're 20% of the way there. Knowing this number — and watching it grow — is motivating in a way that abstract "save more" advice isn't.
Note: investable assets include investment accounts (401k, IRA, brokerage), but typically exclude your primary residence and emergency fund.
How Savings Rate Affects Your Timeline
Here's the counterintuitive insight behind the FI math: your savings rate is more predictive of your FI timeline than your income.
That's because both sides of the equation — how fast your investments grow (driven by savings rate) and how much you need (driven by expenses) — are affected by savings rate simultaneously.
| Savings Rate | Years to FI (approximate, assumes 7% real returns) |
|---|---|
| 10% | ~40 years |
| 20% | ~37 years |
| 30% | ~28 years |
| 40% | ~22 years |
| 50% | ~17 years |
| 60% | ~12 years |
| 70% | ~9 years |
Someone earning $50,000 with a 50% savings rate can reach FI faster than someone earning $150,000 with a 15% savings rate.
This doesn't mean income doesn't matter — it does. But the path to FI is more about the gap between income and spending than income alone.
Using Your FI Number
Set milestones: $100K invested is famously the hardest (each contribution is a large % of total). At $500K, growth significantly outpaces contributions. At 50% of your FI number, you're likely within a decade.
Adjust as life changes: Lifestyle inflation, family changes, health events, and location changes all affect your FI number. Recalculate every year or two.
Don't optimize so hard you sacrifice today: The point of financial independence is freedom. If you're miserable on the path to FI, something is wrong with the plan.
The Minimum You Need to Know
- Add up your annual spending
- Multiply by 25
- That's your FI number
- Divide your current investable assets by your FI number — that's your progress
Most people who do this calculation are surprised either by how achievable financial independence looks, or by how their current lifestyle choices affect the timeline. Either way, knowing the number is better than not knowing it.