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Have you ever wondered if you have enough money saved to retire and live comfortably? Calculating your financial independence number can help you determine if you’re on track.
Knowing this magic number provides a target to aim for when saving and investing for the future. It also allows you to measure your progress along the journey to retirement.
In this post, we’ll break down what a financial independence number is, how to calculate yours, and ways to customize it. We’ll also explore why having an estimate matters and how to track your progress over time.
Let’s get started!
Key Takeaways
- Your financial independence number (FIN) tells you how much money you need saved to fund your retirement lifestyle.
- To find your FIN, take your estimated annual retirement spending and divide by your planned withdrawal rate.
- Customize your FIN by factoring in extra income, being conservative with withdrawals, and accounting for inflation.
- Regularly update your FIN as your life situation changes over time.
- Focus not just on the money, but building your ideal retired life with relationships and hobbies.
What is a Financial Independence Number?
Your financial independence number (FIN), also called your magic number, is the amount of money you need to save in order to retire. Once your total savings equals your FIN, you have enough capital to generate retirement income to cover your living expenses.
Financial independence numbers originated in the 1990s from the research of William Bengen. He concluded that retirees could safely withdraw 4% of their savings each year to fund expenses indefinitely.
A FIN provides a goal amount for retirement savings based on the 4% rule. When you hit your number, you have achieved financial independence!
Knowing this estimate offers several benefits:
Gives you a retirement savings target: Having an FIN provides something specific to aim for when saving and investing.
Allows you to track progress: You can measure your total savings vs. your FIN to see how close you are to retirement.
Motivates optimization: Knowing your FIN helps you focus on boosting savings rates and investment returns.
So in short, your FIN answers the question – how much is enough? Let’s look at how to calculate yours.
Calculating Your Magic Number
Figuring out your personal FIN requires just three inputs:
- Your estimated annual spending in retirement
- Your planned safe withdrawal rate
- Expected investment returns
Annual Retirement Spending
Add up an estimate of the expenses you expect to have each year in retirement. This may include things like:
- Housing
- Food
- Transportation
- Healthcare
- Insurance
- Travel
- Hobbies
Aim high to account for unexpected costs and inflation over a 30+ year retirement. If your actual annual spending ends up lower, your savings will last even longer.
Safe Withdrawal Rate
This is the percentage of your savings you take out each year to live on in retirement. 4% is a standard baseline, but you may choose something more conservative like 3-3.5% for an ultra-safe withdrawal strategy.
Expected Investment Returns
While harder to predict, assume an average annual return percentage your retirement investment portfolio is likely to generate. Often 7-8% is reasonable based on historical stock market returns.
Now simply plug these numbers into the FI formula:
FI Number = (Annual Spending) / (Safe Withdrawal Rate)
For example, let’s say you estimate the following:
- Annual spending: $50,000
- Safe withdrawal rate: 4%
- Expected investment returns: 7%
Your FIN would be:
$50,000 / 0.04 = $1,250,000
Once you’ve saved $1.25 million, you can retire knowing you have enough to withdraw $50,000 per year indefinitely!
Precision Points for Fine-Tuning
The simple FIN formula gives you a good starting estimate. But you may want to fine-tune your number by:
Factoring in Additional Income Sources
Income streams like social security or a pension can help cover retirement costs. Reduce your FIN by 25x any extra annual income you expect.
For example, if you anticipate receiving $20,000 annually from social security:
FIN = ($50,000 – $20,000) / 0.04 = $750,000
Adjusting for Income-Producing Assets
If you plan to generate income from investments like bonds, subtract their value from total savings before calculating your FIN.
For instance, a $500,000 bond portfolio generating $20,000 annually would allow you to reduce your FIN by $500,000.
Using a More Conservative Withdrawal Rate
To be ultra-safe, some people plan their FI number using a 3-3.5% withdrawal rate rather than 4%. This adds an extra buffer for market downturns.
Accounting for Inflation
It’s smart to boost your estimated annual retirement expenses by 2-3% to account for inflation over several decades.
Fine-tuning your FIN results in a more accurate estimate personalized to your financial situation. But don’t obsess over perfection – it’s meant to be a helpful guideline.
Tracking Progress Over Time
Once you’ve calculated your FIN , it becomes a benchmark you can track over time.
To measure progress, take your total retirement savings and divide by your current FIN.
For example, let’s say your FIN is $1 million. Here’s how to assess where you stand:
- $300,000 in savings = 30% of your FIN
- $750,000 in savings = 75% of your FIN
- $1 million in savings = 100% of your FIN (financial independence achieved!)
Watching this percentage grow and celebrating milestones can keep you motivated on your journey to financial independence.
Be sure to re-calculate your FIN regularly as your situation changes. Major life events, revised expenses, and inflation can all impact the figure.
It’s Not Just About the Money
Having an FIN as a savings target is important. But remember, retirement is about more than just money.
Also focus on:
- What makes you happy and gives you purpose
- Building relationships with friends and family
- Making time for hobbies and experiences
Saving aggressively now at the cost of everything else results in a hollow victory. Find balance between preparing for the future and enjoying the present.
Design your ideal retired lifestyle, then use your FIN to help make that vision a financial reality.
In Summary
Determining your financial independence number provides a goal for retirement savings and allows you to measure progress over time.
Make sure to customize your FIN to your unique situation for an accurate estimate. And remember, retirement is about more than just money – focus also on enjoying the journey and designing your ideal lifestyle.
What’s your FIN and how far along are you on reaching it? Share your thoughts in the comments!
Frequently Asked Questions
Can I rely purely on the 4% rule?
The 4% rule is a good starting point but consider customizing your withdrawal rate and FIN to be safer, especially for early retirees.
What if the stock market crashes right after I retire?
Have a buffer in your FI number, be prepared to cut some discretionary spending, and potentially do some part-time work while markets recover.
How often should I recalculate my FI number?
Aim to review your FIN annually and make adjustments for any major life changes like a marriage, divorce, new child, or career change.
Can I have fun now, or do I need to save every penny?
Find a balance you are happy with between enjoying today and preparing for tomorrow. Disciplined saving paired with purposeful spending.
Disclaimer: The information provided in this blog post is for general informational and inspirational purposes only. We’re sharing this information to offer ideas, tips and motivation for starting a business, but this should not be considered professional advice. Starting a business is complex with many moving parts, and what works for one aspiring entrepreneur may not work for another. Before taking any action, please consult with legal, financial, tax and other relevant professionals to determine the best steps to take for your own specific circumstances. The financial estimates, costs, revenues, timelines etc. mentioned in this post are approximate numbers gathered at the time of researching & publishing this post and are subject to change. We do not guarantee any specific financial or other results/outcomes.
