Happy Tuesday all!
Thought I would include some information here on the concept of Financial Independence. Financial Independence (FI) is the point where you have enough money to cover your expenses without working a job. It can be intimidating because it’s often a larger number, but for some can be motivating as it gives you something to work towards. Definitely some psychology at play there, your mileage may vary.
This is just high level information, but will hopefully be helpful.
Another disclaimer, the biggest thing about personal finance is to understand and control your spending, and invest for your future. This FI number is something fun to learn about and calculate, but don’t get married to it. Getting in a good financial mindset is more important that finding out a number, especially if you’re young and have questions marks in your life like where you want to live, if you’ll have kids, etc.
The first step in calculating your financial independence (FI) number is to know your annual expenses. This includes things like housing, food, healthcare, pokemon spending, travel, and pokemon spending. It’s important to note that some of these are going to be estimates, and that’s ok. It’s recommended to revisit your FI number, and things often change throughout life, and what expenses may accompany those changes.
You can calculate your annual expenses using credit card statements, bank statements, going through receipts if you’re old school, whichever works for you. I’m a credit card user, so find it most helpful using my statements.
Once you know your annual expenses, you can get to your FI number pretty easily using a rule of thumb called the 4% rule. According to Investopedia:
The 4% rule for retirement budgeting suggests that a retiree should be able to withdraw 4% of the balance in their retirement account(s) in the first year after retiring, and then withdraw the same dollar amount, adjusted for inflation, every year thereafter for approximately 30 years.
So for example, if you determined you had $50,000 of annual expenses, you could get a FI number by dividing $50,000/.04=$1,250,000. Pretty simple!
But, what if you want to retire earlier? Some recommend using 3% instead of 4% for a more conservative estimate. And what if you think that number sounds too high? Some prefer to use the 5% rule. To illustrate the differences, here’s what they all come out to:
3% rule: $50,000/0.03 = $1,666,667
4% rule: $50,000/0.04 = $1,250,000
5% rule: $50,000/0.05 = $1,000,000
As mentioned, these are estimates, and will vary based on your individual expenses. $50,000/year was used for the example here.
So, what does everyone think about the FI number, 4% rule, or related topics? Is it a helpful way marker for retirements savings? Is it an arbitrary number that does more harm than good? Is the 4% rule outdated? If anyone has any questions, please ask and I’m sure either I or someone else will be happy to chime in!
