# How Much Money Do We Need for Financial Independence?

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Have you ever thought about how much money it will take for you (and your family if applicable) to reach financial independence? This number will be different for everyone and there is no right or wrong answer.

The amount you need to become financially independent (FI) will depend on how much money you plan to spend once you get there. And how much you are comfortable to withdraw per year from all of your investments once you hit FI.

Of course, all of this assumes that you have been saving huge chunks of your paychecks for years and are making wise investments.

## How Much Money is Enough?

So let’s assume we are all diligent savers and plan to put away a good portion of our paychecks every month. In my case, I have an option at work to invest money into both a 457 plan and a 401k/403(b) plan. Currently, we are not investing any of our income in these plans as my work does not offer any employer match. However, we are planning to change our investment strategy very soon in the future.

Currently, most of our investments are being made into taxable brokerage accounts … mostly Robinhood. We will save the debate on which type of plans to invest in for another day – like 457, 401K, 403(b), IRA, Roth IRA, etc. The point for now is to save, save, save.

Over the years … my wife and I have been investing some of our income … but not as much as we should. So we have been focusing now on being more frugal, so that we can put away more of our income to hit our financial independence number.

## How to Calculate Your Financial Independence Number

If you research how to calculate your financial independence number, you are likely going to come across many different opinions. One of the most commonly accepted calculations for FI is to multiply your expected annual expenses by 25.

FI Number = annual expenses * 25

Using this equation, let’s assume your going to live a very frugal life (post FI) and will plan to spend \$25,000 annually. In this example, your FI Number would equal \$625,000.

\$625,000 = \$25,000 * 25

I won’t go into the reasoning or math behind this equation in this post, but it takes into account your annual spending along with the 4% withdrawal rule … once you hit financial independence.

So here is another way to look at this equation –

FI Number = Yearly Spending / Safe Withdrawal Rate

In this case, our safe withdrawal rate is going to be the widely used 4% rule. So another way to get to our FI Number is like this –

\$625,000 = \$25,000 / 4.0%

Using this equation could be helpful if you don’t plan on using the 4% safe withdrawal rate. Maybe you plan to be more conservative and withdraw only 3% per year. That would bring your FI Number up to \$833,333.

As you can see from the examples above, playing around with the numbers just a little can make a big impact on your calculation.

## What is Our Financial Independence Number?

Now that we have the equation, I can easily calculate our family’s financial independence number.

The first step in this process is to estimate what our annual spending amount will be. I should point out that our annual spending today will probably be much higher than what it will be when we hit financial independence.

For example, today we have a mortgage we are working to pay off. At some point we will either move into a smaller house that will hopefully be paid off … or will be close to paying off our current home as we move into FI.

We also have 2 car payments right now. As soon as I leave my job … there is no need to have a second car … so we will have lower annual spending.

But since it is hard to predict our future spending … for now we will use an estimate on our current spending. Or at least what we want our current spending to be. We are in the process of reorganizing our budget … trying to cut out anything that is non-essential to us. For example, we decided to save \$500 a year on coffee … by switching from K-Cups to brewing our own again.

As we go through our budget, we will get a better idea of our desired annual spending. But for now, we will use a range to get an estimate of our FI Number.

### Calculating our FI Range

Ideally, we would like our annual spending to be around \$40,000. As of today, I know we are above that amount … but that is our goal to get there. So we will use \$40,000 in annual spending as our minimum range.

On the high end, I think we are closer to \$50,000 per year in spending. Again … we will have to dive deeper into our spending numbers using our Personal Capital account to figure this out. But for now … we will set our upper range at \$50,000.

Note – We are also going to use the 4% safe withdrawal rate for now in our calculations, so we will multiply our annual spending by 25.

Low Range FI Number = \$40,000 * 25 = \$1,000,000

High Range FI Number = \$50,000 * 25 = \$1,250,000

Note – As we tweak our budget and continue to review our spending … I will likely adjust our numbers. But for now, we will stick to a low range of \$40,000 per year and a high range of \$50,000.

So for now, we at least have a target to shoot for to reach FI. That target is \$1 million to \$1.25 million … which seems like a bunch … and it is.

But we have a good nest egg already started … which brings our needed savings amount down under \$1,000,000.

As we continue to tweak our budget and get a handle on our personal finances, we will provide updates to our FI Number, as well as how much more savings/investing we need to make to get there.

What is your FI Number? Have your reached your number, or are you still working towards hitting that goal?

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