How Much Money Do I Need to Be Financially Independent?February 27, 2018 December 21, 2021 /
How much money do you need to be Financially Independent? You need to accumulate approximately 25 times your planned annual expenses to be Financially Independent.
The traditional investment advice of save 10-15% of your income until you are 65 and you’ll be able to do with your money and your time as you please just doesn’t cut it for those of us who want more out of the brief time we have here on Earth.
We strive to achieve Financial Independence so that we can control what we do with our time as much as practically possible. Once we determine Financial Independence is the right journey for us, we need to determine the amount of assets needed to provide income for expenses during the Financially Independent phase of our lives.
Many people dream of having enough money to kick back, not work and enjoy true independence. However, very few people really understand how much it takes to be financially independent. The fact is, achieving financial independence may be more achievable than you think.
Here, we will take a look at how much money it takes to become financially independent.
How Much Money Do You Need to be Financially Independent?
The short answer is that you either should have about 25 times your annual spend rate or you have enough passive income to cover your annual expenses after taxes. The actual number will depend on how much you intend to spend during your financial independence.
What is FIRE?
When you start researching the concept of financial independence, then you will come across the term FIRE. This stands for Financial Independence Retire Early. Followers of the FIRE movement usually save and invest the vast majority of their money in order to retire at a young age. For instance, FIRE blogger Mr. Money Mustache was able to retire in his early 30s by saving 75% of his income and living a modest lifestyle in retirement. Other FIRE bloggers to follow include 1500 Days and The Frugalwoods.
Calculating Your Path to Financial Independence
If you want to discover how much money you need to become financially independent, then you first need to calculate how much money you will spend when you are financially independent. Be sure to calculate your everyday living expenses. Remember, the less you can live on, the lower your overall financial independence of FIRE number.
Let’s say you can live on $4,000 per month. Now, you will multiply $4,000 by 12 – the number of months in a year – and get $48,000. Now take that number and multiply it by 25. Your FIRE number is $1,200,000.
Why this number?
With $1,200,000, you can put this money in a low-cost index fund such as the Vanguard Total Market Return Index (VTSAX) and pull out 4% per year without running out of money.
Tips to Become Financially Independent Faster
If you want to achieve financial independence before you collect Social Security, then it is certainly possible. In fact, some people have been able to achieve financial independence in 10 or 15 years. Here are some tips to achieve financial independence faster:
1). Lower Your Current Expenses and Save More
The more you save and invest, the faster you can reach your goal. Let’s say that you want to retire with the same income you have today. If you save and invest 10% each month in a S&P 500 index, then you can become financially independent in 36.93 years. However, if you boost your saving and investing rate to 25%, then you can be financially independent in 24.4 years. Save 50% of your money and become financially independent in 13.78 years!
2). Lower your Expenses at Retirement
You can also plan to live on less when you are financially independent. For instance, if you decide to move to a lower cost country such as Mexico, Panama or Costa Rica, you can live on $2,000 or $1,500 a month. That allows you to lower your financial retirement goal by more than 50%.
Achieving Financial Independence
Many on the path to FI focus on building their assets using passive index fund investing. Others focus on building their assets using real estate, either by owning rental real estate or using Real Estate Investment Trusts (REITs) in their investing portfolios. I’ve been in the FI Community a number of years now and I can tell you that you can retire early using either of these methods, a combination of the two, and/or even starting your own business. During your pursuit, you will meet many generous people and they will gladly share their experience and knowledge with you.
Of course your FI number will change over time. But, for now, it is important to determine how much money you believe you will need to be Financially Independent. Then you can begin to focus, plan, and work towards that goal.
- The Shockingly Simple Math Behind Early Retirement by Pete Adeney of mrmoneymustache.com
- Picking The Best Online Retirement Calculator by J.D. Roth of getrichslowly.org. Select one or more of the calculators mentioned and explore. Input a variety of assumptions to gain an appreciation of what factors can significantly impact your retirement planning.
- What Is The 4% Rule? How Much Money Do I Need To Retire? on YouTube
- No Retirement Savings in Your 50s – What to Do? on YouTube
- Estimate your current annual spending and compare that with the expenses you anticipate needing in Financial Independence. Determine, using a trusted retirement calculator, how many years you believe it will take you to reach the value of assets needed to support your annual expenses. The numbers will change during your journey to Financial Independence. The important thing is that we set goals and immediately begin achieving them.
- Stocks — Part XIII: The 4% rule, withdrawal rates and how much can I spend anyway? by JL Collins of jlcollinsnh.com
- The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?” by Pete Adeney of mrmoneymustache.com
- Financial Newbie or Financial Pro – OnTrajectory Has You Covered! by Tyson Koska of ontrajectory.com
“Money is not the only answer, but it makes a difference.” – Barack Obama