Your FI Number – How much do you need to retire?
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We have already covered a lot on Financial Independence (FI). However, we need to go into more detail about the FI Number. Your FI Number is an essential Personal Finance Metric.
Your FI number will tell you how much money you need to be financially independent or retire. It is essential to know this number precisely to see where you stand in your journey toward Financial Freedom. It sounds straightforward. But it is not as simple as it looks.
If you want an accurate view of your FI number, you need to estimate how your expenses will be once you are financially independent. And you also need to consider your future income. There is also a more straightforward strategy where you only consider your current expenses. We see all of that and more!
This article details how to calculate your Financial Independence (FI) number.
Your FI Number
If you embark on a journey toward Financial Independence, you need to know your goal. And your goal is your FI number. Your FI Number is very important. This number is the amount of net worth you need to have accumulated before you can be financially independent and possibly retire.
We have already seen several kinds of Financial Independence and Retire Early (FIRE). The kind of FIRE that you choose will impact your FI number. It will make it bigger (FatFIRE) or smaller (LeanFIRE).
So how can you calculate your FI number? First of all, you will need to take a look at your expenses. From it, you will be able to derive a first FI number. But you must also look at your planned income to get your final FI number.
Note: Some people also call it the FU Number. The name comes from the fact that you can say FU to your boss once you have reached this number. I prefer the term FI number. But they are both the same thing.
Your expenses when financially free
There are two strategies to compute your FI number based on your expenses. We will start with the most common approach. For this, you must estimate the yearly expenses you will need when financially free. We will cover the other strategy in the next section.
The first thing you need to do is look at your expenses. You need to know how much you will spend in retirement. If you do not plan to retire, you still need to know how much you will spend once financially free. It is not an easy task.
Do not forget to take inflation into account when you calculate your expenses for the future. If you are planning to be FI in a few years, this will not change a lot. However, if you plan to be FI or retire in 20 years, this could make a huge difference. Inflation will highly depend on where you are planning to become financially free. Also, it is not enough to multiply your number by inflation. Some of the items in your expenses will not go up with inflation. For instance, inflation will not change your mortgage payments!
I already have a guide on how to estimate your expenses in retirement. You need to take many things into account. For instance, your taxes will likely be less in retirement than now. And since you will have much more time on your hand, you also need to estimate how much you will spend during this time. And some costs will grow faster than others, like your health costs.
You do not need to have a perfect approximation. But you need to have a good approximation of these expenses.
Your expenses now
The other strategy to compute your FI number is to only consider your current yearly expenses. Using your current expenses is easier. But it seems much less precise.
There is something fundamental to this strategy. You need to update your number at least once a year. Keeping track of your expenses will automatically cover inflation and other lifestyle changes!
Moreover, if you plan to retire in a few years, your expenses will not change much! And since it is impossible to predict future expenses correctly, you will have them at retirement. It is not such a bad idea to lose some precision anyway. And it keeps it simple.
As long as you update your FI number regularly, you can use your current expenses to figure out your FI number.
This is what we are doing now with our FI goal. Since we are far from being able to retire, we want to keep it simple. Once we grow closer to our goal, we will try to develop a good estimation of our retirement expenses, but we are satisfied with the current estimation.
FI number from your expenses
Now that you estimated your expenses, either from your current expenses or estimated for the future, you can get the base of your FI number.
Knowing your FI number will require knowing your Withdrawal Rate. The withdrawal rate is the percent of your initial net worth you can withdraw each year. For instance, if your withdrawal rate is 4% and your net worth is one million, you can withdraw 40’000 each year.
4% is the most common withdrawal rate. It comes from the original Trinity study. It showed that using such a withdrawal rate had a 98% chance of our money lasting 30 years. If you are more conservative, you can use a smaller withdrawal rate. If you are more aggressive, you could even take a higher number. Some people are living with a withdrawal rate of 5%. I use 3.5% as my withdrawal rate.
It also depends on how early you want to retire. If you want to retire very early, you may need a lower withdrawal rate since you will need to sustain your lifestyle for a longer time. For more information, you can look at examples of withdrawal rates success rates for long retirement periods.
Once you have your withdrawal rate, you can get your initial FI number by multiplying your planned yearly expenses by 100/withdrawal rate. For instance, if my planned expenses are 65’000 CHF, and my withdrawal rate is 3.5%, my FI number is 1’857’142 CHF. That is almost two million CHF! That is how much I need to accumulate before I am financially independent.
If I used 4%, I would need to multiply our planned expenses by 25 (100 / 4). This would give us 1’625’000 CHF to be financially independent. We can see that a lower withdrawal rate (more conservative) makes the FI number more significant.
So, what is your FI number at this stage?
Your earnings
There is a last component to the FI number that most people forget. It is the income that you may have when financially free.
Even after stopping working, you may have some income. For instance, you may have a rental property that brings some monthly income. Or you may have a side hustle that you continue after retirement. You need to estimate how much you will earn monthly, if anything, during your financial independence.
You should not consider dividends income towards your FI number! The reason is that they are already included in the withdrawal of your net worth every year. If you count dividends towards the FI number, you are more likely to run out of money before being financially independent.
At some point, you are also likely to get some social security benefits, for instance. However, this is not easy to calculate if you want to retire early. It is expected to change before you retire. And you still need to cover the years before the official retirement age.
I do not count for now my social security benefits in my retirement calculation. It is too early to do it. But if you are closer to retirement age, you may want to count it as an income as well.
Once you estimate your FI income, you can compute your final FI number as your expenses minus income * 100/withdrawal rate.
For instance, if I could earn 1000 CHF per month in retirement, that would mean I could remove 342’857 CHF from my FI number. This extra income would bring it down to 1.5 million. I do not plan to have this income in my own future. It was for the sake of the example. But many people do not realize that their FI number can be lower than they think if they get some income. If you cannot get your expenses lower, you could get extra income when you are retired.
Some expenses in retirement can go a long way in helping you be financially independent earlier.
Refresh your number
One thing you need to remember is that this is not a science. Your FI number is likely to change over time. Indeed, your goals may vary, and your life may evolve more than you think now. It is complicated to predict what you will spend in retirement. That is why you will have to refresh it from time to time.
If you are beginning your journey, it will likely take you ten years or more to become financially independent. Are you sure your FI number will be the same in ten years? You may have new hobbies, new goals, or new dreams, or life may be much more (or less) expensive than it is now. That is why you should not set your FI number in stone.
I think that you should revisit this exercise at least once a year. Or even every quarter if you are motivated enough! You want this number to be as accurate as possible. If you think your FI number is too small because your expenses increase, it is better to realize that now than to be broke because you retired too early!
Your Target Net Worth
So, your FI number is the net target worth you need to reach to be financially independent. But is that target net worth the same as your net worth?
Not really. For instance, if your FI Number is one million and you have a house worth half a million, you are not 50% of being FI! The problem is that your house is not liquid. You cannot withdraw money from your house for your expenses.
Of course, you could sell the house and use the results for your expenses. But now, you will probably increase your expenses by renting, and you will have to reconsider your FI number. Also, you will lose some part of the value in the sale.
So, you need to only consider your liquid assets. I am calling this the FI Net Worth. For more information, I have an article about FI Net Worth.
FAQ
What is your FI Number?
Your FI Number is the money you need to become Financially Independent. It depends on your expenses and your withdrawal rate.
How can I compute my FI Number?
To compute your FI number, you need to choose a withdrawal rate. You also need to estimate how much you will spend in retirement. Then, your FI Number is (100/Withdrawal Rate) * Annual Expenses.
How can I reduce my FI Number?
There are two ways to reduce your FI Number. You can reduce your planned expenses or you can increase your withdrawal rate.
Conclusion
By now, you should understand that computing or estimating your Financial Independence (FI) number is fundamental if you plan to get financially independent.
And computing this FI number is not as simple as it seems. The most accurate evaluation of this metric is based on estimating your expenses when you retire. However, there is no perfect way to estimate your expenses in the future.
Therefore, a second, more simple strategy is to take only your current expenses into account for computing your FI number.
If you refresh your number at least once every year, you will have a good evaluation of this number that will evolve with you! With this, you should have a good idea of your goal of being financially independent.
Now that you know your FI number, you should calculate your FI Ratio. These two metrics are directly related. And if you want to reach your FI goal faster, you must work on your savings rate.
Have you ever computed your FI number? How do you calculate it? And what is it?
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Well, yes, borrowing money can make me FI faster as shown above. But it is also riskier (investment risk and refinance risk). So it depends on the conditions. My ultimate goal is to be FI without debt, but I might temporarily use a mortgage debt to reach FI if the conditions (the mortgage rate) are attractive enough. I would for example consider a 5Y mortgage at 1.5%.
Makes sense, each path to FI is individual! Thanks for sharing!
Dear Mr. Poor swiss,
What a great site. I especially like your distinction between “net worth” and “FI net worth”.
I just updated my net worth and I am at 1.75mCHF. However, my “FI net worth” is only 1mCHF. The difference is due to a large owned property.
My retirement expenses are at 60 kCHF per year. I am using a 3% withdrawal rate, giving 2mCHF as my FI number.
If I could use my owned property to generate 30kCHF per year rental income during retirement, my (net) retirement expenses would go down to 30 kCHF per year and my FI number would only be 1mCHF, i.e. I would already be financially independent!
How close am I, i.e. is my FI ratio really only 50%? I feel like I am much closer.
I guess it comes down to converting my large property into an income stream, either by selling some of it and invest the proceeds or start renting it out?
Hi klw
Well done on making it to this level already!
By owned, do you mean fully owned? If not fully-owned, dont’ forget to remove your mortgage from the total net worth as well.
Your logic seems right that if you can generate 30K net income from your property, you can reduce your retirement expenses. Don’t forget that if you currently live in this property, you will need to move and then rent something, which may increase your expenses. And extra rental income means extra taxes since extra income.
Another idea if you are fully-owning it is to take a mortgage on it and invest the cash. This will increase your expenses, but if you put everything together, it may increase your FI ratio.
A property still contribute to your retirement in (generally) lowering your expenses. But in generally, a large amount in living property is not that useful.
Hi Baptiste,
Thanks. I am the sole owner of the property. I valued it very conservatively at 1.15mCHF and my mortgage is 0.4mCHF, the difference of 0.75mCHF being exactly the amount of equity in the property and also exactly explaining the 0.75mCHF difference between my net worth and my “FI net worth”.
You are right that increasing the mortgage would lower the equity in the property thereby also decreasing the difference between net worth and “FI net worth”. I am actually planning to do the opposite, i.e. pay back the mortgage when it expires. This would increase the equity in my property to 1.15 mCHF and make my “FI net worth” even lower at 1.75mCHF – 1.15mCHF = 0.6 mCHF.
I then need to save up/generate another 0.4 mCHF to make “FI net worth” 1mCHF again and make sure I can reliably generate at least 30kCHF rental income per year in retirement and I will be financially independent with retirement expenses of 60 kCHF per year.
I can both live in the property and generate rental income at the same time because the property consists of more than one apartment. Isn’t that nice!
I don’t want to rely on debt when I am financially independent.
The above statement about debt reliance changes with (5Y fixed) mortgage rates under 1.5%.
For example, if I could get a 1.5% fixed 5 year mortgage for 800kCHF,
My yearly interest expenses would increase from currently 400kCHF x 0.5%=2kCHF to new 800kCHF x 1.5% = 12 kCHF.
Hence, my retirement expenses would be 60kCHF + 12 kCHF – 2 kCHF = 70 kCHF. Still assume 30 kCHF rental income, giving a net retirement expense of 40 kCHF. This requires, @3% withdrawal rate, 40kCHF / 0.03 = 1.333 mCHF “FI net worth”. But if I increase my mortgage from 400kCHF to 800 kCHF like this, my property equity would reduce from 0.75mCHF to 0.35mCHF and my “FI net worth” would increase from 1mCHF to 1.4mCHF. In other words, I would obtain an FI ratio of 1.4 / 1.333 = 105%. In this scenario, I would be financially free with such a mortgage! Without needing to save up more than I already have. I only need to make sure I always maintain >= 0.8 mCHF in liquid assets so I keep the option to repay the mortgage at its maturity (5 years after FI).
The net worth remains at 1.75 mCHF regardless of the mortgage size or interest rate at the point of renegotiating the mortgage.
I expect to reach FIRE within the next 3 years. But with a bit of luck with mortgage rates, I might reach it already in Sep 2025 when my current super mortgage @0.5% expires.
I wish you all the best on your FIRE journey.
Thanks for the explanations!
Wouldn’t you be FI faster if you kept your mortgage? Adding 400k to your house equity will decrease your FI net worth significantly (as you justly pointed out). Is it really worth it?