Your FI Number – How much do you need to retire?| Updated: |
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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 if you want to see where you stand in your journey towards 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 towards 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 that there are 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 also need to look at your planned income to get your final FI number. So, let’s see how it goes.
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 will need to 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 take a 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 take into account 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 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 (WR). The withdrawal rate is the percent of your initial net worth that you can withdraw each year. For instance, if your WR is 4% and your net worth one million, you will be allowed to 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 WR had a 98% chance of our money lasting for 30 years. If you are more conservative, you can use a smaller WR. If you are more aggressive, you could even take a higher number. Some people are living with a WR 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 smaller WR 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/WR. 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 were to use 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?
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 income every month. Or you may have a side hustle that you continue after retirement. You need to estimate how much you will earn per month, 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/WR.
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 at the beginning of 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, 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 then use the results for your expenses. But at this moment, 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.
What is your FI Number?
Your FI Number is the amount of 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 have an estimate of 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.
By now, you should understand that computing, or estimating, your Financial Independence (FI) number is something 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 the estimate of 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 go ahead and calculate your FI Ratio. These two metrics are directly related. And if you want to reach your FI goal faster, you will need to 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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19 thoughts on “Your FI Number – How much do you need to retire?”
There are way too many IFs to be able to come up with such a number. Maybe get a number and multiply it by a factor X.
The truth is that if you retire too early, let’s say when you are 30, 40 or 50 you risk to run out of money or lose them in a one event when you are old and you cannot work anymore. What do you do if you are 80+ and run out of money? Sure FIRE is nice in the aspect that learns you to save and invest, but you cannot really retire without taking a significant risk. The retirement part is utter bullshit. For most of us mortals the only path is to work until 60+, maybe part-time and still save and invest.
PS: I reached my hypothetical “FIRE number” multiplied by a couple of times, but I still have 20+ years to work… and save and invest.
I sense a bit of anger and resentment here. That’s ok. Coming to terms with a lot of my bad financial decisions has put me through a mix of negative emotions as well and I’m only 35. That’s ok.
“What’s ifs” are life. What ifs drive everything. You can choose to fight against them and be in conflict or your life or you can learn to be resilient and flexible. Human beings are incredibly resourceful. If you’re worried about bad/declining health consider public health insurance from the exchange that was created under Obama (I’m assuming you’re from the US), as a factor in your retirement.
Math cannot and does not lie. It’s the only real truth we have in life. Keep that in your back pocket, use it if you need to.
The downside of the FI number is that it will give you an amount that is truly sustainable, i.e. you can go on living 1000 years with it.
However, and this is a personnal decision, I do not plan to die with 1’200’000 CHF in assets lying around. This is why I calculate with the aim of downsizing to 100’000 CHF or less when I am 80 years old.
For example, with a yearly expense of 32’000 CHF, and assuming an interest rate of 6%, if I have 500’000 CHF in year 0, I will have 113’095 CHF in year 40. So I would be happy to early retire once I am 40 years old.
I guess this calculation has some flaws (like not taking inflation into account), and would love to hear what you think of it.
Thanks for your great blog!
It’s not true that the FI number gives you an amount that is truly sustainable. It all depends on the withdrawal rate you choose. Even with the trinity study, if you end up with 1 CHF the day after your retirement, it is considered a success.
However, it’s true that when you choose a reasonable withdrawal rate, you are likely to end up with a lot of money.
The first problem with your calculation is indeed that you do not take inflation into account. This will make a big difference over 40 years. Also, you are not considering historical returns, only average returns. The problem with that is if you have several bad years in a row, your result will be much worse than the average.
Using my calculator, your withdrawal of 32K out of a 500K (6.4% withdrawal) would not be sustainable at all even with 100% U.s. stocks. Historically, you would have had less than a 50% chance of success.
That’s what I thought: I oversimplified. Thanks for bringing me back to earth ;)
I’m a little confused about the math of calculating the FI number, i.e. according to your formula, a higher WR would lead to a lower FI CHF amount. This does not make logical sense because it would be that you need a lower FI amount when you withdraw a higher % per year from your portfolio.
Using your example, 3.5% WR and CHF 65K annual expense would mean your FI amount is 1’857’142 CHF. Replacing 3.5% with 4% (i.e. withdrawing more a year), you would then only need 1’650’000 CHF to reach FI.
Am I missing something in the maths here?
Actually, you understand it really well :)
Your withdrawal rate represents how much of your portfolio you are willing to withdraw each year. If your withdrawal was 100%, you would have a tiny FI number (65K in your example).
A higher withdrawal rate means less to accumulate since you can withdraw more each year. But a higher withdrawal rate is also more risky.
Think of it that way: for a given annual expenses, a lower withdrawal rate (conservative) increases your FI number while a higher (more risky) increases your FI number:
* If you are more conservative, you need to accumulate more
* If you are less conservative (willing to take more risks), you need to accumulate less
Does that make sense?
I’m taking a more conservative 3% rule approach. No idea what the taxes are going to be, so putting some random 15% there.
3% is really conservative. Don’t make it too complicated for you ;) But if you feel comfortable with that, that is the most important thing and you should follow your own path!
15% seems about right indeed!
Thanks for stopping by :)
Good post. One observation regarding SWR. I truly believe you can safely take take 4% or even 4.5%. The trinity study does not take into account that you can greatly reduce the risks of negative sequence of returns:
1) you have a slightly more modest living if your stocks take a plunge. Say you take cheaper holidays for a year or two. You keep your car longer, etc.
2) you keep a cash reserve to smooth out market downturns.
Ideally a combination of both.
Yes, you are right. There are things that you can do to improve your safety. The SWR series of post is really great for that matter. It’s much more powerful than the Trinity study I think. I want to go through the entire series once again and see if my SWR is really what I need. Then, I will maybe change it up. But before that, I’m fine with 3.5% .)
Which SWR did you choose?
Thanks for sharing :)
My annual expens is 18.000€/year and I am living in my house.
My WR is 4%, so I need 450.000€.
I am planing to reach that amount in next 15-20years, so I need to calculate inflation.
Wow, that amount of expenses is really awesome! I really wish I could live on that level of expenses.
Yes, if you plan to retire in about 20 years, you really need to take inflation into account. It seems you have everything under control! Good luck for reaching your retirement on time :)
Thanks for stopping by!
So, how to take inflation into account in your FI number? Or take it into account in your expected invested amount? I get confused as some of these FI forums from different sources say it is already included in the SWR… and the “magic 4%”. Whereas this 4% just seems to represent the market risk premium (excess return of the risky basket of assets over the inflation). So If I retire at this moment and withdraw the premium as a percentage of my assets at time is 0 yes then the inflation is taken into account. IF I retire in the future it seems not to be.
– Am I right or missing something?
How to calculate the future FI number?
Are we just using the Present Value / Future Value formula here to calculate a future FI number? So lets say my SWR is 4% and my spending (FI number or passive income) is /are 40.000 per year then I would need to save 1.000k.
The SWR would ensure I can take out the 40.000 safely each year. Then again. If I reach this number in 20 years the 40.000 per year would have a present value about 24.000. Which does not match my FI number.
So I would need to calculate the future value of my current FI number (the FV of 40.000 a year). And then calculate the total assets needed based on the future FI number. Right?
With kind regards,
Frederik van Ewijk.
There are two parts to taking inflation into account for your FIRE journey.
1) Before you retire, you need to take inflation into account for your FIRE number (your goal). If you think you are going to retire in 10 years, you need to target a FIRE number that takes into account 10 years of average inflation in the country you are retiring to. There is no need to be very precise at the beginning since you are far from your goal and as you get closer to the goal, you can make your estimation more precise.
2) Once you are retiring, there is no need to consider inflation anymore. The chances of success of your strategy based on the trinity method will take this into account.
Does that make sense?
I have absolutely no clue what my expenses will be when I FIRE. So what I do is take my current yearly expenses, and map that against my investments. I also use a 3.5% WR which gives me a cash flow.
The current yearly expenses are the expenses of the last 12 months. That makes it quite accurate, and luckily I automated this reporting so it doesn’t take time to compute each month.
Currently I’m slightly over 6% FIRE.
It’s interesting, you are doing exactly the same as me! As you said, it’s very difficult to estimate expenses in the future. It’s perfectly fine to take the running average as a moving target.
I just reached 8% this month, I’m pretty happy about it. We are increasing the rate at which we increase the FI ratio.
Thanks for sharing :)
Nice article, first I struggled with withdrawal rate. I found it makes more sense to me by multiply number of years I expect to live after retirement with yearly spending. For example if I expect to live until 90 years old after retiring at 50. Meaning that I need money for another 40 years. I simply multiply 40*yearly expense = FI number. Let me know your thought ;)
The problem with that approach is that you are going to be extremely conservative in the long term. For 40 years, that is the equivalent of a 2.5% withdrawal rate. 3.25% is almost guaranteed to work in most situations, so 2.5% is really too conservative.
Next month, I will publish an article on how to choose a withdrawal rate, this should help :)