Becoming financially independent (FI) is a dream for many investors. The idea of walking away from your job to do whatever you want with your time can be an incredible motivator. But what amount of money does it take to make the dream a reality? On a Fool Live episode recorded on Feb. 19, Fool contributors Brian Feroldi, Jason Hall, and Brian Withers discuss the most common rule of thumb for calculating your FI number and what else you should consider.
Brian Withers: Let’s talk a little bit about the math. Generally, the definition to be FI [financially independent] is when your investments and net worth are equivalent to 25 times your annual expenses. That’s generally a definition that’s out there. It goes along with what’s been dubbed the four percent rule. I’ll throw a couple of links in the chat. The four percent rule was looking at a portfolio of 60 percent stocks, 40 percent bonds over a 30-year life, you could pull four percent out of the total every year, and you would be, I think, in the high 90s percent certain that you wouldn’t run out [of money] over a 30-year retirement.
There’s certainly a lot of caveats to that. How do you guys think about, what is the math for you? Is there a certain target that you’re hitting? How do you think about what’s the FI number is that you’re trying to achieve?
Brian Feroldi: I’ll go first, I guess.
Jason Hall: Yeah, go ahead, Brian. [laughs]
Brian Feroldi: I think that it’s a great rule of thumb. Just like having a rough rule of thumb out there in the world is very helpful. To me, one of my favorite bloggers is Mr. Money Mustache, Pete Adeney from Colorado. He was the one that really hammered this home for me. One of the things that he said that really aligned to my thinking with this is, people always think that your financial independence number is some number, like it’s like a million, two million, five million, 10 million, and if you ask the average person on the street, what’s your FI number? They’d be like 10 million or some ridiculously high number because it seems like impossible to achieve it.
What he did is he said, “No, it’s not.” The way to calculate it is just whatever your expenses are, times 25. It’s a function of your spending, not a function of your net worth. Your net worth could be 500k and you could be at FI if your lifestyle was cheap enough, and other people could be, they have to get to 20 million before they got to that number. It all depends on what their spending level is. I think 25 times your annual spending is a fine rule of thumb, but there’s all …….
Source: https://www.fool.com/investing/2021/03/06/how-much-do-you-need-to-reach-financial-independen/
