How can you calculate the number of years it will take to reach financial independence?
The term financial independence gets used often because it’s such a compelling goal. Financial independence is when you have enough assets that produce income to cover your living expenses indefinitely. Essentially, once you reach FI, working for money is optional.
3 Steps to Calculate the Years to Reach Financial Independence
Follow the steps below to determine when you will be financially independent:
Step 1: Your Financial Independence Number
The financial independence number is the total amount of money required to give you a sufficient income to cover your living expenses for the rest of your life.
It’s expressed with the following equation:
Financial Independence Number (FI Number) = Yearly Spending / Safe Withdrawal Rate
Yearly Spending is your total annual expenses that include housing, food, transportation, and discretionary spending. The Safe Withdrawal Rate (SWR) a conservative method that retirees use to determine how much money can be withdrawn from accounts each year without running out of money for the rest of their lives.
Step 2: Years to Achieve Financial Independence
Now, use your FI Number to figure out how many years it will take to reach FI:
Years to FI = (FI Number – Existing Portfolio Amount) / Yearly Saving
Existing Portfolio Amounts = the total amount of money already saved that includes retirement accounts, investable accounts (brokerage, stocks, etc), pensions, and other savings accounts.
Yearly Savings = the amount of money you save and invest per month multiplied by 12 months.
Step 3: Calculate the Years to Reach Financial Independence
Now, let’s calculate the Years to reaching financial independence
For example:
- FI Number: $1,000,000
- Existing Portfolio Amount: $250,000
- Yearly Saving: $25,000
Years to FI = (FI Number – Existing Portfolio Amount) / Yearly Saving
($1,000,000 – $250,000) / $25,000 = 30 Years to FI
If your FI number is $1,000,000 and you’ve already saved $250,000, then all you’ll need is $750,000.
Also, if you’re going to save $25,000 per year, then it will take you 30 years to reach your FI number.
Things to keep in mind
If your lifestyle cost is lower, then you’ll have a lower FI Number. And if you’re saving a lower amount per year, then it’ll take you more years to reach financial independence.
This is a simplification of the FI process but can help you understand the concept. If you’re keeping your money in a savings account, then you’re not growing your savings compared to having investments in the market. Investing your money for growth can shorten the number of years you’ll need to reach your FI Number.
