Financial Independence: How to Calculate Your FI Number

At 7:12 a.m., Leila’s coffee went cold while her to-do list kept growing: team stand-up at 9, client review at 1, gym if she had energy. But the question that had been nagging her for months got louder than the calendar alerts: How much is “enough” to buy my time back? She had savings, a 401(k), and a good salary—yet no clear finish line. Then she discovered the idea of a “FI number,” and for the first time, freedom had a price tag she could calculate.

What Your FI Number Actually Is

Your FI number is the size of the portfolio needed for your investments to cover your living expenses indefinitely. It’s built on the concept of a sustainable withdrawal rate—often summarized by the “4% rule,” popularized by analysis of historical market returns (commonly referred to as the Trinity Study). In practical terms, the shorthand is:

FI Number = Annual Expenses × 25

Why 25? Because withdrawing about 4% of a portfolio each year implies you need roughly 25 times your spending to fund it. For deeper background, see primers on financial independence and the 4% rule from mainstream financial sources. Your goal isn’t to chase a magical number—it’s to align money with the life you want.

Start With the Number That Matters Most: Your Annual Spending

Investments don’t fund job titles; they fund expenses. That makes your lifestyle the single biggest input in your FI math. Most people underestimate their true costs because they forget non-monthly items (gifts, travel, healthcare deductibles) or one-offs that actually recur.

Build a clean annual figure

1. List monthly essentials (housing, utilities, groceries, transport, insurance).
2. Add periodic spending (car maintenance, holidays, subscriptions billed annually, medical).
3. Project discretionary goals (travel, hobbies, education).
4. Choose a lifestyle version you actually plan to live at FI (baseline, lean, or “fat” FI).

If you’re new to budgeting, frameworks like the 50/30/20 rule can help you map needs, wants, and savings quickly before you refine things.

From Spending to FI: The Core Calculation

Once you estimate annual expenses, multiply by 25 for a 4% withdrawal rate target. Prefer a more conservative approach? Use 3.5% (multiply by ~29) or 3% (multiply by ~33). It’s the same idea: the lower the withdrawal rate, the larger the portfolio target—and the higher the durability against bad market sequences.

Example: If your annual spending is $40,000, your baseline FI number at 4% is $40,000 × 25 = $1,000,000. At 3.5%, it’s ~$40,000 × 28.6 ≈ $1.144M.

Case Study: Leila’s “Freedom Math”

Leila is 33, earning $92,000 as a product marketer. After taxes and contributions, she spends about $3,100 per month, or $37,200 per year. She wants a comfortable (not extravagant) FI with room for one international trip a year. Her plan:

• Annual expenses: $37,200
• FI number @4%: $37,200 × 25 = $930,000
• Current invested assets: $135,000 (401(k) + brokerage + HSA)
• Planned savings rate: $2,300/month = $27,600/year

She runs two versions of her plan:

Version A — Stay Put, Optimize

• She refinances high-interest debt, automates investing, and negotiates recurring bills.
• She aims for a blended long-run return assumption of 5–6% after inflation (conservative).
• Projected time to FI: ~14–16 years given starting balance + savings + compounding.

Version B — Geo-Flex & Partial FI

• She tries “mini-retirements” and considers 3–6 months per year in lower-cost cities.
• She builds a side consulting practice to earn ~$10,000/year during FI.
• Her effective annual withdrawal need drops from $37,200 to ~$27,200 after side income.
• New FI target @4%: ~$27,200 × 25 = $680,000—shaving years off the journey.

The lesson? Your FI math is flexible. Adjust lifestyle, location, and income mix, and the “finish line” moves with you.

Key Levers That Move Your FI Number

1) Spending (the biggest lever)

Every $100 you permanently remove from annual expenses lowers your FI target by ~$2,500 at 4%. Trim housing, transport, food waste, or subscriptions, and you shrink the mountain you need to climb.

2) Savings Rate (speed to the summit)

Your savings rate dictates how quickly compounding takes over. Even a temporary push—to 40–50% during high-earning years—can collapse the timeline. A quick rule of thumb: higher savings rates mean fewer years to independence because you’re both saving more and proving you can live on less.

3) Withdrawal Rate (durability)

Market returns come in streaks. A more conservative withdrawal rate (e.g., 3–3.5%) adds buffer against poor early-retirement sequences. See discussions of safe withdrawal rate for context.

4) Asset Allocation & Costs

Diversified, low-cost index funds remain a common backbone for FI portfolios because fees are a guaranteed drag while returns are uncertain. Lower costs = more of the market’s return stays with you. Revisit your mix of stocks, bonds, and cash as your horizon shortens.

5) Inflation Awareness

Inflation quietly raises the bar. Build an inflation-adjusted runway and consider assets historically associated with beating inflation over long periods (equities, certain real estate). Plan to increase withdrawals with inflation in retirement, not hold them flat in nominal terms.

How to Pressure-Test Your Number

1. Run multiple scenarios: optimistic, baseline, conservative (different returns and withdrawal rates).
2. Add cash buffers: 6–12 months of expenses can help weather down markets without selling assets.
3. Include optional income: part-time work or small business revenue meaningfully reduces portfolio stress.
4. Stress lifestyle costs: model a higher-cost year (medical, family support, travel) and confirm resilience.
5. Re-underwrite annually: revise spending, contributions, and market assumptions at least yearly.

Common Mistakes (and Better Habits)

• Counting illiquid assets as FI fuel: Don’t rely on home equity unless you’ll sell or rent it.
• Ignoring taxes: Remember that withdrawals from tax-deferred accounts are taxable; Roth and brokerage differ.
• Setting and forgetting: Markets, goals, and life change. Recalibrate your number and plan regularly.
• Chasing yield: A portfolio engineered for yield alone can be riskier than a total-return approach.

Mini-Playbook: Calculate Your FI Number in 20 Minutes

1. Pull last 6–12 months of transactions; categorize to find an honest annual spend.
2. Pick your lifestyle target at FI (lean, baseline, or “fat” FI).
3. Compute:
   • @4%: Annual Spend × 25
   • @3.5%: Annual Spend × 28.6
   • @3%: Annual Spend × 33.3
4. List current investable assets and annual contributions.
5. Sketch your timeline using conservative return assumptions.
6. Pick two levers to move this quarter (expense cut + contribution bump).

FAQs

Is the 4% rule still valid?

It’s a starting framework, not a guarantee. Many planners still reference it, while some advocate 3–3.5% for added safety in low-yield environments. Adjust based on risk tolerance, flexibility, and other income sources. See broad overviews from Bankrate’s 4% rule guide for context.

Should I calculate FI using gross income or expenses?

Use expenses. Your portfolio has to cover what you spend, not what you earn.

Do I include my mortgage or rent if I’ll own a home free and clear?

If your plan is to own your home outright at FI, remove the mortgage or rent—but keep property taxes, insurance, maintenance, and utilities. If you’re unsure, model both scenarios.

What if I plan to work a little during FI?

Great—partial income can meaningfully reduce the target. If you can reliably earn $8,000/year, you can lower your annual withdrawal need by the same amount before multiplying.

How often should I revisit my FI number?

At least annually, or after major life changes—new city, child, career shift, or big market moves. The number is a living estimate, not a tattoo.

Your Action Step (Do This This Week)

Block 30 minutes. Add up a year of real expenses, then multiply by 25. That’s your first pass. Next, pick one lever to pull: cancel two unused subscriptions, refinance a lingering debt, or automate an extra $150/month into low-cost index funds. Momentum beats perfection.

Final Takeaway

Leila didn’t magically feel “rich” once she knew her number. She felt calm. The fog cleared because freedom had a formula and a plan she could control—spend with intention, save aggressively when it’s easy, invest simply, and review annually. Financial independence isn’t about retiring from something; it’s about choosing what you’re retiring to. Calculate your FI number, commit to the next small step, and put time back on your side.

Further reading for context: high-level overviews of the FIRE framework, the basic logic behind safe withdrawal rates, and budgeting models like the 50/30/20 rule.