Calculating Your FI Number

Your FI (Financial Independence) number is the portfolio size at which work becomes optional. Reach this number; passive income covers expenses; you no longer need a paycheck.

The standard calculation: 25× annual expenses (the 4% rule's inverse). Real-world adjustments for healthcare, taxes, lifestyle changes make the simple rule less simple.

The basic formula

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FI Number = Annual Expenses × 25

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The math: 4% withdrawal rate × 25 = 100% (one full year of spending). Said another way: a portfolio of 25× expenses can sustain 4% annual withdrawals indefinitely under historical assumptions.

For a retirement spending $50K/year: FI number = $1.25M.

What "annual expenses" actually means

The number that goes in the formula must represent your actual spending in retirement. Common errors:

Using current spending without adjustment

You spend $80K/year now. In retirement:

- Mortgage paid off → less

- No more commuting → less

- Healthcare → potentially much more

- Travel → potentially more

- Hobbies → potentially more

Net could be more or less. Project realistically.

Forgetting taxes

Your $80K spending is mostly post-tax. To withdraw $80K post-tax from a traditional IRA, you need to withdraw more (because of taxes).

Roughly: pre-tax withdrawal needed = post-tax spending / (1 - effective tax rate).

For a retiree in 22% effective bracket, $80K post-tax requires ~$103K pre-tax. FI number with this adjustment: 25 × $103K = $2.575M.

Missing healthcare

Pre-Medicare (under 65) healthcare can cost $15-25K/year per person. Medicare itself plus supplemental, drugs, etc. is $5-15K/year.

For early retirees, healthcare may be the biggest variable expense. Don't forget to include it.

One-time expenses

New roof every 20 years; new car every 10. These don't fit "annual" spending but happen during retirement. Include amortized: divide by years; add to annual.

The 4% rule: what it actually says

From the Trinity Study (1998) and updates:

A 60/40 portfolio (stocks/bonds) supporting 4% inflation-adjusted withdrawals had a high success rate over historical 30-year periods.

Caveats:

- 30-year period (not 50)

- Historical data (US-specific; favorable era)

- 4% adjusted for inflation each year

- Specific portfolio mix

Most analyses find 4% sustainable in nearly all 30-year historical windows.

For longer retirements (40-50 years for early retirees), 3-3.5% is safer.

For shorter retirements (20-25 years for late retirees), 4-5% may work.

Adjustments to the basic number

Long retirement (early)

Retiring at 50 with 40-year horizon: use 3-3.5% withdrawal → FI number = 28-33× expenses.

Short retirement (late)

Retiring at 65 with 25-year horizon: 4-4.5% may work → FI number = 22-25× expenses.

High variable expenses

If spending varies (good years and bad), some flexibility helps. Lower withdrawal rate during bad markets (Guyton-Klinger guardrails); higher during good.

Heavy guaranteed income

Social Security + pensions cover much of expenses → smaller portfolio needed.

If $40K/year of guaranteed income covers half of $80K spending, only $40K/year of portfolio income needed → FI number on the portfolio piece = $1M.

Heir-aware

If leaving substantial estate matters: lower withdrawal rate; larger FI number.

Coast FI variation

CoastFI: save aggressively early; let compound growth do the rest; don't actively save anymore.

The CoastFI number is what you need *now* (much less than FI number) so that compounding alone reaches FI by traditional retirement age.

See [CoastFire](CoastFire).

Common adjustments

Mortgage status

If you'll have a paid-off house, lower expenses post-mortgage.

If you'll have a mortgage in retirement, include the payment.

Long-term care

Some plan for separately; some include in expenses; some self-insure.

A separate "LTC bucket" of $300-500K is common.

Healthcare specifically

Pre-Medicare bridge years: include ACA premiums or other insurance costs.

Medicare years: $5-10K/year per person for premiums + Medigap + Part D, plus out-of-pocket.

Inflation

The 4% rule assumes inflation-adjusted withdrawals. The portfolio grows enough to keep up. Don't double-count by adjusting expenses upward yourself.

Lifestyle inflation

Will you spend more in retirement than now? Travel; healthcare; gifts to grandchildren?

If yes, project upward.

Worked example: typical FI calculation

**Sarah, age 45, planning to retire at 55**:

- Current spending: $75K/year

- Mortgage paid off by 55: subtract $24K → $51K

- Pre-Medicare healthcare bridge (10 years): add $20K → $71K

- Travel and hobbies: add $10K → $81K

- One-time expenses (cars, home repairs): amortized $5K → $86K

- Effective tax rate: 18% → pre-tax need ≈ $105K

- Long retirement (40 years): use 3.5% withdrawal

- FI number: $105K / 0.035 = $3M

For Sarah, $3M is the target portfolio. Less than that and the 40-year retirement is risky.

This is much higher than the simple $75K × 25 = $1.875M. Adjustments matter.

Tracking progress

Periodic FI number recalculation (annually):

- Update spending estimate

- Update health/healthcare situation

- Update market valuations

- Compute current FI ratio: portfolio / FI number

When the ratio reaches 1.0 (or higher buffer), you have flexibility.

See [NetWorthTracking](NetWorthTracking) for the broader practice.

Common failure patterns

Using gross instead of net

Pre-tax spending vs. post-tax. Tax matters; don't ignore it.

Optimistic spending estimates

"I'll spend less in retirement" — sometimes true; often false. Plan conservatively.

Forgetting healthcare

Especially for early retirees. The single biggest budget item often.

Single number forever

FI number changes with inflation, lifestyle, family. Recalculate periodically.

Overly aggressive withdrawal rate

4% is the maximum reasonable for 30 years; 3-3.5% for longer.

Treating FI as goal that triggers retirement

Reaching FI doesn't require retiring. Some people work past FI for non-financial reasons.