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.
FI Number = Annual Expenses × 25
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.
The number that goes in the formula must represent your actual spending in retirement. Common errors:
You spend $80K/year now. In retirement:
Net could be more or less. Project realistically.
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.
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.
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.
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:
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.
Retiring at 50 with 40-year horizon: use 3-3.5% withdrawal → FI number = 28-33× expenses.
Retiring at 65 with 25-year horizon: 4-4.5% may work → FI number = 22-25× expenses.
If spending varies (good years and bad), some flexibility helps. Lower withdrawal rate during bad markets (Guyton-Klinger guardrails); higher during good.
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.
If leaving substantial estate matters: lower withdrawal rate; larger FI number.
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.
If you'll have a paid-off house, lower expenses post-mortgage.
If you'll have a mortgage in retirement, include the payment.
Some plan for separately; some include in expenses; some self-insure.
A separate "LTC bucket" of $300-500K is common.
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.
The 4% rule assumes inflation-adjusted withdrawals. The portfolio grows enough to keep up. Don't double-count by adjusting expenses upward yourself.
Will you spend more in retirement than now? Travel; healthcare; gifts to grandchildren?
If yes, project upward.
Sarah, age 45, planning to retire at 55:
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.
Periodic FI number recalculation (annually):
When the ratio reaches 1.0 (or higher buffer), you have flexibility.
See NetWorthTracking for the broader practice.
Pre-tax spending vs. post-tax. Tax matters; don't ignore it.
"I'll spend less in retirement" — sometimes true; often false. Plan conservatively.
Especially for early retirees. The single biggest budget item often.
FI number changes with inflation, lifestyle, family. Recalculate periodically.
4% is the maximum reasonable for 30 years; 3-3.5% for longer.
Reaching FI doesn't require retiring. Some people work past FI for non-financial reasons.