Financial independence is when invested assets can fund lifestyle without needing paycheck. The FI number is just annual spending translated into portfolio target using assumed withdrawal rate, plus buffers for real-world costs that don’t show up in simple calculators.
Defining Your FI Number
Most foundational math for retirement planning begins with the “4% rule” shorthand: by withdrawing approximately 4% of a portfolio annually (adjusted for inflation), one can estimate the total assets required to fund a specific lifestyle. Many financial analysts summarize this as the “Rule of 25,” where the target portfolio size is 25 times annual expenses, as $1 / 0.04 = 25$.
Successfully calculating financial independence requires a deep understanding of the relationship between annual spending, sustainable withdrawal rates, and the total portfolio size needed to maintain that lifestyle indefinitely. This calculation is best expressed as a customizable formula:
- Desired Annual Spending (post-tax)
- Minus reliable non-portfolio income (pensions, rental net, or part-time work)
- Equals the net annual spending that must be funded by the portfolio.
- Portfolio Target = Net annual spending / chosen withdrawal rate.
For example, using the standard 4% framework, a $60,000 annual spending requirement results in a $1.5 million target. It is important to note that “25 times expenses” is not a guarantee of success, but rather a baseline estimate that must be stress-tested against an individual’s specific time horizon, spending flexibility, and risk tolerance.
Formula flexibility is a critical advantage. An individual with $50,000 in annual expenses who also receives a $10,000 pension only needs a portfolio to cover the remaining $40,000. At a 4% withdrawal rate, their required assets drop to $1 million instead of $1.25 million, demonstrating how even modest outside income sources can dramatically reduce the required portfolio size.
The Withdrawal Rate Engine
Reason 4% starting point is commonly discussed is historical withdrawal-rate research behind it. Stanford paper reviewing topic notes that Cooley, Hubbard, and Walz in 1998 reported 95% historical success rate for 30-year horizon, 4% withdrawal rate, and 50/50 stock-bond mix, and success rose to 98% with 75% stocks.
Original Trinity-style paper titled Sustainable Withdrawal Rates From Your Retirement Portfolio defines success as completing payout period with terminal value greater than zero. In its tables for inflation-adjusted withdrawals and 30-year horizon using historical data through 1997, it reports 4% initial withdrawal rate had 95% success rate for 50/50 stock-bond portfolio and 98% success rate for 100% stock portfolio.
Success rate factors:
- Withdrawal rate: Lower rates like 3% increase success probability
- Time horizon: Longer retirements reduce success rates at same withdrawal
- Asset allocation: Higher equity typically improves long-horizon success
- Flexibility: Ability to reduce spending during downturns dramatically improves outcomes
- Sequence of returns: Market performance in first decade matters enormously
Someone retiring into strong bull market can sustain higher withdrawals than someone retiring into bear market even with identical portfolios and spending plans. This sequence risk is why many early retirees build extra safety margin.
Extended Horizons Change the Math
Many FIRE plans aren’t 30-year retirement but often 40-60 years. That’s why shouldn’t treat 4% and 30-year statistic as universal default.
RBC’s retirement withdrawal-rate summary shows how success rates change when extending horizon. For 40-year time horizon from 1926-2014 at 4% withdrawal rate, RBC reports success rates of 86% for 50/50 portfolio, 92% for 75/25 portfolio, and 88% for 100% stock portfolio.
Message isn’t that 4% fails but that confidence level accepted may be lower than thought once extending timeline. That’s why many serious FIRE planners either aim for lower starting withdrawal rate than 4% or plan to be flexible by spending less in down markets, working part-time, or delaying big purchase.
RBC explicitly contrasts set-it-and-forget-it 4% approach with more dynamic approach targeting 85-95% success zone with adjustments along way. The flexibility to reduce spending by 10-20% during bear markets dramatically improves sustainability.
Three FI Number Versions
Instead of one number, build three providing different confidence levels and flexibility requirements:
- Base FI (simple estimate): Annual spending times 25 using 4% rule. Provides baseline target assuming traditional planning assumptions.
- Conservative FI (long-horizon plus uncertainty): Annual spending divided by 3% approximately equals 33 times. Fidelity’s early-retirement guideline suggests aiming for 33 times expenses if retiring before age 62, assuming 3% withdrawal rate.
This conservative approach acknowledges extended time horizon of early retirement and provides larger safety margin for market volatility and unexpected expenses.
Flexible FI (barista or partial FI): Annual spending minus part-time income, then divide by chosen rate. Equifax explicitly describes Barista FIRE as incorporating part-time work to cover some day-to-day costs, allowing lower savings goals than full early retirement.
Three-number method example:
- Annual portfolio-funded spending: $40,000
- Base FI at 4%: $1,000,000 (25 times spending)
- Conservative FI at 3%: $1,333,000 (33 times spending)
- Flexible FI with $15,000 part-time income: $625,000 (25 times $25,000 net spending)
This three-number method makes planning practical because it links portfolio target to flexibility realistically committable. Someone willing to work part-time or reduce spending during downturns needs substantially smaller portfolio than someone requiring complete spending inflexibility.
Worked Example to Copy
Assume desired annual spending of $48,000, reliable annual non-portfolio income from side work of $12,000, resulting in portfolio-funded spending of $36,000.
Targets:
Base FI at 4%: $36,000 divided by 0.04 equals $900,000 or 25 times portfolio-funded spending.
Conservative FI at 3%: $36,000 divided by 0.03 equals $1,200,000 approximately 33 times, consistent with Fidelity’s early-retirement rule-of-thumb approach.
Then stress-test: if wanting 40-year horizon, recognize that historical success rates at 4% vary by allocation and may be in mid-80s to low-90s in RBC’s table depending on stock-bond mix.
This person might choose $1 million as target if willing to be flexible with spending or increase side income during downturns. Or might choose $1.2 million for higher confidence without flexibility requirements.
Practical FI Checklist
- Calculate portfolio-funded annual spending: Include healthcare and lumpy buffers. Don’t use current spending if employer provides healthcare or other benefits that disappear in early retirement.
- Decide whether planning for 30 years or 40+ years: Success rates shift with horizon. Traditional retiree at 65 plans for 30 years. Early retiree at 45 plans for 50 years.
- Build three targets: 25 times, approximately 33 times, and flexible or barista version. Having range allows adjusting plan based on accumulation progress and life circumstances.
- Choose portfolio risk level holdable through drawdowns: SEC notes stocks have historically had higher returns but can lose money in short term and are volatile. Can’t sustain aggressive allocation if selling during panic.
- Write bad-market policy: What will get cut, what won’t get sold, so FI plan survives exact moments that break most plans. Flexibility during downturns dramatically improves sustainability.
The FI number isn’t single magic target but range based on assumptions about withdrawal rate, time horizon, spending flexibility, and outside income sources. Building three versions with clear assumptions enables adjusting plan as circumstances evolve rather than blindly pursuing single number that might not fit reality.
