2.4.8 FI Number

"Your financial independence number is as unique as your fingerprint; it reflects your personal goals, lifestyle, and values." – Anonymous

Financial Independence - How much do you need?

Achieving financial independence (FI) is a highly personalized journey, and your Financial Independence number—the amount you need to save to achieve FI—varies significantly depending on the type of FI you pursue and your annual expenses. The FI community often discusses several variations, including lean FIRE, fat FIRE, and barista FIRE, each catering to different lifestyles and financial goals. Lean FIRE involves living a frugal lifestyle with minimal expenses, while fat FIRE allows for a more luxurious lifestyle with higher spending. Barista FIRE, on the other hand, is a hybrid approach where you retire early from your primary career but continue to work part-time in a low-stress job, such as a barista, to supplement your income and reduce the need to draw down your savings aggressively.

 

The type of FI you choose directly impacts your FI number. For instance, if you aim for lean FIRE, your FI number will be relatively lower since your annual expenses are minimal. Using the 4% rule, if your annual expenses are $30,000, you would need $750,000 saved to reach FI ($30,000 ÷ 0.04). In contrast, if you aim for fat FIRE with annual expenses of $100,000, your FI number would be significantly higher, at $2.5 million ($100,000 ÷ 0.04). Barista FIRE adds another layer of flexibility; since you plan to earn a modest income from part-time work, you might only need enough savings to cover part of your expenses. If you expect to earn $15,000 annually from part-time work and have total annual expenses of $40,000, your savings would need to cover the remaining $25,000, reducing your FI number to $625,000 ($25,000 ÷ 0.04).

 

Ultimately, determining your FI number requires a thorough understanding of your desired lifestyle and careful planning of your annual expenses. Whether you choose lean FIRE, fat FIRE, or barista FIRE, the key is to align your savings and investments with your long-term financial goals and personal values. By doing so, you can achieve a level of financial independence that allows you to live life on your terms, whether that means embracing frugality, enjoying luxury, or finding a balance through part-time work.

Step-by-Step Guide to Determining Your Financial Independence (FI) Number

Achieving Financial Independence Retire Early (FIRE) is a goal many people aspire to, but figuring out your personal FI number can seem daunting. Here’s a step-by-step guide to help you determine your FI number:

 

Step 1: Calculate Your Annual Expenses

  • Track Your Spending: Start by tracking all your expenses for a few months to get an accurate picture of your annual spending. Include everything: housing, utilities, groceries, transportation, healthcare, entertainment, travel, and any other regular expenses.
  • Estimate Future Costs: Consider future expenses that might not be part of your current budget, such as healthcare in retirement, travel plans, or hobbies you wish to pursue once retired.

Step 2: Decide on Your Desired Lifestyle

  • Choose Your FIRE Type: Determine which type of FIRE suits your goals and lifestyle. The main types include:
    • Lean FIRE: Minimalist lifestyle with low expenses.
    • Fat FIRE: Comfortable or even luxurious lifestyle with higher expenses.
    • Barista FIRE: Semi-retirement where you work part-time to supplement your income.
  • Adjust Expenses Accordingly: Depending on the type of FIRE you choose, adjust your annual expenses estimate to reflect your desired lifestyle.

Step 3: Apply the 4% Rule

  • Understand the 4% Rule: The 4% rule is a guideline suggesting you can safely withdraw 4% of your portfolio each year in retirement without running out of money over a 30-year period (See The Trinity Study on the next page).
  • Calculate Your FI Number: Divide your annual expenses by 0.04 to find your FI number.
    • Formula: FI Number = Annual Expenses ÷ 0.04
    • Example: If your annual expenses are $40,000, your FI number would be $1,000,000 ($40,000 ÷ 0.04).

Step 4: Consider Additional Buffers

  • Account for Market Volatility: To provide extra security against market downturns, some people choose to be more conservative and use a lower withdrawal rate, such as 3.5% or 3%.
  • Healthcare and Longevity: Include additional savings for unexpected healthcare costs or longer life expectancy. Adjust your FI number upwards if necessary.

Step 5: Plan for Other Income Sources

  • Part-Time Work (Barista FIRE): If you plan to work part-time, subtract the income you expect to earn from your annual expenses before calculating your FI number.
    • Example: If your annual expenses are $40,000 and you plan to earn $10,000 from part-time work, your FI number would be based on $30,000 of expenses ($30,000 ÷ 0.04 = $750,000).
  • Social Security or Pensions: Consider any future income sources like social security or pensions and factor them into your calculations.

Step 6: Review and Adjust Regularly

  • Periodic Review: Your lifestyle, expenses, and financial goals may change over time. Regularly review and adjust your calculations to ensure your FI number remains accurate.
  • Inflation Adjustments: Make sure to adjust your annual expenses for inflation over time to maintain your purchasing power.

Step 7: Save and Invest

  • Create a Savings Plan: Based on your FI number, create a savings and investment plan to reach your goal. Automate your savings to ensure consistency.
  • Invest Wisely: Diversify your investments to balance risk and return. Consider low-cost index funds, bonds, real estate, and other investment vehicles suitable for your risk tolerance and time horizon.

By following these steps, you can determine a realistic and personalized FI number, giving you a clear target to work towards on your path to financial independence and early retirement.

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