How can I calculate my Financial Independence number

Hello! Calculating your ‘financial independence number’ is a great step towards achieving financial independence and potentially retiring early. This number essentially represents the amount of money you need to have saved or invested, so that the returns or income generated from it can cover your living expenses indefinitely.

Here’s a basic way to calculate your financial independence number:

1. Estimate Annual Expenses: First, you need to know how much you spend annually. This includes all your expenses – housing, food, transportation, entertainment, insurance, and any other personal expenses.

2. Determine Your Safe Withdrawal Rate: The safe withdrawal rate is the percentage of your total investments that you can afford to withdraw each year without depleting your principal over time. A common benchmark used is the 4% rule, which suggests that you can withdraw 4% of your investment portfolio each year with a reasonable expectation that your funds will last over 30 years.

3. Calculate Your Independence Number: Divide your annual expenses by your safe withdrawal rate. For example, if your annual expenses are $40,000, and you’re using the 4% rule, your financial independence number would be $40,000 / 0.04 = $1,000,000.

To help you with these calculations, Pearler offers a calculator tool that considers your current savings, expected investment returns, and your desired retirement lifestyle. By inputting these details, you can get a tailored estimate of how much you need to save to reach financial independence. This tool acts like a roadmap, helping you plan your financial journey effectively.

Additionally, focus on reducing your expenses and adopting a frugal lifestyle. Being mindful of how you spend can significantly lower the amount you need to save and invest, making your financial independence more attainable.

Pearler is designed to support investors like you who are aimin

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Hi Diego.

Most of the FI community works on a rough rule of thumb called the 4% rule. That’s the amount you can typically live off from a diversified share portfolio per year over a retirement period of many decades.

This means you need roughly 25x your annual spending in shares. So if you spend $40k per year, you need $1m. If you spend $60k, you need $1.5m and so on.

Hope that helps.