What is Financial Independence?

Financial independence is the point at which your investments will safely produce enough investment income to support your living expenses.

The Financial Independence tab is designed to help you identify your “crossover point,” or the point at which you can withdraw enough from your investments every year (using the 4% rule) to support your lifestyle.

In order to calculate this directionally, we have to make a few assumptions about the future:

1. How you’re going to earn. We recommend increasing income by 3% per year, but you can adjust this.

2. Your average annual rate of investment return. We recommend using a 9% nominal rate of return, but you can adjust this.

3. Your annual inflation rate. We recommend using 3%, but you can adjust this.

4. Your preferred safe withdrawal rate. We recommend using 4%, but if you’re retiring early, consider using 3.5% instead.

5. How much you plan to contribute to long-term invested assets. In order to do this, we look at the balances and planned contributions for accounts with the “Long-Term (Financial Independence)” tag.

By looking at your current invested long-term assets, income, spending, long-term savings, and tax rate, we can begin to project how your financial future will play out over the next 40 years. Learn more about which accounts and contributions are being used to feed this calculation.

How to enter each section of your Financial Independence data

Your Current Numbers Summary

The Wealth Planner will automatically populate most of this section for you.

1. “Current Long-Term Invested Assets” is referencing the current balances of your accounts tagged as “Long-Term (Financial Independence).”

2. “Current Income” is using your current gross annual income.

3. “Current Monthly Spending” is totaling your monthly expenses and debt payments (the monthly expenses amount will lower in the data when it projects the debt is paid off).

4. “Estimated Effective Tax Rate” is totaling your federal, FICA, state, and local tax rates.

5. “Estimated Monthly Employer Match Contributions” is where you’ll enter an estimate for the amount your employer(s) is adding to your long-term investment contributions each month. For example, if you get a 10% match that usually equals around $250 per month, you’d enter $250 in this cell. This will factor those employer contributions into your investment growth.

Temporary Major Monthly Expenses

If you currently (or expect to) pay a large, ongoing monthly expense (e.g., childcare) that your investments will not have to support in the future, you can enter the amount, start year, and expected end year. You can overwrite the “Temporary Major Monthly Expense [Name It Here]” with the actual name of the expense, if you’d like to label it!

How Temporary Major Monthly Expenses alter your financial independence timeline:

1. If the expense is current (that is, the start year is 2025) and the expense is already included in your budget, assumptions about your expenses and long-term investment contributions will not be affected for the duration of your temporary expense—however, when it ends, that amount will be (a) removed from your expenses and (b) added to your long-term contributions in the future.

2. If the expense begins in the future, the expense will be (a) added to your expenses and (b) removed from your long-term contributions for the duration of the expense, because we’ll assume your savings will go down temporarily to accommodate it.

Future Assumptions

1. Annual Income Increase. We like to use around 3%, but if you’d like to be more conservative, you can estimate 0% (or a decreasing rate, if you expect to earn less in the future).

2. Average Annual Rate of Investment Return. We typically recommend using something between 7% and 9%, but if you’re invested primarily in bonds or other fixed income instruments, you might want to use 5%. This is the nominal—or before inflation—return, not the “real” return.

3. Annual Inflation. We usually use around 3% to account for how your spending will rise each year, but feel free to adjust if you know your personal inflation rate.

Future Net Income from Other Sources

1. Pensions. Enter your estimated monthly pension payment (make a conservative post-tax estimate, preferably), if you have one, and the year you expect it to start. If your pension has a cost-of-living adjustment and will be increased with inflation, check the “Cost-of-Living Adjusted?” box. There’s room for two pensions.

2. Social Security. Enter your estimated monthly Social Security benefit (make a conservative post-tax estimate, preferably), and the year you expect to begin taking it. There’s room for two Social Security checks that begin in different years.

Debt, Future Large Purchases, Inheritances

1. Debt. If you currently have debt, some of your monthly expenses are being used to service that debt. At some point in your Financial Independence timeline, your debt will be paid off, and your expenses will lower by the corresponding amount. If you’d like for us to take that into account, keep the box checked. (Recommended!)

2. Major One-Time Expense from Investments. If you plan to use a large portion of your “Long-Term” invested assets for a one-time purchase (e.g., draining your financial independence brokerage account to buy a house), enter the estimated amount and expected year. This will allow us to lower your invested balance accordingly and adjust your timeline. There’s room for two major one-time expenses.

   1. If you’re planning to make a one-time major purchase with money that you’ve already set aside in “short-term” or “medium-term” savings or investments, like a house fund or 529 plan, you do not need to input the expense here, because that money is already excluded. Only include major one-time expenses that will use your long-term investments.

3. Major Future Inheritance. If you know you’ll be receiving a big inheritance that you intend to invest for the long-term, enter the estimated amount and expected year. This will be added to your invested balance.

Financial Independence and Retirement Assumptions

1. Preferred Safe Withdrawal Rate. Research indicates 4% is the sweet spot for traditional retirements, but if you plan to be retired for more than 30 years, we recommend using 3.5%.

2. Year You Plan to Stop Working. If you learn that you’re financially independent in 2050 and you’d like to see how your timeline would change if you quit working and began living off your investments in 2050, you’d select “2050” from the dropdown. Your income column will zero out, and you’ll see how your invested balance will change as you withdraw your annual expenses from it each year.

   1. Be sure not to select a year that occurs before you reach Financial Independence. For example, if you’re set to reach FI in 2042 but you say you’re going to stop working in 2037, you’re going to run out of money. The earliest year you could safely quit work (per these assumptions, of course) is the first year you’re set to be financially independent.

How to read your Financial Independence results

1. “Years Until Financial Independence” describes how many more years you’d need to execute the inflation-adjusted version of your current plan in order to reach financial independence.

2. “Projected FI Year (EOY)” is the calendar year in which you’re projected to reach financial independence, by December 31.

3. “Safe Withdrawal Amount This Year (Gross)” tells you how much income your long-term investments can currently produce each year.

4. “Projected FI Number” is the nominal value of your investments in the year you’re anticipated to hit financial independence. Because this number is typically impacted by a decade or more of inflation, it usually looks quite large.

“Oh, no! Why does my “Years Until Financial Independence” say ‘Over 40 Years’?”

If your Wealth Planner is returning “Over 40 Years,” that means that your current plan does not produce an outcome in which your investments can support your expenses in the next 40 years. A few things to check:

1. Did you fill out your Long-Term (Financial Independence) contributions on the Dashboard tab to tell the Wealth Planner how much you intend to save for financial independence? (Learn more.)

2. Have you filled out your Long-Term (Financial Independence) investment balances in the Dashboard tab?

3. Do you need to double-check that your assumptions for things like rates of return and inflation are accurate? If you’re estimating a return that’s too low or an inflation rate that’s too high, that can throw off this calculation.

4. Do you have a Major One-Time Expense from Investments that’s eating up too much of your balance too late in the game? For example, if you’re FI once you hit $2 million but you plan to quit working for an income then spend $1.5 million of your long-term investments on a house, you might become “un-FI” and not reach it again without more income.

Other Useful Reminders

1. Be careful not to cut & pasting cells. This can create #REF errors. (Copy & paste is fine.)

2. Only change data in the white cells. Colored cells have formulas in them to make the Planner work!

3. Avoid adding or deleting rows & columns. (Hiding rows and columns is fine.)