Our friend Even Steven has convinced me to to dig a little deeper into my financial independence day (“FI day”). In previous posts I had estimated that I would become financially independent by age 40 which would be in year 2028. I had run the numbers quickly in the past and realized that this was probably a conservative and achievable goal. The reason I had not sit down and actually crunched the numbers is because of how many variables could actually affect the outcome. Even the slightest change in my assumptions could throw off my calculation by years. Therefore I did not want to set myself up for disappointment. But then I sat back and thought, why not set a goal and then try to beat it! Below is my calculation, along with explanations of my assumptions.
Rate of return – I used 7% as my annual rate of return on my investments. The S&P 500 has returned approximately 11 to 12 percent annualized for the past 30 years including dividends, but historical returns do not dictate future returns so I went a little more conservative on this. In other financial independence day calculations I’ve seen anywhere from 5 to 9 percent used, so I settled in the middle. I like to keep it simple, stupid – so a large majority of my net worth will be in broad market low-cost index funds (thanks Mr. Bogle).
Spend inflation – I expect my annual expenses to increase with inflation at about 3 percent.
Safe withdrawal rate (“SWR”) – I will use the common 4 percent safe withdrawal rate to calculate when my investments alone can support my spending. For more information on the SWR, I’d start with jlcollinsnh’s stock series.
Assumed savings increase – I think I can add $5k a year to my annual savings which is a combination of raises, bonuses, side income, etc.
Year & Age – Self explanatory… I’m getting old. No longer “just graduated” from college.
Annual Savings – I should be able to save around $40k this year which includes pre-tax 401k, HSA, Roth IRA, student loan debt pay down, and savings to after-tax accounts.
Net Worth at End of Year – The calculation of this column is net worth at end of prior year times 7 percent plus the annual savings.
Annual Spend – I assumed $3k a month for expenses. I spend a little less than that a month right now but I do plan on traveling more in the future, and I currently share living expenses (apartment and utilities) with two roommates which I don’t plan to do for too much longer. This amount just increases with inflation at 3 percent a year in my calculation.
This is definitely a category that can fluctuate greatly going forward as I don’t plan on living and renting in Manhattan forever, especially after financial independence.
FI? – This is a simple calculation to see if 4 percent of my net worth will cover my annual spend.
As you can see by my calculation I project my FI day to occur in 2026 when I am 38 years old. According to my calculation, I’ll actually get there a few months before December 2026, so my FI day goal is officially September 2026. I’m going to do everything in my power to get there before then, but as we know a million different things can occur between today and September 2026, and therefore I’m going to keep an open mind to any of the changes that may come.
I think one of the most important parts to this financial independence journey is staying flexible and being able to adapt to changes. If the S&P 500 drops 10 percent tomorrow, I would not think of it as detrimental to my goal, but a great opportunity! I am currently saving more than I ever have and I would use it as a great buying opportunity. Same goes for if I decide to strike out on my own entrepreneurial endeavor. This new career path may pay less and postpone my FI date, but if it offers me more flexibility and more happiness, then this would also not be a disappointment at all.
Did I miss anything that you have included in your FI day calculations? Does this seem like a good FI day calculation that I can use and update every year? When is your projected FI day?