How the calculator works
The calculator divides what you spend each year by your expected annual withdrawal rate, then adds your one-time goals and a safety buffer. The result is an estimate of how much money would cover your expenses without working. Everything is in today's money, so there's no need to enter inflation.
The withdrawal rate is the share of your savings you spend each year, and it folds expected returns and inflation into one number. The 4% figure comes from a US study of historical data on diversified investment portfolios, which found savings lasted 30 years at that rate (Bengen, 1994). A lower rate is safer, but it needs a bigger pot.
The formula
F = (N + R) ÷ W + B + G
- F
- — your financial freedom number
- N
- — net annual spending: expected spending minus other annual income
- R
- — the yearly cost of recurring purchases: price × (1 − resale share) ÷ years between purchases
- W
- — the expected annual withdrawal rate as a decimal (4% = 0.04)
- B
- — the safety buffer: net monthly spending × number of months
- G
- — the total of your one-time goals
A worked example
Using the calculator's default values: annual spending of 240,000, a 4% withdrawal rate, a six-month buffer, a 150,000 car replaced every 5 years and resold at 40% of its price, and a 400,000 goal for children's education:
- N = 240,000 − 0 = 240,000
- R = 150,000 × (1 − 0.40) ÷ 5 = 18,000
- (N + R) ÷ W = 258,000 ÷ 0.04 = 6,450,000
- B = 240,000 × 6 ÷ 12 = 120,000
- G = 400,000
- F = 6,450,000 + 120,000 + 400,000 = 6,970,000
More than 90% of the number comes from recurring spending, which is why it responds far more to a change in annual spending than to the goals.
A few things to keep in mind
- The number is a rough estimate to illustrate the idea, not a financial plan. It doesn't account for fees or taxes.
- Goals are counted as if you needed the full amount today. A distant goal, such as children's education ten years out, needs less today, because the money set aside for it can be invested and grow until it's due.
- Other income moves the number a lot. At a 4% rate, every 1,000 a year of it lowers the number by about 25,000.
For what financial freedom means and how to measure your progress toward it, read What Is Financial Freedom? If you don't know your annual spending precisely, start by tracking your budget. And to see how many years your savings need to reach your number, try the compound growth calculator.