What's Your Financial Independence Quotient?

[retire@40]

I was asked today by someone how close he is to financial independence. The best answer I could give him was to divide 1/25th of his total investments by his annual spending. I also explained that his annual spending may be different now than it would be in retirement, so he would need to understand the makeup of his spending under different scenarios,

For example, if you have $1 million in investments and spend $52K annually, you would be 77% financially independent ($40K/$52K).

How close are you to financial independence?

 

[Tadpole]

Are you assuming that pensions and social security are not independence?

 

[Delawaredave5]

Nice and simple quotient.

Expenses are after-tax dollars and portfolio income is a mix of tax / tax advantaged, so you prpbably need to be 1.2 or so to be FI.

For this group, need more survey categories above 100% !

 

[retire@40]

Are you assuming that pensions and social security are not independence?

You could net your annual spending by those amounts. So if your annual spending is $52K and you collect $10K in pensions, you would use $42K in the formula.

 

[megacorp-firee]

Nice and simple quotient.

Expenses are after-tax dollars and portfolio income is a mix of tax / tax advantaged, so you prpbably need to be 1.2 or so to be FI.

For this group, need more survey categories above 100% !

I disagree, the expenses should include taxes, so it should be included in the quotient already.
I have a minimum amount (comfortable, but below luxury) and a luxury amount.
My quotient is 1.12 for luxury and 1.66 for mininum, that's including pension, but no SS ... and of course taxes on the expense side.
So I agree, for this board, you will probably need survey categories above 100%.

 

[Goonie]

For this group, need more survey categories above 100% !

So I agree, for this board, you will probably need survey categories above 100%.

Yeah, what they said.

 

[cashflo2u2]

I'd be interested to see the logic or theory behind this explained, i.e., why this should work as a valid concept.

 

[Marquette]

I'd be interested to see the logic or theory behind this explained, i.e., why this should work as a valid concept.

General rule of thumb is that you need 25x your current living expenses saved up to retire... plays into the 4% SWR rule of thumb (which doesn't give you a 100% chance of success).

This is just reversing that to give you a ratio of how close you are to that magic FIRE line.

 

[Tadpole]

You could net your annual spending by those amounts. So if your annual spending is $52K and you collect $10K in pensions, you would use $42K in the formula.

So using before tax as the estimate of expenses:
no pension and SS - 50%
with pension and SS - 428%
with pension alone - 98%

I think I don't trust your formula to predict my future but only because it gives more affluent answers than other estimates.

 

[retire@40]

I'd be interested to see the logic or theory behind this explained, i.e., why this should work as a valid concept.

Most people (not on this board) have no idea how close they are to financial independence. I've talked to 3 people so far, two of which were amazed at how far away from FI they were (despite maxing out their 401(k) plans), and one person was amazed (and somewhat incredulous) that she was 85% FI.

By using this formula they can establish how much of their spending can be supported by their investments and how much still needs to be derived from other sources.

If you are contemplating semi-retirement and your percentage is 77%, it means you need to work enough to earn at least 23% of your anticipated annual spending.

 

[retire@40]

So using before tax as the estimate of expenses

No, spending ALWAYS includes taxes.

 

[audreyh1]

What about those of us already FI? People might be interested in that statistic as well.

Audrey

 

[Urchina]

I just figured out our quotient, very helpful as far as a benchmark goes. I'll use it as a quick estimator.

I think age also has a lot to do with it -- for example, our quotient is 30%, but we're in our early 30s and didn't count our tax-advantaged retirement funds in our quotient, or our home equity, since those are things we've decided not to draw on for ER. (for plain ol' R , at a traditional age, our quotient is 75%, including SS).

How bout an age-adjusted quotient? Any mathematicians out there want to take that one on?

 

[Tadpole]

No, spending ALWAYS includes taxes.

That is what I meant by before tax - before the taxes were taken out. So I did include taxes.

 

[aenlighten]

Age adjusted

From the Millionaire Next Door, wealth/(income*age/10), where 0.5 is poor, 1 is average, 2 is wealthy. Someone retired with a 25x expense portfolio at age 50 would have one 25/(1*50/10) = 5. Interesting to see one can be wealthy but not afford to retire by their measure, while I think most of us would only consider something more than financially independent, perhaps 25%, 50%, or even 100% more wealthy, depending on how much we crimp on expenses.