Here’s a “draft zero” of a Financial Independence plan. Clone it into a document for your own use. Numbers here are representative.
E : annual expense : observed : $36k
W : withdrawal rate : chosen : 4% (US historical)
T : target for assets invested : E/W : $900k
A : assets invested : observed : $45k
I : after-tax income : observed : $45k
S : savings : I-E : $9k
Y : yield on overall portfolio invested : observed : 4%
N : years left to FI : (T-A)/S/(1+Y) : 91
R : savings rate : S/I : 20%
Yup. Pretty straight-forward.
So I just plug in my current expense, after-tax income, assets invested, and portfolio yield, and out comes my target number and how long until I’m there?
Yes. You might want to turn this into a tiny spreadsheet, since you’ll be tweaking it.
OMG that’s a lot of years!
That’s an upper bound. Play around with the inputs to start figuring out what’s acceptable to you. Go explore better ways to calculate this, too, if you want a better estimate.
No, seriously, that’s longer than I’d like.
Yup. You can make changes to the various inputs (observed and chosen) to discover what effects that would have on the numbers. How would you go about making such numbers happen in real life?
That expense number looks low to me.
People can, have, and will live on that (even less), if it’s fulfilling and sustainable. My own E changes as I adjust what is in my fulfilling life and what that costs to manifest.
That withdrawal rate looks high to me.
Go explore the arguments, and decide for yourself. I put 4% here as a defensible default, knowing full well you (the planner) will adjust it to reflect your own (hopefully researched and informed) opinion.
That portfolio yield looks low to me.
Adjust to suit your chosen asset allocation and actual returns. Doesn’t matter whether it’s real estate, stocks, bonds, businesses, or other investments, go observe it.
That income number looks low to me.
Probably. Raising income is one of your prime levers for raising savings, and thus reaching your target sooner.
My expenses will differ before and after transition to FI life.
Cool, go figure out how to adjust the calculations. And what those later expenses will be. This is, after all, a draft — when you want to change something, you can go out and learn what you need when you need it. One step at a time, you’ll reshape this into a living plan which reflects your path forward.