How to calculate my Financial Freedom Number using the 4% rule

What amount of money makes us feel we have reached “financial security” or “financial freedom”? Do we know the number? Is it 500,000? 1 million? 10 million?

Most of us are scared to look at our current financial position. Somehow it is like knowing to be out of shape; we know we might have gained weight, but we don’t want to step on the scale and know how much. It is difficult to monitor our weight if we don’t measure it, and we don’t have a specific goal; the same goes for our finances. We must also remind ourselves that it is difficult to achieve something we cannot measure. Identifying a numerical target can dramatically help.

 Let’s be clear: if we live within our means, if we have a “safe” job, career or business, if the government/welfare of our country looks after us in case of need,  it provides us with a suitable retirement package, then calculating our financial freedom number could appear an academic exercise, a nerd curiosity.

On the other hand, if we feel our current job or business market is highly uncertain, if the welfare of our country won’t fully provide us with the necessary support, if we ultimately want full understanding and control over our financial future, it is then crucial to identify a numeric target for our financial goals.

Our financial goal and the time required to reach it is a function of:

  1. our financial aspirations: do we want to reach “financial security” or “financial freedom”?
  2. our present and future lifestyle (average expenditures of our household)
  3. the performance of the investments we choose


The strategy for achieving financial security and/or financial freedom has nothing magical; it is not supposed to be a secret; it is 20% inspiration (knowledge) and 80% perspiration (execution); It entails the optimal allocation and management of our present and future financial resources to live a life on our own terms.

The strategy is based on 2 main pillars: active income and passive income streams. Our work is required to generate a consistent flow of cash to be saved and invested. This first income stream provides the “seeds” to be planted (invested) to secure a future harvest.

Such a strategy does not necessarily require us to engage in a specific line of work; it does not require a high income, as long as we can pay ourselves first and set aside 10% or more of our monthly income. Bottom line: what is important is not our gross salary, our net salary, but our “saving-investing ratio”: how much we consistently pay ourselves first every month and invest.

Such a strategy does not suggest saving money for the future. For most of us, considering inflation and our future financial needs, the simple act of saving is necessary but not sufficient. We need a multiplier effect; we need to give every dollar a job!

Therefore, it is essential to develop income streams, most importantly, passive income streams that we can leverage without locking our time. As the great Investor Warren Buffet once put it, “if you don’t find a way to make money while you sleep, you will work until you die”. The point is clear: saving is important, but we don’t want to save ourselves from death. We need to work hard and smart.

Investing is an important income stream for growing our savings. The concept of successful investing is simple: grow our savings to a point at which our investments’ interest will generate enough income to support our lifestyle. Once we save and invest enough, we will reach a “tipping point” at which we hit the required critical mass to generate enough passive income to support our lifestyle.

 Let’s now discuss two key financial goals: Financial Security and Financial Freedom.



We can say we have reached financial security when 5 key cost categories will be fully paid off for life, without ever having to work to pay for them again:

  1. Home mortgage
  2. Utilities
  3. Food
  4. Transportation
  5. Basic insurance costs

So, let’s check our monthly costs for these 5 categories. All in all, they can represent up to 60% of our monthly expenses. For example, we can consider a salary of $5,000 per month, for which we should have basic monthly expenditures of around $3,000. By multiplying it by 12 months, we develop our “basic” annual expenses that will correspond to the annual passive income we need to achieve to be financially secure ($36,000). This financial goal can provide the necessary peace of mind for our household and unlock some of our time for side projects, time off, etc. As such, it can be our ultimate goal or simply our short-term target (milestone) along the path toward Financial Freedom.


We can say we have reached financial freedom when we no longer need to work to have the same lifestyle today. It means the annual interest earned on our investments’ return will provide us with the income needed. Money is now fully working for us; we don’t work for money. Using the same example of a salary of $5,000, by multiplying it by 12 months, we develop our annual passive income figure needed to secure financial freedom (i.e. $60,000).


We need to identify the specific critical mass of financial assets needed (Financial goal number) to generate our required annual passive income for the rest of our lives. It can be used to calculate our financial security number or our financial freedom number (we have to input our annual expenditure amount or our “basic” annual expenditure amount).


The most popular method for calculating financial freedom was detailed in the Trinity Study and is called the Four Percent Rule.  The publication states that we are financially free for life once a 4% annual withdrawal of our investments can cover our annual expenditures. The formula’s application is straightforward: to calculate our Financial Freedom Number, we multiply our annual expenditures by 25.

 Annual expenditures x 25 = Freedom Number

Going back to our example, if we want to secure monthly expenses up to $5,000 per month in our future, we calculate the annual figure ($60,000) and multiply by 25, obtaining $ 1,5 million.

 $60,000 x 25 = $1,500,000

(4% withdraw rate of 1,500,000 equals $60,000)

The beauty of this well-known method is its simplicity. Using this rule of thumb, we immediately obtain a “quick & dirty” Freedom Number. Let’s be clear. There are plenty of alternative formulas used by financial advisors and financial planners, such as:

  • achieve a net worth equal to 20 times your average gross income
  • achieve at least 8 times our ending salary by retirement

Nothing outstanding: just variations of the 4% rule.


if we truly want to articulate our calculation and customize the underlying assumptions, we must rely on online calculators.

After all, we must give some thoughts to the following questions:

  • What are the expected returns of our investments (3%, 6%, 10%)?
  • At which age do we want to retire?
  • What is our current net worth (assets minus debt)?
  • Which inflation rate are we taking into consideration?

We can use this link to test online Financial Calculators.

While doing such an analysis, it is necessary to highlight some suggested assumptions:

  • Our Critical Mass is our “Financial” Net Worth (savings and investments). We don’t want to include our primary home in this calculation. If we decide to sell our house, downscale and free some equity, we will adjust our financial plan and projections accordingly.
  • A Financial Calculator indicates a plausible amount of Critical Mass (savings/investments/ net worth) or the time required to secure our financial goals. As with any automated system, we can test our assumptions and improve our analysis, not to overlook further analyses.
  • In case we aim for Financial Security, we need to cover our “basic annual expenditures” with Passive Income through investments. Once we cover 60% of our annual costs, it is up to us to make the best out of this great achievement: we can choose to either continue working full time, work part-time or take some time off, knowing it will be easier to pay for the rest of expenses.
  • In case we aim for Financial Freedom, we need to cover our full annual expenditures with Passive Income through investments.
  • We can adjust any of these assumptions every year; for example:
  1. while keeping the same financial goal, we can decide to reduce our annual expenses, simplify our lifestyle, downsize, or apply geo-arbitrage (moving to a cheaper location); any of these changes will either reduce the time required reaching our financial goals or allow more ambitious financial goals;
  2. we can decide to increase our target budget and the underlying passive income required to support it; in doing so, we need to adjust our financial plan and “game plan” to turbocharge our income streams.

Overall, as for any projection, it is important to set up reasonable assumptions and targets and adjust them every few years based on changes in markets or life circumstances. It is also essential to choose the type of investments that match our circumstances, temperament and goals.

 So, based on the 4% rule or the financial calculator, what is your ultimate Financial Freedom Number?

Like Eleanor Roosevelt used to say: “It takes as much energy to wish as it does to plan. As such, let’s “sweat our assets”: let’s calculate our financial freedom number and set a plan to reach it!

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