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

Personal Finance


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. It is like knowing that we might 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.

However, it is difficult to monitor our weight if we don’t measure it or have a specific goal. As the famous saying goes:

You can’t improve what you don’t measure (Peter Druker). 

The same goes for your finances. You must remind yourself that achieving and improving something you cannot measure is difficult.

Identifying a numerical target can dramatically help.

Let’s be clear: if you live within your means, if you have a “safe” job, career, or business, and if the government/welfare of your country looks after you and provides a suitable retirement package, then calculating your financial freedom number appears an academic exercise, a nerd curiosity.

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

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

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



The strategy for achieving financial security and freedom is nothing magical; it should not be a secret.

Financial success is 80% soft skills (mindset) and 20% technical skills (money management, investing and entrepreneurship).

A good financial outlook entails the optimal allocation and management of your present and future financial resources aligned with your lifestyle and values. The most effective financial strategy is based on two main pillars: active and passive income streams.


Your work is required to generate a consistent flow of cash to cover your running costs, savings, and investment targets. This first income stream provides the “seeds” to be planted (invested) to secure a future harvest.

Such a strategy does not necessarily require engaging in a specific work line. It does not require a high income, as long as you can pay yourselves first and set aside 10% or more of your monthly income.

The bottom line is that your gross salary or net salary is not essential. What is important is your “saving-investing ratio”:

How much do you consistently pay yourself first every month and then invest?

Such a strategy does not simply suggest saving money for the future. Considering inflation and your future financial needs, the simple act of saving is necessary but not sufficient. You need a multiplier effect; you must give every dollar a job!


It is essential to develop extra income streams, most importantly, passive income streams that you can leverage without locking your time. As the great Investor Warren Buffett once said,

if you don’t find a way to make money while you sleep, you will work until you die.

There is a caveat to his statement, fully backed by his own life: the unstoppable 92-year-old Warren never stopped working, and you can expect to watch him do so until his last day. Buffett’s deal is simple: as long as you enjoy your work, you can work forever. However, ensure it is a free personal choice and not due to financial constraints! So, to be on the safe side, find a way to make money while you sleep 🙂

The point is clear: saving is essential, but:

you cannot budget your way out of poverty.”

“You can’t save your way out of poverty.”

You can’t rely only on savings to achieve financial wealth. The simple act of saving or living within your means is hardly sufficient. You need to work hard and smart, and you need extra income streams.

On Savings, check out my article: Saving more or earning more? And Do you master the cumulative power of savings?

Investing is a significant income stream for growing your net worth and securing financial wealth. Successful investing is simple: increase your investments to a point where your investments’ interest will generate enough income to support your lifestyle. Once you save and invest enough, you will reach a “tipping point” to hit the required critical mass to generate enough passive income to support your lifestyle.

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



According to Tony Robbin’s book Money, Master the Game, you can expect to reached financial security when five 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 five 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 corresponding to the yearly 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 our short-term target (milestone) along the path toward Financial Freedom.


You have reached financial freedom when you no longer need to work to have the same lifestyle today. It means the annual interest earned on your investments’ return will provide you with the required income. Money is fully working for you; you don’t work for money.

Using the same example of a salary of $5,000 multiplied by 12 months, you develop your annual passive income figure needed to secure financial freedom (i.e. $60,000).


You need to identify the critical mass of financial assets needed (Financial goal number) to generate your required annual passive income for the rest of your life. It can be used to calculate your financial security number or your financial freedom number.


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 you are financially free for life once a 4% annual withdrawal of your investments can cover your annual expenditures. The formula’s application is straightforward: to calculate your Financial Freedom Number, you multiply your annual expenditures by 25.

 Annual expenditures x 25 = Freedom Number

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

 $60,000 x 25 = $1,500,000

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

The beauty of this well-known method is in its simplicity. Using this rule of thumb, you 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 eight times your ending salary by retirement

Still, the 4% formula is the golden rule.


if you genuinely want to articulate your calculation and customize the underlying assumptions, you must rely on online calculators.

After all, you must give some thought to the following questions:

  • What are the expected returns of your investments (3%, 6%, 10%)?
  • At which age do you want to retire?
  • What is your current net worth (Total Assets minus Total Debt)?
  • Which inflation rate are you considering (based on the country you live in and invest in)?

You can use this link to test an online Financial Calculator.

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

  • Your Critical Mass is your equal to your “Financial” Net Worth (savings and investments). As a best practice, you don’t want to include your primary home in this calculation. It is fair to assume your house is not an investment to be liquidated. However, If you decide to sell your house, downscale and free some equity, you will adjust your financial plan and projections accordingly.
  • A Financial Calculator indicates a plausible amount of Critical Mass (savings/investments/ net worth) and the time required to secure your financial goals. As with any automated system, you can test your assumptions and improve your analysis.
  • If you aim for Financial Security, you must cover your “basic annual expenditures” with Passive Income through investments. Once you cover 60% of your annual costs, it is up to you to make the most of this great achievement: You 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 the expenses.
  • If you aim for Financial Freedom, you must cover your full annual expenditures with Passive Income through investments.
  • You can adjust any of these assumptions every year; for example:
  1. While keeping the same financial goal, you can decide to reduce your annual expenses, simplify your lifestyle, downsize, or apply geo-arbitrage (moving to a cheaper location); any of these changes will either reduce the time required to reach your financial goals or allow more ambitious financial goals;
  2. You decide to increase your target budget and the underlying passive income required to support it; in doing so, you need to adjust your financial plan to turbocharge your income streams.


As with any projection, it is important to set reasonable assumptions and targets and adjust them every few years based on changes in markets or life circumstances. Choosing the type of investments that match your circumstances, temperament, and goals is also essential.

 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, “sweat your assets”: calculate your financial freedom number and set a plan to reach it!

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