An important step to take during your investing years is to measure your progress to early retirement. Here is how I go about measuring my progress to financial independence.
Financial Independence Formula
- Net worth – the value of all your investments toward financial independence
- Annual Spending – the amount of annual spending you will need during financial independence
- Years of Spending – divide your net worth by your annual spending
- When your Years of Spending is greater than 25, your are financially independent
Why 25 Years of Spending
Conventional wisdom is that you should be able to safely withdraw 4% of the value from your portfolio annually. This is from the well cited trinity study. For simplicity, 25 years of spending is equal to a portfolio (1) divided by a 4% withdrawal rate. A lower withdrawal rate will be less risky and a higher withdrawal rate is not recommended.
Here are some examples based on annual spending requirements:
|Annual Spending Requirement||Needed Portfolio Value|
My progress towards Financial Independence
Below is a graph that shows my progress towards financial independence / early retirement over the last 10 years. The chart shows that I am well on my way to having 25 years of spending in my financial independence fund. It also show the correction in stock prices that occurred in 2008. My portfolio has been pretty aggressive and I am slowly moving into more bonds as I get closer to early retirement.
I hope this post has provided you a new way to think about measuring your progress towards financial independence.