For our purposes, Financial Independence will be defined as not having to work for money i.e. having enough money to live comfortably off of your investments alone. “Comfortable” will vary from person to person, but the idea is if one’s annual expenses total to, $50,000, then they can retire once their assets alone produce $50,000 a year.
The above formula calculates a retirement number that allows you to safely withdraw 4% per year. Where does the 4% come from? It is a conservative number assuming your investments on average yield 7% per year (Since 1970, the S&P 500 average return has been 10.47%). 7% – 3% for inflation = 4%.
The magic number is 25. If your annual spending is $50,000, multiply $50,000 by 25 = $1.25 million. $1.25 million is how large your nest egg should be in order for it to last forever. How did we get to 25? Set up a proportion and solve for x. (50,000/4%) = (x/100%)