In this post I’m going into detail and showing you How To Calculate Your Financial Freedom Number from Financial Freedom by Grant Sabatier.
CLICK HERE for Grant’s calculators.
Formulas for calculating your financial freedom number
Withdrawal rate percentage x your number = expected annual expenses
On page 66 Grant has the formula you need to figure out how much money you need to save in stock index funds in order to be financially free.
Let’s say you figure out that your total expenses for a year are $117,500. In other words, if you get $117,500 a year for life then you are financially free.
Then you use the formula above to figure out how much you need to save in stock index funds.
.04 x number = $117,500
(.04 x number) / .04 = $117,500 / .04
number = $2,937,500
Let’s say it will cost you $72,000 to pay for all of your living expenses in a year. Here is how you would do the formula:
.04 x number = $72,000
(.04 x number) / .04 = $72,000 / .04
Number = $1,800,000
One final example is if you have a lower annual cost of living at $34,000. This is how you would calculate how much you would need to invest in stock index funds.
.04 x number = $34,000
(.04 x number) / .04) = $34,000 / .04
Number = $850,000
On p. 72 of Financial Freedom by Grant Sabatier, he introduces another formula that takes into account the rate of growth of your stocks. There is no guarantee that they will grow every year, and indeed, they haven’t grown in value but actually gone down 20% this year so far.
He is using an average of 7% growth rate.
This formula will help you calculate how much you have to save every year if you want to retire in a certain amount of years.
The formula is a lot more complicated:
S = (Y – A* (1 + r) ^n ) / (((1 + r)^n – 1)/r)
S = how much you need to save each year to hit your number by the time you want to retire
Y = your number
A = amount you already have invested (aka your principal)
r = annual compounding rate (as a decimal – i.e., 7 percent = .07)
n= number of years to retirement
So using my number of $1,250,000:
Y=$1,250,000
A=$0 as the amount already invested
r=7 percent (.07)
n=5 years
S=(($1,250,000 – $0 * (1+0.07)^5)) / (((1 +0.07)^5 – 1)/0.07) = $217,363
S = (1,250,000 – 0 * (1 + .07) ^5 ) / (((1 + .07)^5 – 1)/.07)
S = (1,250,000 / (((1.07)^5 – 1)/.07)
S = $217,363
Conclusion
Grant has calculators that will help you calculate these numbers and I recommend you check them out. It’s always good to understand the math behind them and the basic assumptions.
First of all, Grant is assuming an annual growth rate for the stock market as a whole at 7%. Some would argue that it is actually more like 6%, and you should use 5% as a conservative number.
In addition, past results do not guarantee future results. The stock market might soon become less lucrative, just as the bond market has. The future may lie in markets governed by block chains and nfts or shifts to other countries and different systems.
Would you withdraw 4% out of your stock funds this year, with the stock market on a 20% decline?
What do you do if there is a stock market crash and you have to wait years for a recovery?
Perhaps there are other investments that might offer you better options depending on your background and area of expertise, your market and the investing opportunities that you have available to you.
I hope you got a lot of value out of this article. Please comment below!