Are you and your partner aligned on where you need to be? Discover how to take control and calculate that all-important money number to achieve financial freedom together.
What it Means to Own Your "Freedom Money" Number
Why is this number so important? It all starts with that long-term goal to be able to make all the right life decisions and financial trade-offs together along the way. Knowing that you will hit that number in the future with a high level of certainty helps you go from unnecessary overwhelm to being in control.
It took me over 20 years to realize that I was often choosing to work in the wrong hierarchical corporate environments out of financial fear. As a Xennial (GenX / Millennial), I started learning from the Gen Zers who are ditching corporate jobs in record numbers to run businesses.
But that all started with taking the time to own my "freedom money" number. When I finally got clarity on that number and started aligning with my husband (admittedly a lifetime of imperfect work in progress), my mindset completely shifted from neurotic anxiety to being in a place of control.
Suddenly I felt liberated because that number was actually doable and there were reasonable options to build a fulfilling life now and in the future. With number in hand, I decided to take a calculated risk to quit my corporate job and start my own startup advisory business. Now I get to choose to work with whom I want, where I want. I also made the space to pursue passions like building JointGoals to help others own their "freedom money" number.
Traditionally, people tracked to a "magic retirement number," but that concept has rapidly shifted from a retirement-centric to a lifestyle-centric mindset. This was further accelerated when the pandemic woke many of us up to the YOLO (“you only live once”) realization.
The traditional notion focused on trudging through life with a "nose to the grindstone" job for decades to finally reach your 60s or 70s and set sail on a cruise ship to sit around and eat bonbons ‘til you die.
Then the FIRE movement (“Financial Independence, Retire Early,” see “Your Money or Your Life” by Vicki Robin and Joe Dominguez) started in 1992 and ignited in the 2010s as millennials and FIRE bloggers started spreading the word in online communities. The ultimate goal is to take early retirement by living extremely frugally to save as much as possible, then investing this money to be in a position to retire in your 30s or 40s. But many found that living in tuna can “tiny homes” and eating sardines for over a decade wasn’t actually livable.
The pendulum seems to have shifted back to the middle and now the concept has expanded from “retiring early” to a personalized definition of “financial freedom” based on the needs of each individual or household.
Now the emphasis is on financial freedom and flexibility at any stage of life by having enough resources to live life on one's own terms - whether it’s pursuing passions, taking career risks, or simply having the ability to say "no" to situations or people that don't align with your personal values. This can take many forms, including periodic mini-retirements, downshifting, part-time freelancing, upshifting to a business, or loving your work so much that you’ll keep doing it until you can’t.
What Freedom Looks Like
However you define “financial freedom” for your household, it requires shifting from a situation where your expenses are paid for by income derived through your time and energy, to being funded by "passive" income from investments. As Paula Pant from AffordAnything explains, the before and after looks like this:
So how do you get there? You’ll need your assets to reach your magic number. You can calculate it in 2 ways - first, take a high level approach, then run the details for a more accurate view tailored to your life goals. (For those who want the TLDR Action Items jump here.]
The Quick & Dirty Calculation
Followers of FIRE often consider two things: the 25x rule and the 4% rule. The rule of 25 says you need to save 25 times your annual expenses to reach freedom. This is based on the general assumption that this lump sum will enable you to withdraw enough from investments to fund 30 years of life.
As a baseline, you can use the following retiree household benchmarks for annual expenses based on location averages, including a 20% comfort buffer to live comfortably:
Average in California at the higher end = $90,399
Average in Missouri at the lower end = $55,000
So, let’s say you plan for future household monthly expenses at about $8,000, you multiply that by 12 to get an annual expense of $96,000. Multiply that by 25 and you’ll have your “freedom money” number of $2.4 million. For some that may be a "no brainer." For others earlier in planning, that may look like a big number. Fear not as the time value of money is on your side. Home equity and social security income can also play a positive role. We’ll cover that all here in a bit.
The rule of 25 is just another way to look at the 4% rule. It flips the equation (100 / 4% = 25) to emphasize withdrawing vs. saving. Based on historical data, the 4% rule outlines a safe rate to withdraw funds for 30 years without running out of money. The rule of 25 is the savings-focused approach for a quick estimate of how much you need to accumulate. So when you have that $2.4 million, you can safely withdraw $96,000 annually (4% of $2.4 million).
But experts often caveat that one size does not fit all and households should be cautious about only planning around broad strokes. These are rules of thumb, but it’s also important to plan for a number that’s tailored to your joint goals as a household.
The Tailored Calculation
Total Number of Freedom Years to Fund as a Household
The 4% rule assumes that you’re looking to fund 30 years of freedom. But you may have different plans. As a household, you need to think about what each partner envisions.
For example, Partner 1 wants to start thinking about freedom to fully pursue non-paid pursuits at age 55. Based on longevity tables their life expectancy is 81. But based on family history, they want to plan for the likelihood of living to 95.
Partner 2 loves what they do and wants to keep working until they’re in their 70s, but likely will need to plan for a slow down at 70. Though current life expectancy is 76, they also want to minimize risk and plan to 95. (A recent study showed that 16% of the men and about 34% of the women survived to the age of 90. Source here.)
Assuming Partner 2’s income covers household expenses during the years Partner 1 no longer produces income, they’ll just need their nest egg to cover shared household expenses from ages 70 to 95 for a total of 25 years at the minimum.
Derive Expenses Based on Lifestyle in Your Freedom Years
Start with your current monthly expenses as a baseline, and adjust up or down based on plans. The more you adjust down, the longer your portfolio will fund. Areas to consider:
Downsize a home for zero or lower monthly mortgage or rent. (In a future post we'll cover how your home equity can become liquid assets to add to your investment number.)
With an empty nest, you no longer need to fund kid expenses like education, extracurriculars, food, healthcare, and clothing.
Take the “geo arbitrage” route and move to enjoyable areas with a lower cost of living in small affordable towns like Youngstown, Ohio or Hickory, North Carolina, or destinations abroad like Bali or Lisbon.
On the other hand, new expenses need to be accounted for based on your personal life goals, including travel, hobbies, real estate investments, businesses, major purchases, charitable giving, inheritance and support for your adult children, healthcare and wellness expenses.
As people age, their spending patterns change. According to Fidelity, starting at age 55, spending tends to increase slightly, as some younger retirees travel or take on new pursuits. In the age range when most are retired at 65+, there is a significant drop in overall spending.
For example, current expenses in a pricey urban city can be $15,000 a month for a family of 4, accounting for expensive housing and education costs (though that could throttle up or down by ten thousand or so depending on lifestyle choices). Your freedom years will likely look different. Let’s say you decide to adjust down significantly to $5,000 by:
Downsizing or completely paying off your mortgage to reduce monthly housing expenses by $4,000.
Accounting for empty nesting with a reduction of $4,000 a month without educational expenses and reduced household expenses.
Going the ‘geo arbitrage’ route by spending part of the year in a cheaper locale, you plan to adjust down another $2,000.
But then you have the following new expenses that add $3,000 a month:
Annual family trips, travel to see adult children, gifts for the grandkids - add $2,000.
Tennis club membership, continuing education classes, wellness, and personal training - add $1,000.
That brings planned monthly expenses to fund in the freedom years to $8,000. As you can see, this number is highly dependent on the life goals you define together for the freedom years.
Adjust for Income
You now need to adjust your number for planned income sources during those freedom years, including pensions (lucky you!), enjoyable part-time work, and passive income from real estate investments or businesses.
Social Security Income is the most common potential source. You can find the calculation of your personal Social Security income based on how much you’ve earned and paid into the system by going to the Social Security Administration site here. The amount is calculated based on your average indexed monthly earnings from the highest 35 years of earnings. (Something to think about when making a choice to take less pay in some years as this may reduce your 35 year average earnings).
According to PennyFinance, you can use ballpark numbers based on salary and assuming you don’t draw until at least age 67:
$60k average salary-- $2k per month
$100k average salary-- $3k per month
$200k+ average salary -- close to $5k per month.
Currently, the maximum amount anyone can get from SSI no matter how much you’ve earned through life is $4,873 a month for those who qualify and delay claiming until age 70.
In many cases, married couples will collect two separate Social Security checks based on their own earnings record and the age at which they decided to claim their benefits. Rather than having a maximum married benefit limit, the maximum amount they would receive would be double the maximum benefits for a single person. So your household could get a total of $9,746 a month.
But you may want to adjust down by 25% for a more likely scenario. Sources say by 2034 social security payouts may be reduced down to 77%. Some experts recommend planning with $0 from this source to fully de-risk.
So let’s say your likely household monthly SSI is $8,000, adjusting down by 25% leaves $6,000. As a household with planned monthly expenses of $8,000 minus the $6,000, that gives you $2,000 remaining to fund.
If you want to completely de-risk by ignoring potential SSI, then you’ll need to fund $8,000 in monthly expenses.
Get to Your Total Amount of Expenses to Fund & Adjust for Healthcare
First, multiply your annual expenses by the number of freedom years to fund, then add for increased healthcare expenses. Experts recommend adding at least $383,000 for medical expenses including Medicare premiums, out-of-pocket expenses, and long-term care for each household. Adjust as needed. If you know you have healthcare needs that will require more or you want to ensure that you have the absolute highest level of care a la Mayo Clinic, add a buffer.
Example:
$2,000 monthly expenses needed (accounting for social security) x 12 = $24,000 annual expenses. 25 years to fund times $24,000 for the scenario including 75% partial SSI = $600,000. Adding $400,000 for healthcare expenses takes you to $1,000,000.
But if you want to completely de-risk by not counting on any social security income, the number is significantly higher. $8,000 monthly expenses needed (not accounting for social security) x 12 = $96,000 annual expenses. 25 years to fund times $96,000 for the scenario NOT including partial SSI = $2.4M. Adding $400,000 for healthcare expenses gets you to $2.8M.
The Time Value of Money & "Die with Zero" Formula
Now take your total amount of expenses to fund, then multiply by 0.7. That’s the "Die with Zero" formula by author Bill Perkins, taking into account how interest compounds in retirement. The 0.7 formula, Perkins writes, is the fraction of your savings that isn't taken care of by interest as your money sits. The rest is funded by interest.
So if your total amount of expenses number is $1,000,000, then multiplying by 0.7 to account for compound interest, then your "freedom money" number is $700,000.
If you don't include any social security income in your plan, then multiplying total expenses of $2.8M by 0.7 gets you a "freedom money" number of $1.96M.
In the Driver's Seat
At the end of the day, you need to align on the level of risk you’re comfortable with together. If you want to de-risk as much as possible, then it’s best to be on track to hit that upper target or higher. If you’re comfortable with relying on likely partial SSI, it’s good to add a buffer and aim in the middle, making sure to follow the latest SSI developments over time to adjust accordingly.
For those who love playing with tools, there are some great Scenario Planning models available for free, here and here. Having your joint “freedom money” number clearly in hand, now puts you in the driver’s seat to pull the right levers and enjoy life’s ride together.
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TLDR Action Items:
Multiply benchmark annual expenses x 25 to get a quick and dirty number.
Build a tailored calculation by first assessing your individual goals and aligning on the number of freedom years to fund.
Take current expenses as a baseline and adjust down for changes, e.g., home downsizing, empty nest, and "geo arbitrage" options.
Adjust up for new expenses, e.g., new life goals, travel, hobbies, grandkids.
Multiply new annual expenses times the number of freedom years to fund.
Adjust number for likely expected income - pensions, rent, social security.
Add for increased healthcare expenses.
Adjust for the time value of money to get your "freedom money" number!
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