Our Journey to Financial Independence: Where We’ve Been

Mountain Road

This is the first of a three part series detailing our journey to financial independence.  Part One will cover how we have done to date and what has gotten us there.  Part Two will explore where we go from here, including the impact of potential actions we are considering with our finances.  Part Three will review the workings of a downloadable Excel model you can use to calculate your own progress towards Financial Independence.  Enjoy!

What is Financial Independence?

It’s a good question, and will undoubtedly mean something different to everyone.  In my very first post I said that financial independence to me means being able to downshift my job to spend more time with my family no questions asked.  While I still believe that to be true, I wanted to put some hard numbers to it to validate.

When viewed through that lens, you’ll see that we in fact aren’t yet financially independent but instead are well on our way.  You’ll also see that despite changing jobs and moving out of state (with a big cut to pay and capacity to save along with it), we really haven’t put that big a dent in our timeline.  That’s a big win in my book!

The method I think is most valuable for determining financial independence is based on how much your investment portfolio can support your annual spending.  Once it can fully support it, congrats you’re there!  There are two ways to calculate it:

  • Having a portfolio balance equal to a certain multiple of your annual spending.  I’ve seen others use anything from 25 to 40 times spending.  The higher the number, the more conservative you’re being.
  • Hypothetically withdrawing a certain percent of your portfolio each year and comparing that to result to your annual spending.  The lower the withdrawal rate, the more conservative you’re being.

I prefer the second way, because it very directly shows you exactly how far along you are in the journey to FI.  With a little additional math too, you can calculate how long it will take to get there.

How to Calculate Percent to FI

For purposes of calculating how close one is to achieving FI, you only need to to know two numbers from your finances:

  • Current investment portfolio balance
  • Amount of annual expenses (budgeted, prior twelve months, etc.)

In addition, you’ll have to pick an assumed withdrawal rate from your portfolio.  I’d suggest using one of the following:

  • 2% withdrawal rate to be very conservative.  It implies you will have saved 50 years of expenses in your portfolio.
  • 3% withdrawal rate to still be conservative, but not quite as much.  It implies 33.3 years of expenses saved.
  • 4% as a reasonable baseline.  It’s not too aggressive and in line with the standard advice for retirement planning.  It implies 25 years of expenses saved.

To calculate, simply multiply your portfolio value by the assumed withdrawal rate.  Then, divide your annual expenses by the result.  Voila!  What you get is how close you are to achieving financial independence expressed as a percent.

How to Calculate Years to FI

With a little extra information, you can transform the % to FI calculation into the number of years it will take you to get to 100%.  You will need:

  • Amount of annual savings (budgeted, prior twelve months, etc.)
  • Assumption for real (after inflation) returns on your investment portfolio.

To calculate, you can use the NPER (number of periods) function in Excel, which is what I’ve done for you in the downloadable model we’ll review in Part Three.  What this function does is calculate how long it will take your portfolio to grow to support your annual expenses, based on how much you’ll add each year through savings and how much it will grow through returns.

PVF’s Road to FI

Now that you have a baseline for how I think about FI and how to calculate it, I’ll go through each of the components above from my family’s finances.  I have good data back to 2010; anything prior is a little messy and not that meaningful anyway.

Investment Portfolio Growth

Our investment portfolio is comprised of all our financial assets: bank accounts, 401ks, IRAs, and HSA, taxable brokerage and other investment accounts and life insurance cash value.  Pretty much anything that could generate a return and be used to fund living expenses counts.  I do exclude the 529 college savings accounts I hold for my kids since that money is already earmarked for them.

Investment Portfolio Balance
Investment Portfolio Balance

As you can see, we have experienced really tremendous growth in our investment portfolio over the past 7 or so years.  We’re currently sitting at about 3.5x where we were at the end of 2009.  For a while the slope was consistent enough to ski down.  The little bumps are when we had some bonuses come in.  The big dip in 2010 was the down payment on a condo coming out.  We were also pretty much flat in 2016 as we pulled money out to buy a house.  More on that later.

Investment Portfolio Growth
Investment Portfolio Percentage Growth

In percentage terms, the growth each year has been impressive too.  Every year of growth building the portfolio just increases the amount of annual expenses it can cover and move us closer to FI.

Drivers of Investment Portfolio Growth

Where is that growth in our investment portfolio coming from?  Here is a breakdown of growth each year between savings, gains and other changes:

Investment Portfolio Growth Contribution
Investment Portfolio Growth by Source

Savings is the combination of contributions to investment accounts, employer 401k matches and regular paydown on our mortgage.  Investment gains include reinvested dividends, unrealized gains and growth of life insurance cash value.  Other is primarily when we made large principal payment on our mortgage, usually after receiving a bonus.  We didn’t know how long the bull market would last, so were consistently deleveraging in anticipation of another downturn.  Overall, actions we took like savings contributed to about two-thirds of the growth over the past 7 years, while things out of our control like market returns.

Investment Portfolio Contribution Pie
Investment Portfolio Growth by Source

Savings vs. Spending

We were able to contribute so much to our investment portfolio as a result of a pretty high savings rate over the past 7 years.  While it was not consistent, our income wasn’t that consistent either.  A large portion of our annual income came around once a year as a bonus, which was pretty much always saved/invested or used to pay down our mortgage.  By saving so much when the times were good (financially anyway), we were able to make our career/lifestyle change from a position of strength.

After-Tax Savings Rate
After-tax Savings Rate

Up until 2016, our spending pretty consistently grew each year.  Some of it was keeping up with the Jones’s, but a lot was just not being super dedicated to a budget.  We were making a decent amount of money, so sad to say there wasn’t a ton of pressure to hold the line on expenses.  We were still saving a ton, so didn’t fuss much about it.

Spending Growth
Annual Growth in Spending

The big change happened in 2016, when we did a 180 on our careers and lifestyle.  I left a high paying but high stress job and we moved from the big city to a different state with much lower cost of living.  Despite paying for childcare now that we weren’t before, our expenses took a nosedive.  While we aren’t able to save more as a result since our jobs don’t pay as well, our portfolio doesn’t need to nearly as big since it has to support less.

I noted above that our portfolio was flat in 2016 because we took some money out to buy a house.  With cash.  Combined with the proceeds from selling our condo, we were able to buy a home and eliminate all our mortgage payments.  That change represents easily half of the decline in our annual expenses.

% to FI

Running our historical numbers through the % to FI math I highlighted above yields the following trends:

Percent to FI

As expected, the more conservative the withdrawal assumption, the further we have to go to reach the 100% threshold.  But the biggest thing you’ll notice is the huge jump in 2017.  That’s the power of dropping our annual expenses as much as we did.  We were chugging along at a decent clip before, but living on a lot less is what really moves the needle.

I must say it feels pretty good to know that while I’m just in my mid-thirties, I’m already halfway to being completely financially independent under baseline assumptions.  Even under ultra conservative assumptions, we’re 25% of the way there.  That’s also without doing any of the additional actions with our finances that I’ll explore in Part 2.

Years Remaining to FI

While it’s good to know where I’m at today, I want to know how long it’ll take to get me to 100%.  I also wanted to see how our big lifestyle change impacted that as well.  In order to calculate the years remaining, I took our annual savings each year would continue into the future and assumed we’d earn an 4% real return in the future.

Years Remaining FI

Because our portfolio was growing so much despite our spending staying relatively constant, we were chipping away at our time to FI up through 2014 (we ticked up a bit in 2015 with extra kid expense and my wife on maternity leave).  At that point we would have 8 years left to go under baseline assumptions, but I don’t know if I had eight more years of work like that in me.  What’s the point if all you do is work?

While 2016 saw our time to FI increase, I think this was as much an impact of us doing our big move halfway through the year as anything else.  2017 is really our first full year under the new arrangement.  And we’re right back to only being 8 years away from FI that we were before.  True, the stock market gains in 2017 have helped a lot, but it feels great to know that our vastly improved work/life balance only “cost” us three years of additional work.  I can confidently say that those three years will be infinitely more enjoyable.


So there you have it.  Looking purely at the math I’m 50% of the way to financial independence with only 8 years left until I get there.  Under more conservative assumptions, it’s 38% with 12 years.  At the most conservative I could go, I have 19 years of work left.  That means I’ll be able to retire in my mid-fifties at the latest with absolute confidence in my ability to do.

Thanks for sticking with me through my journey to FI so far.  Be sure to read Part 2 to see where I’m going next and Part 3 for an overview of the model you can use to calculate your own journey to FI.  You can download the model here.

Where are you on your path to FI?  What additional steps (pun intended) can you take to speed the journey?

John started Present Value Finance in 2017 to share his experiences and insights on personal finance to help people make better decisions and take control of their financial lives.  

He achieved financial independence in 2016 by walking away from the high stress world of corporate finance to focus on his family. He’s a husband, father, family CFO, and all around finance geek.

He uses Personal Capital to track his spending, investments and investments for free and recommends you do too.


    1. Thanks Mrs. Kiwi. I think I’m on your boat too. The last thing I want to do is go full belt and suspenders and work longer than I have to just to be triple certain I’ll be ok. I haven’t even counted social security which is another potential source of value as well.

    1. Thanks for the kind words, Jason. Agreed on the marathon comment. It’s more like an ironman, but one where you don’t know the course in advance

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