Every time financial independence comes up in a conversation with somebody who is new to this idea, it is often received with skepticism. This is understandable. When I first heard about it, I was skeptic as well. After reading stories about early retirees, meeting some of them, and crunching the numbers myself, I realized that reaching financial independence long before you are 65 years old is actually possible!

At that time, spring of 2015, I didn’t have any significant sources of income as I was just about to begin grad school, and Elisa had been working for about one year. With just one income, we continue to grow our stash and today it stands close to $82,000. I have now graduated and will be starting my full-time job at an accounting firm soon. Taking into account my soon to be salary, I put together our 10-year plan to financial independence.

Financial independence is reached when your passive income exceeds your expenses. For us, this is projected to happen in the year 2025. Here is a snapshot of the spreadsheet I used. You can download a free copy to plan your own journey at the bottom of this post.

Combined income after taxes: this represents the part of our paychecks that actually belongs to us. Part of the gross figure belongs to Uncle Sam’s and therefore should not be included in this calculation.

Annual spend: includes everything we spend on a year. Click here for a breakdown of our 2015 expenses.

Annual savings and savings rate: these two are calculated automatically based on your income and expenses.

Rate of return of investments: Stocks have historically returned about 9% per year on average (7% when taking inflation into account). I decided to use 5.5% to be a bit more conservative.

Withdrawal rate: represents the amount you can withdraw each year from your portfolio without running out of money in retirement. A 4% withdrawal rate has a 95% probability of success (A.K.A. 95% chance of not depleting your portfolio during your lifetime). I used 3.75% to be slightly more conservative. Click here if you wish to learn more about withdrawal rates.

Investments: stocks, index funds, bonds, rental properties, REITs, and any other investments you own.

### Final Thoughts

Reaching financial independence is not a competition so focus on your own journey and the things you can control. We are excited to continue our path to financial independence and will be posting updates on how results compare to the plan.

Download the spreadsheet I used and create your own plan. it is free!

Looking forward to checking it out Juanito. Does the formula include emergency funds for unforeseen circumstances ? Health, loss of job, visa renewal etc?

It does not include emergency funds. If you want to include that just increase your annual spend (cell B3) a bit.

Also, keep in mind it does not include good stuff. Like salary increases, bonuses, expense reductions, tax optimization (e.g. maxing out IRA accounts), etc.

So what you see in the post is a “base case” scenario. You can certainly create your own “worst case” and “best case” scenarios if you want.

Do you not take inflation into account for your expenses?

Great question, Confused.

Inflation is not taken into account for expenses specifically.

However, the model is inflation neutral because:

– The rate of return is real (5.5% is already adjusted for inflation)

– I also keep income constant (even though it is supposed to at least keep up with inflation).

Let’s assume inflation will be 2% for the next 10-years. I could have built the model with a 7.5% rate of return, and increase my expenses and income by 2% every year. In that case, the timeline would not change at all. What would change would be the dollar figures. I chose to keep the model inflation neutral for 2 reasons:

– I don’t know what inflation is going to be so I rather see everything in today’s dollars.

– The model is simpler this way while it still works.

So you’re actually expecting a 7.5% return indefinitely (or actually a 9% return as it appears in the post) with no tax owing on the growth/dividends?

The rate of return I assume is 5.5% as indicated under “rate of return on investments”.

9% to 9.5% is what stocks have returned historically, 7% to 7.5% is what stocks have returned historically when adjusting for inflation.

Regarding taxes:

– The income figure is post-tax so I have already paid taxes on that money. I can invest it in a Roth where it will grow tax free.

– Part of the investments are in tax deferred accounts like 401k’s and IRA’s. So those will also grow tax free.

– There is a portion that is in regular taxable accounts. As discussed in the post, 5.5% is a conservative rate of return (by historical measures), so this accounts for the fact some of the dividends will be taxed along the way.

I earn 10k on paper but in the real sense, after deductions, I take home 8700-9000k monthly.

However, I’d love to retire by 40.

I’m 22. How can this be?

Knowing fully well I have expenses showing up everyday.

Thanks.

Thank you for your comment Temitompe.

Do you know what your annual or monthly expenses are? Expenses are a key piece of the early retirement puzzle.

If are not sure what they are, I’d suggest reading the following post:

https://financeclever.com/tracking-expenses-lessons-learned-2015/

Once you know what those are, I can give you a more detailed response.

Question about the savings in the spreadsheet. Are we investing that entire savings amount into the stock market? I always have trouble understanding this. I do have savings every year but I set aside some for my bills or emergency expenses. Is the assumption to invest every dollar of income you don’t spend?

Great question Scott.

The short answer is yes, all of this money should be invested.

This assumes you already have an emergency fund in place. If that’s not the case, some of the savings will go towards building that emergency fund, so not all of it will go into investments.

Regarding paying bills, that gets accounted for before you arrive to savings.

Income – bills & expenses = savings.