How The Number Is Irrelevant To Financial Independence

There are many sources of financial information that focus on how much you need to achieve financial independence (aka retire).

$3 million? $2 million? $5 million?

For many, this can be an incredibly abstract concept, because, while it’s fun to watch your Balance Sheet grow, it isn’t as applicable to your financial life all by itself (except to tell you how well your portfolio is growing and how disciplined you are in saving money).

But really what it comes down to is, how much of your income would you need to replace?

Because that’s really the essence of it: Instead of actively working as a means to create income, you want to be able to create enough passive income that allows you to no longer work.

I believe in multiple sources of inspiration to achieve financial independence: It’s not just about focusing on the Balance Sheet (eg ‘The Number’).

More importantly, it’s about focusing on your lifestyle and it’s underlying expenses: What activities will continue? What spending will increase? What needs will ‘go away’? Hopefully more will go away than increase, because that allows you to reach financial independence and retire sooner.

Income Replacement Ratio‘ is a concept you are likely already familiar with, although you may not know it by this name.

It’s basically the percentage of your current income you would have to replace in order to actually no longer have to work.

Start by looking at the income that needs to be replaced. Then reverse-engineer from there to see how long you need to plan for (age 85? 90? 95?). You don’t want to sell yourself short, you may need to estimate a longer life than you think.

Then your age: How many more years do you want to work? Hopefully that is a number that aligns closely to how many more you need to work.

It’s crucial to recognize the gap between the 2, because you want to minimize the gap so that you continue to have a worklife that is meaningful beyond a paycheck.

From there, you are now more informed to determine if you really are saving as much as you can. Also, at this point you will be more motivated to save, because you have a more concrete number you are trying to achieve (‘once my assets can provide me with ‘x’ amount a month, I’m free!).

So, while it continues to be crucial that your Balance Sheet grows and grows, the reason we need it to continue to grow is what it provides you with:

A more concrete vision and applicable number for your future: The target income replacement that drives ‘The Number’ on your Balance Sheet.

Since the most significant resource for your ability to retire is you, it’s critical that you envision your future self in terms of your current self saving enough to propel that future vision into reality.