Step By Step Guide To Building A Financial Independence Roadmap

Building a financial independence (FI) roadmap is key to understanding when you can act on your financial independence, how you will reach your goal, and what your goal number actually is.

It also acts as an accountability tool, and will allow you to see the downstream affects of an adjustment you make earlier on in your roadmap. Keep in mind though that a roadmap is designed to be a dynamic plan. Things may change (debt added, increased income, unexpected expenses), so just anticipate it.


Step 1) Finding Your Number

How To Determine Your FI Dollar Target

The simple way

(total annual expenses) x (years you plan to be FI)

Most recommend a “years you plan to be FI” multiplier of 25. Your total annual expenses represent everything from your mortgage, to your cell phone bill, to your dog food costs. Sum them all up as accurately as possible.

If you don’t have this yet, no problem. To start keeping track of this number I recommend Mint.com. Another helpful tip is to build a budget that fits you.

The 25x multiplier represents 25 years worth of savings. This assumes you reach financial independence at 55 and live to be 80 years old. You may want to adjust this multiplier depending on what age you plan to achieve FI by and also due to people increasingly living longer (see figure below).

Source: National Institute of Aging

The more accurate (more complicated) way

(retirement $ account value) x (safe withdrawal rate) = years of FI

The more complex way uses what’s known as a safe withdrawal rate of 4%* (assumptions listed below). You should also decide what percentage of your current income you’d like in retirement… do you want to live on $40,000 annually? $80,000 annually? For this example, let’s assume you want to live off $60,000 annually.

*Assumptions of 4% safe withdrawal rate: 30 year retirement period, mixture of stocks & bonds, assumes >= $1 in the bank is a success. MadFientist has a great article with more details.


Step 2) Determining Your Time Till FI

How To Determine Your Time Till FI

(required $ to FI) / (annual $ added to FI accounts) = years until FI 

You calculated the “required $ to FI” in step 1 of this exercise. Now you’ll need to figure out the average growth of your investment accounts annually. You can do this by calculating the annual increase (or decrease) in value each year, then average them based off the number of years you have been contribution.


Step  3) Building Your Roadmap

How To Determine Roadmap Steps

Step 1) Build an emergency fund

The very first thing on your agenda should be to build an emergency fund, even before you begin paying down debt. An emergency fund acts as a place to access liquid cash in times of emergency. The term emergency is relative to each person and their situations, but examples may include an unexpected hospital stay, a car accident, etc. An emergency fund typically represents anywhere from 3 – 6 months worth of total expenses.

Step 2) Contribute to employer matched 401k’s or IRA’s

If your employer matches with 401k’s or any kind of retirement account, contribute at least up to the matching point. It is free money, and compounding interest is extremely powerful in the financial world.

Step 3) Pay down high interest debt

Generally high interest debt is considered anything > 5%. Think of it this way, the stock market on average returns ~7% non guaranteed. By paying down high interest debt, you are getting a guaranteed return, which is something you do not get from the stock market.

Step 4) Contribute to IRA’s and retirement accounts

Max out annual IRA and retirement account contributions. Depending on your income levels you can utilize these for various tax saving strategies. See Roth vs Traditional IRA for more information

Step 5) Contribute to taxable income investments

At this point, you should have some level of retirement portfolio built up between your potential employer matched accounts and your personal retirement accounts. You can examine the risk strategy of them and decide how to diversify your investments. Other investment options in this step include real estate, stock market, collectibles, website holdings, etc.

Step 6) Re-balance portfolio where necessary

Decide how often you want to re-balance your portfolio to reduce exposure and risk. Maybe a certain investment class increased significantly in % allocation of your portfolio, and it poses higher risk than you like? Re-balancing essentially takes that % allocation and redistributes it to get you back into your desired risk vs reward tolerance.


Step 4) How To Monitor Your FI Goals And Adapt When Needed

Checking Your Net Worth

There are a variety of net worth trackers on the internet, Mint.com and Personal Capital just to name a few. These tools allow you to measure your portfolio gain & losses as well as the distribution of asset classes so you can manage risk tolerance.

Adjusting For Risk

See step 3.6 above to learn more about the concept of re-balancing your portfolio.

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