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Which Assets Should I Include in My Financial Independence Calculations?

Some people get caught up in the debate over what to include in their net worth versus financial independence calculations. While it might get confusing, these are two different numbers to track. There is a subtle difference between the two that can cause your FI target to be off.

Net worth definition

In a recent article, we wrote that calculating your net worth is as simple as subtracting your liabilities from your assets.

Net worth = Assets – Liabilities

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It’s your choice whether or not to include certain assets in your net worth, but the formula is as clear as water. Net worth includes everything you own and owe under the sun.

Your financial independence number

What do you include in your financial independence calculations if you want to retire early or consider yourself financially independent?

This is where things get a little tricky.

Unless you sell it, an asset that does not generate income will not help you cover your annual expenses. But, before we dive into what you should include in your financial independence calculations, let’s take a look at how to figure out what number to aim for.

Funding your lifestyle forever

To figure out your financial independence number, we recommend using the 4% rule to calculate it. To get this estimate, simply multiply your future annual expenses by 25.

FI Number = Annual Spending x 25

For example, if you plan to retire in 5 years and anticipate spending $45,000 per year, you’d need $1,125,000 in your portfolio of stocks and bonds.

If you have any other income-producing assets aside from your stock and bond fund portfolio, such as rental or business income, you can use the following formula to calculate how much you’d need in your portfolio:

FI Number = (Annual Spending – Other Annual Income) x 25

For example, assume Marie has a rental property that generates a $7,000 net profit per year and her annual spending is $40,000. What would her FI number be, excluding the real estate asset?

($40,000 – $7,000) x 25 = $825,000

So Marie’s portfolio would need to be worth $825,000 in order for her to withdraw $33,000 to cover her annual expenses today. This was discussed in greater detail in this post.

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This is also based on the assumption that you will withdraw 4% of your portfolio each year. The 4% rule takes inflation into account. Therefore, you’ll adjust your number by inflation in order to keep your purchasing power.

There are several schools of thought on whether a 4% SWR will last long enough in retirement. For the purposes of this article, we will not go into specifics about safe withdrawal rates and will use the rule as a guideline. To truly understand the many possible scenarios with different withdrawal rates, including a 4% SWR, read Big Ern’s extensive Safe Withdrawal Rate Series.

So which assets should you include in your financial independence calculations?

Simply put, you should include all assets that can generate income and help you fund your early retirement. Let’s look at some of the assets that people get confused about when deciding what to include in their financial independence calculations. The topics that I see people debating online the most are owning a home and a car.

Real estate


Should you include your home in your financial independence calculations?

It depends.

If you intend to sell it and reinvest the proceeds in your portfolio once you have achieved financial independence, you can include approximately 85% of the equity portion in your calculations. I recommend going with 85% because you will incur selling fees and it is better to be conservative.

If you intend to stay put, it wouldn’t be prudent to include it in your financial independence calculations because the equity will not generate income. However, let’s not disregard that equity!

One disadvantage that some of us early retirees may face is a lack of funds in taxable accounts because we may have saved a lot in traditional retirement accounts to take advantage of tax breaks. Here’s where a home equity line of credit (HELOC) can help. If you have equity in your home, you can use a HELOC as part of your emergency fund. A HELOC is simply another tool in your arsenal for accessing cash while your investments grow and before you can access them penalty-free.

Rental properties

Do you own rental properties? If so, as in the earlier example, you can use that annual net income to offset some of your spending.

Do you intend to convert your home into a rental property? The projected income from your rental property can then be used to offset future spending as well.

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How we dealt with our real estate assets when we retired early

In our case, we kept our rental property, which generates a monthly net profit of $1,000. That more than covers our entire mortgage.

So, in early retirement, we’re deducting $12,000 from our annual spending, bringing our portfolio withdrawal down to $41,100 for this year. The great thing is that rent keeps up with inflation. So our annual rent income of $12,000 grows as inflation rises because we raise the rent periodically.

Should I include my car as part of my financial independence calculations?

If you intend to sell it and invest the proceeds in stocks and bonds, you may include the future value of your car.

Otherwise, if you’re keeping it, you just need to factor in the cost of replacing the car in the future in your annual budget or have a lump sum set aside for this purpose.

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Final thoughts

Owning a home and a car is where I typically see people get confused about what to factor in when figuring out their financial independence calculations. Whether you decide to include these or not, the most important thing is to figure out an estimated number and track it.

You can keep track of it with a simple spreadsheet. We did it on a monthly basis. That’s what worked best for us, but you can use whatever frequency works best for you.

Life is not a spreadsheet, so be adaptable and willing to make changes as you go.

We reached financial independence in 2017 and continued to work for another two years. We were primarily waiting until our first child was born to quit our jobs. Everyone’s path will be unique.

Understand that reaching financial independence is only the beginning of your journey to freedom. It’s a worthwhile goal to pursue even if you don’t want to quit your job and retire early to pursue other interests. Financial independence gives you the freedom to choose and live your life on your own terms.

We decided to own our time because we felt that our jobs were interfering with our happiness. We moved on because we were excited to do other things. This freedom also helped us deal with the series of events that have occurred over the last few years. We were extremely fortunate to not be dependent on an employer for the last two years, which could have forced us to choose between losing a job and getting experimental medical treatment.

Of course, knowing us, we wouldn’t have gone down without a fight. 😉 Financial freedom allowed us to maintain our body autonomy. It kept our freedom to choose intact. That was an unexpected but crucial benefit for us.

While on the FI journey, don’t forget to have fun along the way. It’s not worth becoming obsessed with the destination while ignoring the journey. Cheers!


After dedicating 13 years of his career to Vanguard, José retired from the corporate world at the young age of 44. During his tenure at Vanguard, he expertly coordinated the production of both electronic and print educational materials for 401(k) participants. Now, he relishes in his early retirement, cherishing time spent with his family, indulging in his favorite hobbies, seeking out new experiences, and savoring meals in the comfort of his own backyard.

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1 year ago

Another wonderful written article!

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