What Is Your Freedom Number?

The Crossover Point

The Crossover Point is the magical moment when the money coming in passively from your investments is more than what you spend. It's like your money is bringing home the bacon while you're busy living your best life. Here’s what it looks like:

Here's how to find your Crossover Point:

An easy way to calculate your Freedom Number is by using what’s called the 4% Rule, which is a rule that says that if you withdraw 4% of your investment portfolio in your first year of retirement, and then adjust that amount for inflation each year after, your money should last for at least 30 years.

Where did this magic number come from? Back in the '90s (when Friends was still on TV), a financial advisor named William Bengen crunched a ton of numbers. He looked at historical data and found that 4% was the "safe withdrawal rate" that would keep your money lasting through retirement, even in the worst economic times.

1.Figure out how much you spend in a year (everything from rent, food, car, avocado toast, botox treatments... get an accurate $$$ on how much your life costs!)

2.Use the “4% Rule” (explained below) to calculate how much income you could withdraw from your investments each year.

3.When #2 is bigger than #1, congratulations! You've hit the Crossover Point!

So what does the Crossover Point have to do with the Freedom Number? Well, they are interrelated concepts — they’re two sides of the same coin. Since hitting your Crossover Point means you have enough income from your investments to live off of, hitting your Crossover Point also means hitting your Freedom Number.

Calculating your Freedom Number

1.Figure out how much you need to live on each year

2.Divide that number by 4% (or multiply by 25, a shortcut for the math-phobes)

Let's break it down with some examples:

Example 1: You need $80,000 a year to live comfortably

Your Freedom Number: $80,000 ÷ 0.04 = $2,000,000

You need $2,000,000 invested to generate $80,000 a year

Example 2: You need $50,000 a year to live comfortably

Your Freedom Number: $50,000 ÷ 0.04 = $1,250,000

You need $1,250,000 invested to generate $50,000 a year

In bad market years, you might want to withdraw less, such as 3.5%, and supplement with side hustle income or tighten the belt on discretionary expenses. Plan on staying flexible... life is inherently unpredictable and the way you handle your money should reflect that!

The 4% Rule is based on a 30-year retirement: If you're planning to retire at 35 and live to 100 (you overachiever, you!), you might need to be more conservative, since you’ll be living off your portfolio for much longer than 30 years. Aim for 3% or 3.5% instead. It assumes a mix of stocks and bonds: The original rule was based on an investment portfolio of about 50-75% stocks and the rest in bonds. If your portfolio is entirely made up of NFTs, crypto, or rare Pokémon cards, your results may differ.

But wait, there's more! The 4% Rule isn't perfect (shocking, I know). Here are some things to keep in mind: The bottom line? The 4% Rule is a fast and easy way to figure out your Freedom Number. It gives you a target to aim for and helps you understand how much you need to save. Which is SO exciting! Defining a specific number gives you something concrete, finite, and therefore achievable… to aim for.

Now that you're armed with this knowledge, go forth and calculate! And remember, whether your Freedom Number is $500,000 or $5 million, the journey of a thousand miles begins with a single step (or in this case, a single dollar saved). You've got this! 💪💰🚀

Next up – now that you know how much money you need to save, let’s talk about where to put that money in the next articles on the 8 accounts you need for financial independence !

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