How Much Should You Save to Achieve Financial Independence?

How Much Should You Save to Achieve Financial Independence?

How Much Should You Save?

Do you feel like not working some days?

Wouldn’t it be nice to have the financial freedom to choose what you work on, when you work on it, and for how long?

To have this superpower, you need to achieve financial independence.

Financial independence means you have enough invested that you can live off of the money that your investments generate for you.

In this article, I’m going to show you how much should you save in order to achieve financial independence.

Examining the 50/30/20 Budgeting Method

Basically, this method suggests you allocate your after-tax income in the following manner:

  • 50% of your income is for things you need to have and can’t do without rent, groceries, utilities, minimum debt payments, etc.
  • 30% of your income on things you want but don’t necessarily need like restaurants, movie theaters, the 3rd pair of shoes, an NBA league pass, etc.
  • 20% of your income is towards debt payments, savings, and investments.

While it may be a decent starting point for many, the 50/30/20 method should not be blindly followed and should be adapted to suit the particular circumstances of different individuals.

If you are a high earner making $20,000 after tax each month, spending 30% of that or $6,000/month on things that you don’t necessarily need but want to have is probably excessive. 

You should probably be putting away a higher percentage of your income if you’re a high earner. After all, just because you have a high income today doesn’t mean you’ll always have one.

To determine your savings rate, start with what you are saving for first.

I’m assuming many of my readers share my goal of achieving financial independence i.e. the ability to live off the income my investments are generating and to decide what to work on.

I don’t necessarily want to lounge around on a beach somewhere all day eating Captain Crunch. The laid-back Captain Crunch lifestyle may appeal to me for a day or two but I’d quickly get bored and want to do something productive.

The prophet peace be upon him said (translated into English): “If the day of judgment is upon you and in the hand of one of you is a small plant, if they are able to plant it before the day of judgment happens then they should plant it.”

Every minute of life is an opportunity to grow closer to our creator through our good deeds and we should strive to take advantage of every minute of life we are blessed with to do exactly this.

What financial independence gets you is the ability to choose what you want to work on and for how long. This is something that I think is worth striving for.

How much money do you need to have to be Financially Independent?

An exhaustive study of historical returns was conducted in 1994 which concluded that, during the last 50+ years, even during untenable markets, no historical case existed in which a four percent annual withdrawal exhausted a retirement portfolio in less than 33 years. (1)

This leads to something called the 4% rule which states that you should withdraw 4% of your portfolio each year in retirement for a comfortable life.

To put the 4% rule in numbers, if you have 100K saved, you should be able to withdraw $4,000 the first year and the inflation-adjusted equivalent every year after that for at least 33 years before you run out of money. 

It’s important to note here that the 4% rule isn’t really a rule. It’s more of a guideline with success depending on a number of factors such as actual inflation and the rate of return on your investments.

Just because the 4% rule has worked on the historical numbers doesn’t mean it will continue to work in the future. As they say in the investment world, “past performance is not a guarantee for future results”. 

However, I do think the assumptions of the 4% rule regarding inflation and return are quite reasonable. Accordingly, I think the 4% rule provides a useful tool for getting a ballpark estimate of how much savings we need before we can say we’ve achieved financial independence.

For a 4% withdrawal to cover your annual expenses, you’ll need an amount in savings that is 25 times your annual expenses.

Scenario 1

Let’s assume your annual expenses in retirement are estimated to be 50% of your income.

This means you’ll be able to reach 25 times your annual expenses, assuming a 5% average annual return on your savings (stock market returns are historically at around 8% annually but I assumed a 5% return to account for inflation. In other words the 5% return represents real growth of purchasing power), with the following (savings rate, years of savings) combinations:

Savings Rate  (as a % of income)Number of Years to Reach 25 Times Expenses (assuming retirement expenses are 50% of income)

This is rather powerful.

This means that if the 4 percent rule holds and you are able to live off of 50% of your current income and save the remaining 50% for 16 years, you would be able to maintain your lifestyle for at least another 33 years after that without having to work. 

Let’s say you started this policy at 22, you could theoretically achieve financial freedom by the time you’re 38!

Scenario 2

What about if your annual expenses in retirement are estimated to be 75% of your current annual income? Which is perhaps a more realistic approximation for many.

This means you’d be able to reach 25 times your annual expenses, assuming a 5% average annual return on your savings, with the following (savings rate, years of savings) combinations:

Savings Rate (as a % of income)Number of Years to Reach 25 Times Expenses(assuming expenses are 75% of income)

This second scenario seems more feasible for most, that is, to live off of around 75% of current income, save the rest and be in a position to retire in 32 years with the same standard of living you have today.

Keep in mind my calculation doesn’t account for taxes on withdrawals which would change the calculations somewhat.

What if I can’t save that much?

I would caution from falling into the trap of saying: well there’s no way I can save 25% of my income, I’m living hand-to-mouth over here, so I’m just not going to bother. 

Save whatever it is you can. 1% is better than 0%!

If your employer offers a 5% match on your contributions to your 401(K) and you contribute 5% of your salary then you’re already at 10% of your pre-tax salary. You’re about halfway there.

Make sure you take advantage of tax-advantaged accounts such as 401(k)s and IRAs and make absolutely sure you take advantage of any matching contributions your employer may offer.

If you get a raise, instead of increasing your spending, try increasing your savings rate instead. I’m not saying you should live in poverty, I’m saying make sure you have a handle on your spending.  

Allah SWT says in the generous Quran:

لَا تَجْعَلْ يَدَكَ مَغْلُولَةً إِلَىٰ عُنُقِكَ وَلَا تَبْسُطْهَا كُلَّ الْبَسْطِ فَتَقْعُدَ مَلُومًا مَحْسُورًا

And don’t have your hand chained to you neck, nor stretch it forth to it’s maximum length, lest you find yourself blamed and poor.

Picking Up a Side Hustle

Remember increasing your savings rate is going to come in one of two ways: either you cut back on spending or you increase your income. If you don’t think you can cut back on your spending anymore or you simply don’t want to then consider picking up a side hustle to increase your income.

Even if the income from a side hustle isn’t too great, often the tax write-offs that you get make it well worth it. Plus, this side hustle may give you something to do when you stop working your 9 to-5 job which can dramatically increase the fun you have in retirement.

Save or Pay Off Debt?

Save enough for an emergency fund first.

There is a range of views on this topic that range from only having $1000 in cash to having at least 3 to 6 months of expenses in cash. I tend to fall in the 3 to 6 months of expenses camp.

Once you have your emergency fund in place start throwing everything else at your debt until your out of it.


Instead of following the 50/30/20, start with your savings goal and then work your way back towards figuring out how much you should spend on your wants.

Remember if you want to achieve financial independence you’re going to want to have at least 25 times your annual expenses in retirement saved up.

Depending on how aggressive you are with your savings and budgeting, reaching this goal may not be as far off as you think.

Who knows, maybe someday we’ll bump into each other while lounging on the beach eating our favorite cereals, and reminiscing on this article.


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