Financial Independence

4 min read

Financial Independence

Financial independence is the point where your money generates more than you need to live --- not “rich,” but free. A ratio, not a number.

What is it?

Financial independence (FI) is reached when your investment income and passive returns cover your living expenses without requiring active employment. It is not retirement (you may choose to keep working). It is not wealth (you may live modestly). It is optionality --- the ability to choose what to work on, for whom, and on what terms.

The formula is simple:

FI = Annual expenses × 25

This is the “4% rule” inverted: if you can safely withdraw 4% of your portfolio annually without depleting it (based on historical stock market data), then a portfolio of 25× your annual expenses sustains you indefinitely.1

If your annual expenses are CHF 60,000, your FI number is CHF 1,500,000. If you can reduce expenses to CHF 40,000, it drops to CHF 1,000,000. The savings-rate is the engine: it simultaneously reduces the target (lower expenses = lower FI number) and accelerates accumulation (higher savings = faster growth).

In plain terms

Financial independence is when your money works harder than you have to. You still work --- but because you choose to, not because you must. The difference changes every decision you make.

How does it work?

1. The ratio, not the number

Most people think of FI as a large, paralysing number. The reframe: FI is a ratio between passive income and expenses. You can move toward it from both sides --- increasing passive income (saving, investing) and decreasing expenses (structural changes, not deprivation).

The ratio view also reveals partial independence. If your investments cover 50% of your expenses, you only need to earn the other 50% --- meaning you could work half-time, take lower-paying but more meaningful work, or absorb a career disruption without crisis. FI is not binary. It is a spectrum.

2. The safe withdrawal rate

The 4% rule comes from the Trinity Study (1998), which tested portfolio survival rates across historical market conditions. A portfolio of 50% stocks and 50% bonds, with 4% annual withdrawals adjusted for inflation, survived 30+ years in 95% of historical scenarios.1

Criticisms are valid: future returns may be lower than historical ones, especially in a low-interest-rate world. Swiss-specific factors (lower inflation, different tax treatment, mandatory pension contributions) modify the calculation. Conservative planners use 3-3.5% as the safe withdrawal rate, implying a target of 28-33× annual expenses.

3. FI for entrepreneurs

For someone whose goal is to build ventures --- not to retire --- FI takes a different shape. You may never accumulate 25× expenses in passive investments. Instead, you build a combination of:

  • Partial FI through investments (covering 30-50% of expenses)
  • Business income from ventures you own (variable but growing)
  • Entrepreneurial-runway as a bridge (liquid savings buying time)

This hybrid model is more realistic for someone transitioning from employment to independence. You do not need full FI to leave employment. You need enough passive income and runway to buy the time required for your ventures to generate the rest.

Why do we use it?

Key reasons

1. Strategic direction. FI gives your savings-rate and cash-flow-architecture a target. Without a target, saving feels like deprivation. With one, it feels like progress. 2. Decision filter. Every financial choice can be measured against: “Does this move me toward or away from independence?” The filter is simple and powerful. 3. Optionality. Even partial FI transforms your negotiating position --- in employment, in business, in life. The person who can walk away from a bad deal always gets a better deal.

Check your understanding

Where this concept fits

Where this concept fits 

graph TD
    SR[Savings Rate] --> FI[Financial Independence]
    CI[Compound Interest] --> FI
    CFA[Cash Flow Architecture] --> FI
    FI --> ER[Entrepreneurial Runway]
    FI --> PC[Portfolio Construction]
    style FI fill:#4a9ede,color:#fff

Sources

Footnotes

  1. Cooley, P. L., Hubbard, C. M., & Walz, D. T. (1998). “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable.” AAII Journal, 20(2), 16-21. The “Trinity Study.” Updated analyses by Wade Pfau and others have refined the conclusions but the 4% rule remains the standard reference point. ↩ ↩2

Graph View

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