Should Your Mortgage Count in Your FI Number? A Worked Example of Temporary vs. Permanent Expenses

The popular "25 times your spending" shortcut works best for costs that last forever. A mortgage with an end date is a different kind of expense.

Should a mortgage be included in your FI number?

Yes, but usually not at 25 times the payment. The 25x shortcut is built for spending that continues for life and rises with inflation. A fixed-rate mortgage does neither. A common approach is to multiply only your permanent spending by 25, then add the loan's remaining balance, or a separate fund that covers the payments until it ends.

That distinction can move your target by hundreds of thousands of dollars, which can mean years of extra work. This guide walks through why the shortcut overcounts, then builds a full worked example you can copy with your own numbers. It explains the math and the trade-offs; which path fits you depends on your own situation.

If you are new to the idea of a target number, start with our guide on how to calculate your financial independence number, then come back here.

Why the 25x rule fits some expenses and not others

The 25x shortcut comes from the so-called 4% rule. In a 1994 study, financial planner William Bengen tested withdrawal rates against U.S. market history going back to 1926. He concluded that, assuming a portfolio needed to last at least 30 years, a first-year withdrawal of 4%, followed by inflation-adjusted withdrawals in later years, "should be safe." In his historical tests, it never exhausted a portfolio in fewer than 33 years. Since 4% is one twenty-fifth, a portfolio of 25 times your yearly spending supports a 4% first-year withdrawal.

Two details in that research matter for a mortgage.

First, Bengen's withdrawals were adjusted up or down for inflation every year. Groceries, utilities and travel tend to cost more over time, so building the rule around a rising withdrawal makes sense for them. A fixed-rate mortgage payment, by contrast, stays the same dollar amount until the loan is paid off. Treating it like a cost that grows with inflation sets aside money for increases that will never come.

Second, the rule assumes the spending lasts as long as you do, at least 30 years. If your mortgage has 12 years left, multiplying the payment by 25 sets aside money for decades of payments after the loan is gone.

Our explainer on the 4% rule covers the rule's limits in more detail, including why some planners prefer a lower rate for very long retirements.

A worked example: one household, three answers

Let's use a hypothetical couple. These numbers are made up for illustration, and the math is rounded to the nearest dollar.

• They plan to spend $72,000 a year once they reach financial independence.
• Of that, $21,600 a year ($1,800 a month) is the principal and interest on a fixed-rate mortgage.
• When they plan to stop working, the mortgage will have a $200,000 balance, a 4.5% interest rate and 12 years (144 payments) left. At that rate and term, the monthly payment works out to $1,800.
• Their other spending, including property taxes, homeowners insurance, food, health care and everything else, is $50,400 a year.

Answer 1: The shortcut. Multiply all spending by 25: $72,000 × 25 = $1,800,000.

Answer 2: Pay off the mortgage on day one. Multiply only the permanent spending by 25 and add the loan balance: ($50,400 × 25) + $200,000 = $1,260,000 + $200,000 = $1,460,000.

Answer 3: Keep the mortgage and fund it separately. Multiply permanent spending by 25, then add a side fund big enough to make the remaining 144 payments. How big depends on what the side fund earns:

• If it earns 3% a year, it needs about $217,449.
• If it earns 4% a year, it needs about $205,592.
• If it earns 4.5%, the same as the mortgage rate, it needs exactly $200,000, the loan balance.

At a 4% return, Answer 3 comes to about $1,465,592.

Either way, the split approach lands near $1.46 million, roughly $340,000 below the shortcut. For a household saving $40,000 a year, $340,000 is about eight and a half years of contributions before any investment growth. That is the real cost of the shortcut: it can keep you working long after your money could cover your life.

Option 1: Paying off the mortgage when you reach FI

Paying off the balance in one lump sum is the simplest version. Your monthly spending drops to $4,200 ($50,400 a year), and your portfolio only has to support costs that rise with inflation, which is what the 4% research modeled.

The cost is interest you would otherwise have paid at a low fixed rate versus whatever your money might earn elsewhere. In our example, keeping the loan would mean about $59,202 in remaining interest over 12 years. Paying it off avoids that interest but also removes $200,000 from your invested savings on day one.

A few practical points before choosing this route:

• Check for a prepayment penalty. According to the Consumer Financial Protection Bureau, some lenders charge a fee if you pay off all or part of a mortgage early, though not all mortgages have one. Your loan documents or your servicer can tell you.
• Think about where the money comes from. A lump sum pulled from a traditional 401(k) or IRA counts as taxable income in the year you take it, which could push you into a higher bracket. Money from a taxable brokerage account may trigger capital gains tax. Check current brackets and rules on irs.gov before you plan the withdrawal.
• Liquidity matters. Home equity is hard to tap quickly. Once the money is in the house, getting it back usually means borrowing against the home or selling it.

Option 2: Keeping the mortgage and building a side fund

The second route keeps your cash invested and treats the mortgage as a known, fixed bill with an end date. You set aside a separate pot of money sized to cover the remaining payments, often in safer, predictable holdings such as a ladder of CDs or Treasury securities that come due as payments are needed.

The appeal is flexibility: the money is still yours and still accessible, and if the side fund earns more than the mortgage rate, you end up with something left over. The risk runs the other way. If you put the side fund in stocks and the market falls early in your retirement, you could be selling at a loss to make mortgage payments, a problem known as sequence of returns risk. That is why many people who use this approach keep the side fund separate from their long-term portfolio and in lower-risk holdings.

Notice what the example showed: when the side fund earns less than the mortgage rate, it needs to be bigger than the loan balance. At 3%, the side fund needed about $217,449 to cover a $200,000 loan at 4.5%. When safe returns are below your mortgage rate, paying off the loan may need less money upfront than funding the payments. When safe returns are above your rate, a side fund can need less.

What stays in your budget after the mortgage is gone

Owning a home free and clear does not make housing free. When people separate their mortgage from their FI number, a common mistake is to pull out the whole monthly housing payment, including the parts that never go away.

Many homeowners pay property taxes and homeowners insurance through an escrow account bundled into their monthly mortgage payment. The CFPB explains that lenders often require escrow so the bills get paid, and that property taxes and insurance premiums can change from year to year. Once the mortgage is gone, the escrow account ends, but the tax and insurance bills keep coming. They belong in your permanent spending, multiplied by 25, because they continue for life and tend to rise.

The same goes for maintenance and repairs, homeowners association dues and utilities. Only the principal and interest portion of your payment is temporary.

If you have an adjustable-rate mortgage, the payment can change when the rate resets, so the side-fund math above, which assumes a fixed payment, would need to be revisited each time the rate changes.

Step by step: building your own split FI number

Here is the process from the example, applied to your own numbers.

1. List your expected yearly spending at FI. Use a recent year of actual spending as a starting point, then adjust for costs that will change, such as commuting or health insurance.
2. Pull out every expense with a firm end date. For most people that is the principal and interest on a fixed-rate mortgage. A car loan or a private school bill for a child who will graduate might also qualify.
3. Multiply the permanent spending by 25. In the example, $50,400 × 25 = $1,260,000. If you use a more cautious withdrawal rate, such as 3.5%, divide by that rate instead.
4. Price each temporary expense. Either use the remaining balance (if you plan to pay it off) or estimate a side fund for the remaining payments at a conservative return. Your loan servicer's statement shows the payoff balance and the number of payments left.
5. Add the two pieces together. That total is a more precise target than the shortcut.
6. Revisit it once a year. Your balance shrinks with every payment, so the temporary piece of your number gets smaller over time.

Spreadsheet programs can do step 4 for you. In most of them, the present value function, PV(rate/12, payments left, -monthly payment), returns the side fund needed at a given annual return.

Trade-offs to weigh

Neither option is right for everyone, and many households end up somewhere in between, such as paying extra toward principal in the last few working years so the remaining balance at FI is smaller.

Some people value the peace of mind of owning their home outright and are willing to hold a larger sum upfront to get it. Others prefer to keep money invested and accessible, accepting some market risk in exchange for flexibility. Your mortgage rate, the returns available on safe investments, your tax situation and how you would feel in a market downturn all shape which approach fits.

What the math does show clearly is that the 25x shortcut and a mortgage with an end date don't mix well. Separating temporary costs from permanent ones gives you a target that reflects how your spending will actually change, and it may show you are closer to financial independence than you thought.