Passive Income and Financial Independence (FIRE)

Your financial independence (FI) number is the yearly income you need to cover your actual spending without a paycheck. Under the 4% withdrawal rule, you need a portfolio of 25 times that spending, so $91,000 a year takes $2.275 million. With rentals, the target is net cash flow after the mortgage and every operating cost that covers the same $91,000, which in the example below takes 10 rentals with 5 of them paid off. Leaving a job also adds costs the paycheck used to cover, most of all health insurance.

How to calculate your FI number from actual spending

1. Total 12 months of spending from bank and card statements, so annual bills such as insurance, property taxes, and travel are included.
2. Remove costs that end when you stop working, such as commuting and retirement plan contributions.
3. Replace your share of employer health insurance with the full cost. In KFF's 2026 survey, the average employer family plan cost $28,303 a year, and workers paid $7,471 of it. Without the employer, you pay the whole premium for a similar plan, or a marketplace price (see the health insurance section below).
4. Add a margin for costs that run over plan. The example uses 10%.
5. Add the income tax you will owe on the rental income or withdrawals you live on (see the taxes section below). A tax preparer can estimate it from your projected Schedule E income and account withdrawals. The example leaves tax out to keep the arithmetic visible.

An example with assumed figures: a household spends $62,000 a year, including $7,471 for its share of a family health plan. Swapping in the full $28,303 premium raises spending to $82,832. A 10% margin brings the target to about $91,000 a year before income tax, or $7,600 a month.

The 4% rule versus rental cash flow

The 4% rule comes from a 1994 study by financial planner William Bengen. Using market returns and inflation from 1926 on, he found that withdrawing 4% of a portfolio split evenly between stocks and intermediate-term Treasury notes in the first year, then raising the dollar amount with inflation each year, never ran the portfolio out in less than 33 years. He set 30 years as the minimum a retirement portfolio needed to last. A 3% first-year withdrawal lasted at least 50 years in every case he tested, which matters if you stop work at 40.

The rental target is a cash flow figure, not a portfolio size. How many rentals it takes depends mostly on whether they carry mortgages. In the example below, each $200,000 rental nets $301 a month with a mortgage and $1,350 a month once the loan is paid off. Covering $91,000 a year takes about 26 mortgaged rentals or 6 paid-off ones. Real estate vs stocks compares the returns, risks, and work of the two paths.

How many rentals it takes: a worked timeline

The assumed figures for each rental:

• Purchase: $200,000, with $50,000 down (25%) and a $150,000 loan at 7.5% for 30 years. Principal and interest are $1,048.82 a month.
• Cash needed: about $65,000 for the down payment, closing costs, and reserves.
• Income: $2,250 rent minus $900 in operating costs (40% of rent, covering taxes, insurance, vacancy, repairs, and management) leaves $1,350 a month, or $301 after the loan payment.
• Household: saves $40,000 a year and puts all rental cash flow into the next purchase. After the 10th rental, all cash goes to paying off loans, smallest balance first.
• No growth: all figures stay at 2026 levels, with no rent or cost increases.

Two notes on this timeline. Fannie Mae limits a borrower buying a rental to 10 financed properties, and a mortgaged home counts toward that limit, so with a home loan the 10th rental would need a portfolio loan (one the lender keeps on its own books) or a DSCR loan (one that qualifies on the property's rent). Scaling from one property to a portfolio covers those limits. And rents that rise while the loan payment stays fixed would shorten the timeline; how inflation affects real estate shows how much.

Costs early retirees underestimate

Health insurance

Medicare starts at 65 for most people, so a 45-year-old retiree needs 20 years of private coverage. KFF's 2026 averages for employer plans were $9,804 a year for single coverage and $28,303 for family coverage. On a HealthCare.gov marketplace plan, the premium tax credit is available only if household income is between 100% and 400% of the federal poverty level. Marketplace savings for a year use the prior year's poverty figures, so for 2027 coverage, 400% is $86,560 for a couple and $132,000 for a family of four. The test uses modified adjusted gross income (MAGI), which starts from the adjusted gross income on your tax return and includes net rental income after expenses and depreciation, not the cash you receive. The credit is based on your final income for the year, so if you underestimate it you may have to pay back advance credits when you file. Ask a tax preparer to project your MAGI before you enroll.

Taxes

Rental income and expenses go on Schedule E, and the net is taxed as ordinary income. Depreciation lowers that taxable amount: under IRS Publication 527, you deduct the cost of a residential rental building (not the land) over 27.5 years, so a building that cost $165,000 gives a $6,000 yearly deduction. Money in a 401(k) or similar plan usually owes a 10% additional tax if you take it out before age 59 1/2. Exceptions include leaving the employer in or after the year you turn 55, and a series of substantially equal payments over your life expectancy. Those payments must continue until the later of five years or age 59 1/2; changing them sooner brings back the 10% tax on earlier payments, plus interest.

Vacancies and repairs

A rental's income stops between tenants, and one large repair can use up a mortgaged rental's yearly cash flow, which is $3,614 in the example. Your vacancy depends on your local market and how often tenants move out. Hold cash for these costs outside your spending budget; cash reserves for real estate investors covers how much.

When to quit your job for real estate covers the timing decision once your cash flow nears your FI number, and what is passive income covers how much work rental income takes.