Retirement is a far-off milestone for most people. Any 21 year old fresh faced college graduate sees the coming decades of their life dominated by careers and families, with the option to quit work at least 4 decades away. Put another way, for someone who has only been alive for 21 years, age 65 is triple their time on this planet. So it makes sense that the word retirement evokes some magical distant period despite the anxieties and pressures of having to plan for it now.
The “typical” path of graduate college – start a career – buy a car – get married – buy a house – start a family – work for 40 years (not just maintaining but improving one’s lifestyle along the way) – retire at 65-70 and enjoy 10-20 years to yourself – has been discussed and analysed to death.
It’s pretty common knowledge that today people don’t stay in the same job their whole career and retire with a pension. That they’re weighed down by student loans and buying houses and starting families later. That “work” as come to mean a combination of full-time and part-time jobs, side gigs, and freelance work, that the 40 year career is nearly extinct, and that there is a general feeling that the middle class is falling behind.
Enter Financial Independence, or FI. FI simply means having enough income producing assets that you don’t need to do paid work to survive. Most commonly these assets are investments. The Trinity Study is a common starting point for figuring out how much you need on the basis that you can generally withdrawal 4% of your portfolio annually. The general consensus is that while the study covered only 30 year periods, portfolios usually had a decent amount of money leftover and some more money than when they started.
To find out much you need, take your annual expenses and multiply by 25 (hence the 4% annual withdrawal). As for how to go about saving that much in a relatively short amount of time, all I can tell you is to check out The Shockingly Simple Math Behind Early Retirement by Mr. Money Mustache. This is one of the first articles I read about Financial Independence and has changed my life (like I imagine thousands of other people’s as well).
Not Necessarily Retirement
Early Retirement and Financial Independence are usually mentioned together (often seen as FIRE) and to someone new to the concepts are often misinterpreted.
Basically, Financial Independence (FI) means that you have enough income producing assets (investments, rents, other passive income) that you can support yourself without the need for a job. The Retire Early part comes from the fact that, well, you can retire from your job because you don’t need the money.
Personally, I like to focus on the FI part as that’s the real meat of the concept. Early retirement is just an add-on that likely doesn’t accurately represent what your true goals are.
FI can’t really be misinterpreted. You either have enough assets to survive or you still need to do paid work to get by. And while there are intricies (like safe withdrawal rates and definitions of “passive” income), the core principle remains – FI separates the reward of money from the act of working.
Go Your Own Way
What would you change about your job if you didn’t need to do it for the money? Would you even still do the same job? What other work would you do without the motive of profit?
I’m not going to argue about definitions of “retirement” in this post. I don’t consider my financial habits as a method of retiring early, that alone seems like a weak goal and one that I wouldn’t be able to stay focused on year after year. Reducing the connection between work and money is much more motivating. You’ll feel the effects along the way instead of slogging towards a vague achievement.
And the great part is is that there’s no one way. You don’t have to get a job making 100k/year and save 80% of that, or sell an ebook or become a landlord or entrepreneur. You don’t even need the full 25+ years of living expenses saved up. To completely retire, technically yes you probably do. But what I’ve found, almost 2 years into this process, is that I already feel the benefits today while still doing something that’s going to benefit me a decade or more down the line.
The Trinity Study is just a rule of thumb*. Suggested portfolios are rules of thumb. Thinking that you have to “retire” in order to have the freedom to do what you want can only hold you back.
I don’t know if or when I’ll achieve FI. I’m working towards it now. I track my progress every month and figure out how much passive income my investments give me each month. But it’s not the goal. The goal is to be happier now without sacrificing happiness in the future. And it may seem crazy that you can have both. Getting started down the path has motivated me to save more than I ever have and find more sources of income, as well as feel more secure and confident and optimistic about today.
One more thought about traditional FI (which is weird to say because even today FI is a very nontraditional and against-the-norm thing to aim for) – I’ve been reading through Liberate Life (found through another great FIRE blog The Fire Starter) and Andy has been on it with what the core of all this stuff really is – being happy.
*It’s common for financial blogs to reference the Trinity Study and 4% Safe Withdrawal Rate. While both are important to this line of thinking and a great place to start, I also know there has been some questioning about the impact of basing one’s livelihood on a “rule” and readers taking these concepts at face value. For the record I think the Trinity Study/4% Rule is a great starting point – you can multiply your annual expenses by 25 in your head on the way to work in the morning and think about how you’re going to save money that day.
The fact is that in order to achieve something like Financial Independence, a person has to save a good portion of their income for a decade (and often longer) and go against the norm in a lot of ways. It’s a goal that takes dedication and perseverance to achieve, and I have to believe that after a decade or longer one would be knowledgeable enough about their finances to know if they were secure enough to quit their job. For those of us who aren’t there, it’s common sense to realize that every situation is unique and that however you get there – through investing, owning rentals, creating and selling things – probably matters.
FInally (see what I did there?), all of this is a waste if you forget the simple fact that Money Is Just a Tool. In the case of FI, I’ve found there are ways to use that tool today as well as save it for later. If the knowledge, confidence, security, etc that you get from having a high savings rate, reaping the rewards of multiple income streams, or having several years of expenses saved up allows you to downshift to a less consuming job now to spend more time with kids or take extended time off work or start a business you’ve always wanted or just makes your job easier every day then you’ve found the true power of using money as a tool and having a way to sharpen that tool.
Blogs and other resources with information about FIRE: