Nobody likes the thought of getting old.
As a kid, I remember spending hours upon hours playing outside – exploring and getting into mischief – only to come home to see all the “boring adults” sitting around a table eating dinner and TALKING. (How could that be any fun?)
I vividly remember saying to myself: that’ll never be me. Fast forward a couple decades – and yeah, that’s pretty much all I ever do for fun.
Life comes at you fast, and the world is changing even faster. The same goes for work and retirement. Our parent’s idea of retirement is quickly being replaced by a new (and I’d argue better) standard: Financial Independence.
What’s the difference? And what’s a financial independence number?
In this post, we’ll take a look into the FI/RE movement (financial independence/retire early) and 3 different ways you can achieve your FI/RE number!
The Current Situation
Here are some sobering stats about American’s and their retirement:
- 42% of “affluent” Americans are saving less than 10% of their salary. I’m scared to know what the savings rate of a “non-affluent” person is. My guess would be near zero. (Affluent in the study was defined as aged 18 to 34 with investable assets between $50,000 and $250,000 or those aged 18 to 34 who have investable assets between $20,000 and $50,000 with an annual income of at least $50,000, or aged 35-plus with investable assets between $50,000 and $250,000.)
- 28% of workers have less than $1,000 saved for retirement. I did a triple-take on this one. It’s shocking to realize just how many people are truly living paycheck to paycheck. Even with conservative estimates of total labor force, there’s likely over 30 million people in the U.S. who couldn’t afford to pay for an unplanned emergency, much less their own retirement.
- 45% of American households do not own any retirement accounts at all. No wonder people are always talking about the future of social security… We are going to face some issues in the near future with more and more Baby Boomers retiring every day.
- The average 55-64 year old only has $14,500 saved for retirement. Assuming a 4% SWR (safe withdrawal rate), we’re looking at ~$580/year in retirement income. There’s no way around it, tons of retirees will be either dependent on their family or the govt. to survive in their later years.
- The average retired worker only nets $1,347 per month in Social Security benefits (April 2016). This is barely over what’s considered the U.S. poverty line ($11,770) at $16,164 per year.
- Retirees will spend $130,000 for healthcare on average. The demand for healthcare is incredibly inelastic, and it will only grow as people continue to live longer. Hospitals and Big Pharma have capitalized on this weakness and are raking in the profits. They can charge whatever prices they want, after all, how much is your heart medicine worth to you? $50 a pill or $300 a pill?
These are just numbers and statistics.
I’m not trying to get political in this post, so please don’t take it that way. I’m not taking a stance on entitlements or trying to convince you that we should socialize healthcare!
I frankly don’t have the passion or willpower to talk about such divisive topics.
What I am passionate about, however, is FI/RE. I want to help as many people as I can hit their own financial independence number!
So What is FI/RE?
The FI/RE community over at Reddit offers a good manifesto:
“At its core, FI/RE is about maximizing your savings rate (through less spending and/or higher income) to achieve financial independence and have the freedom to retire early as fast as possible.
FI/RE is about:
- Discovering and achieving life goals: “What would I do with my life if I didn’t have to work for money?”
- Simplifying and redesigning your lifestyle to reduce spending. Your wants and needs aren’t written in stone, and less spending is powerful at any income level.
- Working to increase your income and income streams with projects, side-gigs, and additional effort
- Striving to save a large percentage (generally more than 50%) of your income to accelerate achieving FI
- Investing to make your money work for you, and learning to manage/optimize those investments for the unique nature of FI/RE
- Retiring Early
FI/RE is NOT about:
- Gaining wealth for the purpose of excessive consumption
- Taking the slow road, or the traditional road to retirement (Source: Reddit)“
FI/RE was born in rebellion against the old idea of retirement. It was a giant middle finger to the typical life of excess that was rampant in our country before the ’08 Recession – and many young people are jumping on board. Millennials grew up through the worst economic crisis since the Great Depression, and it changed their entire perception of the world.
Meet Average Jill
The old paradigm of retirement goes something like this:
Jill goes to college. She has a good time for 4 years, but still, finds a way to do decent in her studies. She graduates with roughly the same amount of student loan debt as her peers; maybe $25,000 or so. But that’s okay. She just picked up a sweet job in a new city, and she’s making $45,000/year to start. That’s more money than she’s ever made before! So she celebrates with some short-term splurges, maybe a nice apartment, or a shiny new car – and starts her adult life.
The first year into Jill’s new job goes great. She’s making friends and she’s even saving some money! One of her co-workers told her to sock away as much of her paycheck as she could into the company’s 401k. Jill wishes she could max out her contribution since her company matches, but after her rent, new car payment, student loans and other living costs, she’s only able to put away ~$2,000 a year. Better than nothing!
Life happens. Then one day, Jill wakes up and realizes she’s 55. Where has all the time gone? Jill’s a senior manager at her company now – and you better believe she’s earned it! After all: she’s devoted over 30 years of her life to the same company. Putting in overtime, and even working weekends when necessary.
At 55, retirement’s constantly on her mind now. She looks into her 401k and crunches the numbers… she’s short.
But how’s this possible? Jill’s been making over $100,000 for the past decade as a manager… It’s only then that she realizes her expenses have always risen proportionately with her income. More money always meant a better house, a nicer car, private school for the kids, and nicer vacations. Jill realizes maybe she’s splurged a little too much throughout the years.
She calls her husband Jack to see if his retirement savings any different, but it’s not. With their current expenses, they calculate that their savings would last them only a few years if they stopped working today.
The worry sets in.
Meet FI/RE Jill
The ‘retirement’ of many FI/RE seekers goes something like this:
Jill goes to college. Two years into her studies, she finds that her student loan debts are piling up as well as her living expenses. She needs help. Jill does some research online and stumbles upon a couple good blogs that teach her about Financial Independence and FI/RE. She’s sold – and spends the next 2 years reading up on financial independence in her free time.
Jill graduates college with the average amount of student loan debt and starts her new job in the city making $45,000/year. She decides to celebrate her new job by having a nice dinner with her friends. SHE DOES NOT SPLURGE.
Jill remembers everything that she learned about FI/RE and is fully dedicated to retiring early. So she creates a plan and swallows her pride. She moves into a cheap apartment outside of the city with two other friends. Her rent cost is low. She purchases a used, gas efficient car for under $5,000. It’s not pretty, but it will do the job.
She crunches the numbers and estimates that if she can save 50% of her income for the next 15 years, she’d be able to FI/RE! She wouldn’t retire lavishly, but she could become financially independent.
Jill kills it at work. She’s maxing out her 401k, and she’s become a master at reducing her expenses. It’s actually fun for her to see how much she can save. And never one to be lazy, Jill begins to side hustle. She’s looking for ways to radically increase her income so maybe she can beat her own timeline! Jill decides to give up her evenings and weekends to start a blog and document her journey.
Meanwhile, at work, Jill gets promoted. Her income has doubled, but her spending stays the same. Instead of the planned 50%, she’s now saving almost 75% of her income! After a couple years, her blog gains huge traction – it’s now making her a steady income of over $2,000 a month. She takes some of her saved money and purchases a couple of rental properties. Things are really starting to snowball.
One day, while at a local coffee shop, Jill decides to check in on her finances. She crunches the numbers. She adds up all the money she’s making passively from her real estate, investments, and her blog, and subtracts from it her typical expenses. She’s done it. She’s hit her financial independence number!
Jill calls up Jack to give him the good news. Jack, smiling over the phone, lets her know that he’s almost at his number as well! They celebrate together as they make plans to quit their jobs within the year and begin traveling.
Jill’s 32 and beat her original timeline by 5 years. She’s not a millionaire – but she’s living life on her own terms now. She’s financially free.
What’s Your Financial Independence Number?
The story of Average Jill is all too common. In fact, it may even be a little generous. There are many real Americans who are worse off than our imaginary Jill. Hopefully, by now I’ve made a strong case for FI/RE’ing.
But the first step to becoming like FI/RE Jill is figuring out your own financial independence number.
You can do this through Excel or with budget apps, but I still prefer good old pen and paper (there’s just something liberating about writing it down). Take all of your fixed monthly expenses, and write them down in one column. These will typically be:
Housing (rent or mortgage)
Transportation (car loan or lease)
Reoccurring (insurance, cell phone, Netflix, gym, etc.)
Debt (student loans, personal loans, etc.)
Then add in your variable expenses:
Food & Entertainment
Misc. (clothes, charitable giving, personal vices, etc.)
Got that number? Good. Now multiply it by 20% and add that in.
I call that my Murphy’s Law buffer. It’s not something that’s required, but it’s just what I personally recommend. Just from experience, I find it better to be safe than sorry! Life has a way of surprising you when you can least afford it.
So let’s pretend your FI/RE number came out to $4,000… ($4,800 w/ Murphys Law built in)
This means, that in order to retire early: you would need $4,800 coming in every month passively (without you physically trading your time for that money).
Simple right? 🙂
So How Can You Get To That Number?
This is where the fun begins!
In my opinion, you want your passive income stream to be a little diversified. Think about it: If your entire nest egg is in an index fund, how are you going to feel when the market takes an inevitable dive? Not very good. I know that the majority of the FI/RE community is focused on the index fund route and to each their own… But in my opinion, every reader should try to hit their number using all 3 methods:
In 1998, three professors at Trinity University conducted a study on safe withdrawal rates (SWR) for retirement. They back tested every 30-year interval in the stock market and found that a withdrawal rate of 4% was virtually fail-proof.
So what does this mean for you? If history is any indicator, it means you could safely withdraw 4% of your nest egg every year of your retirement, without worry of it running out.
Here’s an easy way to remember it:
If you want to go the pure index fund route for financial independence, just remember the rule of 25.
Take your yearly FI/RE number, and multiply it by 25. That’s how much money you need to save up into your retirement account in order to stop working.
So for our $4,800 example: that works out to $57,600 per year in living cost. Multiply that by 25, and you get $1,440,000.
In this example, you’d need to focus all your energy towards building up $1,440,000 into an index fund. Once you do, you can start withdrawing $57,600 every year – knowing that historically, the stock market “should” outpace your withdrawal rate, and you shouldn’t go broke.
I will just come out and say: real estate is BY FAR my favorite asset class.
I’ll be writing a lot more on real estate investing in the near future – but for now, suffice it to say I think everyone should try and own income-producing real estate as part of their portfolio.
It requires much more legwork and studying, which is why I think many people shy away from it. But the reward for successful RE investing is incredible.
For example: Let’s say you purchased a duplex to use as a rental property and it generated you $1,800 a month in gross rents ($900 each side). And after all your expenses (mortgage, insurance, repairs, taxes, etc.) you were left with $500 a month in net cash flow. You would only need ~10 similar deals in order to FI/RE.
Is acquiring 10 good duplexes easy? No. But no one said retiring early would be! It’s going to take front-loaded work in order to reap a lifetime’s worth of joy on the backend.
Other Passive Income Streams
This is where we can start to get creative! Find other ways to bring in passive income, and you have a real shot of smashing your FI/RE timeline!
It’s part of the reason why I started this blog. I know what my FI/RE number is, and I’m working on ways to beat my own timeline. You can start your own blog, you can sell things on Amazon, you could even buy already cash-flowing websites from places like Flippa.
Just make sure whatever you decide is mostly-passive. Passive doesn’t mean there’s NO WORK involved. Passive means that the work is typically front-loaded, but it continues to benefit you long after your work is done.
I like to think of passive income like building a well. It requires a ton of work to dig the hole, put the equipment in, and set it all up – but once it’s built, it’ll continue to give you water for years to come.
Some Final Thoughts
I don’t want to shove a square peg into a round hole.
Not everyone has the desire to start a blog or become a landlord. Some people hate the stock market. The point is this: you need to find out what works best for you, and then just do it.
It’s not sexy, and it takes sacrifice. You might have to pick up side hustles. You might have to work twice as hard as your friends – but the payoff is there.
Start by finding out your net worth, figuring out your FI/RE number, reducing your expenses, and then increasing your income from there! We can all be like FI/RE Jill.
(Are you just starting your FI/RE journey? Are you already FI/RE’d? I’d love to hear your story!)
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