So far on the blog, I’ve spoken a lot about pursuing Financial Independence (FI) and how important it can be to living a happy and fulfilling life, but what does it really even mean?
The best way to describe Financial Independence is being in a state of freedom from financial stresses. This can mean a myriad of things depending on how you want to interpret it for your life, but here is the traditional definition of FI in my own words:
Financial Independence is the phase of life one reaches when their passive income from stock dividends, rental income or any other income where they are not actively trading time for money surpasses the amount of expenses they need to live on a monthly basis.
So, what the hell does that mean? Let’s go to the math….
First off, here are my assumptions for Ethan the Early Retiree (I like alliterations):
- $3,000 per month in expenses
- 10% post retirement tax bill (reducing this to 0 is possible, but let’s keep this simple for now)
- Using a safe withdrawal rate of 4%
We will work a couple of different financial scenarios for Ethan. The first will be if he chooses to retire by investing solely in the stock market, I suggest index funds. For his successful retirement, he will need to be able to withdraw $3,333 per month so that after he pays his taxes, he still has enough to pay his bills. This means that he will need
$3,333 x 300 (12 months x 25 years) = $1,000,000 in his portfolio.
Once he crosses this threshold, he can quit his job and start withdrawing $3,333 per month from his portfolio. Yay Ethan! Go sit on the beach and have a drink dude. You earned it.
Another possibility is if Ethan buys 3 rental properties that each pay him with $1,111 per property every month. This would have to be the remaining income after any property management fees, mortgages, vacancies and repairs. Something that is very possible if he did his due diligence when buying these properties.
More likely, Ethan will be simultaneously saving in the stock market while buying his real estate properties. So, if he had one property providing him with $1,111 after all other expenses every month, then he would only need $2,222 to cover the rest. That means he would only have to save $666,600 in his index funds as opposed to $1,000,000, making it possible for him to retire even earlier!
1,000 Ways to Reach FI
Above are only 3 possible scenarios. Ethan could also create a business that he then sells for $1,000,000 and become FI overnight, write a blog that brings in $3,333 in income through advertising and affiliate links, or run an Etsy store selling soaps that does so well, he outsources the production and nets $3,333 per month. Alright, I’m getting out of hand, but you get my point. The possibilities are endless!
The important takeaway is that the financial component of “what do you want to do with your life” becomes completely removed. This allows Ethan to sit on the beach and have a cocktail if that’s what he is so inclined to do. He could also pursue volunteer work, take on a lower paying job he never thought he could afford to have, or spend time with family and friends. There are just as many possibilities with how to spend retirement as there are ways to reach FI.
How would you spend your time if money was no longer a factor? Let me know what you think in the comments!