What would you give up if someone said to you, “If you give up five things, you can quit your job tomorrow and won’t ever have to work again”?
What else would you give up if you instead had to give up ten things? Fifteen things?
At some point it may not be worth it and you’d rather keep your job but I imagine the list of things you’d be happy to give up could be pretty long.
I actually thought about this a lot recently when creating the budget for The Perfect Life.
After determining what kind of life would make me and my wife happiest, I sat down to figure out exactly how much the perfect life would cost.
Definition of Financial Independence
Before I describe the shortest path to financial independence, it’s probably a good idea to reiterate my definition of financial independence.
To me, financial independence is having enough income from your assets to cover your essential expenses so that you can survive without ever having to work again.
Never having to work again is very different from never working again.
Since I plan on working in some capacity after I achieve FI (on things I want to work on, rather than what my boss wants me to work on), I’m not concerned with saving up enough money to cover my discretionary expenses.
I’d rather reach FI as quickly as possible, quit my full-time job, and then slowly build up the amount of “fun money” I have by doing work that I enjoy.
As Mr. Money Mustache described in his First Retire, Then Get Rich article, it’s likely you will make more money and spend less post-FI than you anticipate. Therefore, I’m happy with this plan and am in no way worried about living a boring life after financial independence.
So how can you achieve financial independence as quickly as possible?
List Current Essential Expenses
The first thing you should do is list your current essential expenses. This will allow you to understand how much you spend per month and will help you better predict how much you will need to spend after you quit your job.
Predict Future Essential Expenses
The number you computed in the previous step assumes your post-FI life will resemble your current life.
Most likely, this will not be the case. When you no longer have to work, the number of expenses that you incur should decrease.
This step is the fun part.
If you really envisage your post-FI life, you can quite happily drop expenses that are no longer necessary or important to you.
Housing
We currently own a house but plan on renting after reaching FI. There are a few reasons for this:
- No Irregular Expenses – If a pipe bursts or the roof leaks, I don’t want to have to pay for it and I don’t want to budget for it. I just want to pay $x a month and not worry about any additional expenses.
- Just Enough House – Right now, we have a two-bedroom, two-bathroom house but only my wife and I live there. We bought a two-bedroom house so that we could have guests and potentially have space for a nursery, if we decided to have a baby. For the most part, however, this second room has been unused. Renting will allow us to get exactly the right sized house for our current needs. We’ll be able to spend less on a studio or a 1-bedroom place and then move somewhere bigger if we do eventually need another bedroom.
- Less Stuff – Rather than maintain a house full of belongings, we’re going to sell mostly everything we own and then rent furnished houses/apartments instead. The less stuff we have, the less we’ll feel attached to a particular place, the more money we’ll have in the bank, and the more flexible we’ll be.
- Geographic Arbitrage – As I mentioned in The Perfect Life article, I also plan on using geographical arbitrage to bring my FI date even closer. By living somewhere like Thailand for a portion of the year, the income from my United States investments and businesses will go much further than if I lived in the States. Renting will allow us to easily move to cheaper places, as needed or desired.
The decision to rent smaller apartments/houses in cheaper places will allow me to decrease my future monthly expenses significantly!
Transportation
Sadly, we currently require two cars for me and my wife to both get to work. The costs associated with these cars is ridiculous and if I never have to own a car again, I won’t. Post-FI, we won’t need to own a car.
Not having a car will probably result in additional public transportation costs but by cutting out automobile ownership from our future expenses, I can decrease our future monthly expenses even further!
Other Expenses
I’m sure there are many expenses in your life that you’d be happy to substitute for free alternatives post-FI if you take some time to think about it.
There’s a big, exciting world out there with many amazing, free things to do so why not start with those and then move on to things that cost money after you get bored of all the free options?
Library books instead of TV. Running instead of gym membership. Rock climbing on actual rocks instead of on a fake climbing wall that costs money to use.
You get the idea.
Why Wait Until FI?
This exercise may help you decrease your current expenses even before you achieve financial independence.
If you ask yourself, would I give up x if it meant I could quit my job tomorrow and you answer yes, why would you continue paying that expense now? It is obviously not that important to you so why not remove that expense now and instead use that money to get one step closer to achieving FI?
Supplemental Income for Discretionary Spending
The beauty of saving enough to only cover your essential expenses is that it will force you to really scrutinize your discretionary spending after you achieve FI.
If you have to go out and make extra money to buy something, you’ll most likely only buy things you really need or desire. You will truly be trading your free time for stuff so you will most likely only do that for things that are really important to you.
Again, why wait?
There’s no need to wait until FI to see if you can limit your discretionary spending to what your supplemental income can provide.
If you start developing supplemental income streams by doing things you enjoy now, you’ll be able to increase your savings rate while cutting out the discretionary expenses that really aren’t meaningful to you.
Conclusion
In conclusion, here are the simple steps to achieve financial independence as quickly as possible:
- Record your current essential expenses
- Envision your Perfect Life
- Use your current expenses to help predict the future essential expenses in your perfect life
- Determine what assets are needed to provide the necessary cash flow to cover your future essential expenses (see Safe Withdrawal Rate)
- Save and invest your way to that target
- Enjoy FI
What would you consider giving up if it meant you could quit your job tomorrow?
Want to shorten your journey to financial independence even more? Check out this comprehensive guide – How to Optimize Your Journey to Financial Independence
why keep quoting the 4% “safe withdrawal” figure?
I’m partially in this boat: http://financialmentor.com/free-articles/retirement-planning/how-much-to-retire/are-safe-withdrawal-rates-really-safe
Hi Greg, thanks for the link. That was a long but interesting article and he raises some good points.
I agree that no single safe withdrawal figure can apply to every situation but since it is necessary to make assumptions when planning, I’m happy using the popular 4% rule.
My esteemed colleagues Mr. Money Mustache and Jim Collins both have great posts discussing the 4% rule that you should check out, if you haven’t already. Mr. Money Mustache’s article actually sounds like it was written specifically as a rebuttal to the Financial Mentor’s post.
I tend to agree with both MMM and Jim that the 4% figure is actually quite conservative. In my own personal calculations, I often use a 5% withdrawal rate but I decided to be more conservative for this article and use the standard 4% instead.
A reason I believe 4% is reasonable, especially for myself and for Mad Fientist readers, is because early/semi retirees will have much more flexibility than the retirees that the Financial Mentor is writing for. You’ll notice in his article that he references $2.5 million and $3.3 million nest eggs in his article. I hate to make another assumption but I assume people with nest eggs that large most likely have much higher expenses and more financial obligations (i.e. bigger mortgages, boat loans, expensive habits, etc.) so it may be harder to adjust their lifestyles when the economy changes. For me, however, if I start withdrawing 4% from my portfolio but then the market tanks, I’ll be able to move somewhere where the cost of living is less and potentially pick up part-time work that I enjoy so that I can withdraw less from my portfolio during the downturns.
I agree that 4% is not perfect but since we can’t predict the future, no number we use to plan for the future will be perfect.
What withdrawal percentage do you use when planning for retirement?
The 4% withdrawal plan is not perfect, but it is quite conservative and it’s what I use. I’ve been FI for about 3 years now and the 4% plan has yet to make a dent (we are in a bull market, I know).
The key to acheiving FI is just living below your means. When I was a 9-5’er, I would spend $10 on coffee and $20 on lunch and $30 on dinner. I was miserable. Living on the cheap now has made me much happier and has given me more time to do what I love (surf, in my case). Everyone has a choice and if you choose to live below your means and save you will save. That’s a fact!
Most will say they can’t live below their means because ..(insert some excuse here). How many of these people that simply CAN’T save anything have iPhones, tattoos, brand new cars, Netflix and HBOgo, eat fastfood all the time, etc.
Of course they look at me like I’m crazy when I suggest they cut a $100+ a month cable bill. Or switch to a cheap cell phone provider like metropcs. Or drive a car that is 3 years old. Or only fill up their tank from the cheapest place according to GasBuddy. Or get $25/month budget car insurance from Insurance Panda. Or cook their own food instead of spending a hundred a week on restaurant food (or far more if they like the bar).
We make the beds we lie in. Be responsible for yourself.
Ended up with < 4% in the long run … but probably due to psychological issues rather than math =)
very nice post, MF….
I especially liked your assessment of the renting advantage. In fact I’ve just linked to in in my post: http://jlcollinsnh.wordpress.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
Thanks, too, for linking to my article on withdrawal rates in your response to Greg.
Thanks, Jim!
I actually have you to thank for pushing me along the rental path. Your Rent vs. Buy article (i.e. the one you linked to) made me see renting in a new light and then our subsequent conversations definitely made me realize that my home-owning days are numbered.
These figures may be a wee bit optimistic seeing as they don’t account for pesky things like taxes and unplanned expenses. But it’s a great goal to shoot for. It’s a great feeling when you realize these sorts of goals are eminently attainable, even on a middle class salary.
As for the rent decision, jl, I especially love your idea about using the REIT yield as a model opportunity cost. (Suppose I should have said that on your blog, but I’m saying it here because it came to mind in light of your comment)
The figures are very optimistic! Even though I technically could “retire” with only $200K saved up, I’m going to continue working until 2015 and should have quite a bit more than that, when all’s said and done. I just wanted to compute the minimum amount it would take to cover my essential expenses to see how little I would actually need to survive. You’re definitely right that it’s a great feeling seeing how attainable FI really is!
Taxes should be negligible at the low income levels quoted in the article, assuming the income is from qualified dividends and/or long-term capital gains. There will definitely be some unplanned expenses that come up though so I should maybe bump up my “Misc.” category budget a bit more. I plan on using other passive income streams to cover my discretionary spending and hopefully that side income can also be used to cover some of the bigger unplanned expenses, if necessary.
Thanks a lot for stopping by, Sean! I can’t believe you have time to read and comment on other people’s blogs during your thirty-day, daily post challenge! Very impressive!
Thank you for the article, jlcollinsnh. I’ve always been a firm believer of making smart decisions in purchasing property, however, after doing further reading I am beginning to believe in renting instead of owning. The flexibility would be prized, but I believe the fixed cost is the best aspect. Planning my expenses for the future is troublesome at times, but this change would take out a large variable.
Do you think budgeting $50 per month forever for health is reasonable? You might be able to find a catastrophic insurance for now, but any health insurance that provides some basic coverage is going to cost more right? Also your transportation is included in the rent and utilities after FI?
We have done this exercise as well. Unfortunately our “FI number” is quite high right now. But major part of it due to our high rent in Southern CA, so once we move to Vancouver, WA (we are implementing the geographic arbitrage but within the Western US) we should be able to bring that down quite a bit.
I feel everyone should do an analysis like this, whether they want to achieve FI or not. It puts several things into perspective.
Hi Suba, I’m glad you brought up health insurance. I decided to leave off my explanation for why my health insurance costs will decrease after FI, in order to keep the post a bit shorter, but it is important to note why. Our plan after FI is to live for 6 months in Scotland (my wife’s home), travel around for 1-3 months in America (visiting my friends and family), and live for 3-5 months somewhere else in the world (Southeast Asia, South America, or another low-cost destination). Since we’ll be based in the UK, the majority of our year will be health insurance free (thanks to the NHS). The other six months of the year, we’ll be able to cover ourselves with a travel insurance policy. These policies can usually be purchased for £300 per year in the UK, so $50 a month seemed like a conservative estimate for half-a-year’s worth of insurance (this UK-based travel blog article discusses travel insurance costs).
You’re right though that $50 per month probably won’t be sufficient in perpetuity. The numbers in this article serve as a baseline for what I need to survive. This is how much I’ll need to quit my job and live the life I plan on living immediately after FI. If 5 years after FI I decide that I really want to live in America full time again, I’ll have to increase my health insurance budget by either decreasing some of my other costs or by earning more money through part-time work that I enjoy. The main message of this post is that you don’t necessarily have to wait until every possible future expense is covered…just make sure you can survive in a lifestyle you want to live and then if you need to earn more money to change or enhance that lifestyle, you can do so. A lot of people think, oh I need $2.5 million to retire so that every possible expense that I could incur will be covered. That may be true for someone retiring in their 70s but for someone in their 30s, I say, cover your essentials, start living a free life as soon as possible, and earn more if you want to change your lifestyle later.
As far as transportation is concerned, it has been included in the ‘Rent and Utilities’ and ‘Travel’ categories. The ‘Rent and Utilities’ is a bit high, so that we can live in central locations and not have to rely on paid transportation too much. The ‘Travel’ category covers our flights between Scotland, America, and whichever other country we decide to live in but it also covers things like taxis and buses (I’m accumulating millions of frequent flyer miles between now and when I reach FI so that our airfare costs will be extremely low…more on this in future articles).
I agree that everyone should do this exercise and I loved reading about your early retirement plan. Thanks for the comment and I look forward to reading about your USA geographic arbitrage over at Wealth Informatics!
But someone retiring in their 30s will be in their 70s someday. Are you going I get to 2.5mil on part time work after FI?
Hi Remy,
No, but I won’t need anywhere near 2.5 mil. Again, the numbers in the article are just a baseline for what I will need to survive. I plan to have significantly more than the baseline when I eventually quit my job so the surplus savings will continue to grow until standard retirement age.
The main point of the article is to motivate you to look at your expenses to see what you are really happy trading your freedom for. We often spend money on things without really thinking about it so cutting out the things that you are happy to give up now will help you reach FI much sooner.
Great goals! It’s nice to see your journey play out. Since you are now talking about Thailand in your early retirement plan I thought I would point you to someone very interesting. When you have a minute, google “Paul Terhorst.” Since you are traveling in FI circles, you’ve probably already come across his name and read his book “Cashing in on the American Dream: How to Retire at 35.” In case you haven’t, he and his wife retired at the age of 35 back in the 80’s with about $500k. They have been perpetual travelers ever since – spending significant amounts of time in Thailand, Argentina and other parts of the globe. He would be a wonderful person to feature on your next podcast if you can get him. I consider him to be one of the grandfathers of the FIRE movement.
Hey Prob8, good to hear from you again!
I actually hadn’t come across Paul Terhorst before but I’ve just been reading about him for the last hour and I definitely like what I see. The first line in one of his articles is, “You should retire overseas, for at least part of the year.” That is exactly my plan!
Thanks a lot for letting me know about him. You are right, he would be a great podcast guest so I’ll see what I can do. It looks like he is living the kind of early retirement I’ve been planning so it’d be great to talk to him about his experiences, especially since he’s been doing it for so long.
Thanks again and I’ll be sure to let you know if I’m able to get in touch with him!
No problem and good luck. His book is what started my quest for early retirement – although the investment advice is a bit dated. Another couple who are in the same camp are Billy and Akaisha Kaderli. Again, these are sort of the grandparents of the movement. Although in their 60’s now, they retired at 38 with $500k or so. They also spend a large portion of their time overseas – mostly southeast Asia. Both the Terhorsts and Kaderlis focus on expense management to achieve a full life of travel and fun. The Kaderlis have also written several books avaiable on their website – unfortunately, not for free. They tend to do more interviews so they would be a podcast option too.
Wow, two more really interesting early retirees! Hopefully I can speak the them at some point as well.
Thanks a lot for giving me more people I can look up to. It is really encouraging that both couples have been living that type of life for so long and still seem to be enjoying themselves.
Nice article, Brandon! I like your thinking about retirement as a state of happy affair.
“Never having to work again is very different from never working again.”
I believe that once you have enough F-You money(as my friend Jim says), you surprisingly will make more money in retirement. Why? It’s because you will do what you love most without being slaved to work that you hate doing daily.
Thanks, Shilpan! It’s great to hear you say that!
Hi Brandon,
I’ve enjoyed your podcasts. I’d been reading the MMM blog for some time and recently started Jim Collins blog. I love Jim’s investment series. I’m so glad that your readers suggested Paul Terhorst and the Kaderli’s for interviews. I had thought of suggesting them as we’ll and I hope you will be able to arrange them. Some other suggestions for podcast interviews: Charles Long, author of How to Survive without a Salary. I have three editions of his book and still learn something with each rereading. Also Steven Catlin who wrote Work Less Play More, which included a focus on semi- retirement and extended time away from work.
I’ve been reading this material and planning (or dreaming) of financial independence sine the 80s. Still working on it but getting closer. My plan will be to live at least part of the year in Mexico (my wife’s home country). Again, thanks for making these podcasts happen. I look forward to the next set of them.
Hey Jeff, glad you enjoyed the podcasts! I’m currently arranging my next interview so hopefully I’ll be able to get another episode released soon.
I just requested How to Survive Without a Salary from my library so I’m looking forward to reading it when it arrives. I’ll be sure to let you know what I think after I finish it. I’m also going to see if I can get Work Less Play More because I’ve not read that yet either.
Since you were kind enough to recommend some books to me, I’ll return the favor. Jim Collins, who you mentioned, suggested I read How I Found Freedom in an Unfree World by Harry Browne and it was incredible! I definitely recommend it if you haven’t read it already.
You mentioned that you plan on spending some time in Mexico after you reach FI…where exactly in Mexico? I’d love to spend an extended period of time there at some point so I’d be interested to hear where you plan on going.
Brandon,
Thank for the book recommendation. I’ve not read that book yet, but I’ll check it out. My wife’s family is from the state of Colima, a small state on the Pacific coast. We probably will spend most of our time there since many friends and family are in that area. My wife still has an apartment in Mexico City so I could see us spending some time there as well. It can be a fascinating place, though it can also be overwhelming and traffic can be a nightmare. The metro is pretty good and very cheap. Though it is super crowded during rush hour. Last trip we waited on the platform over an hour waiting for the crowds to die down to just very full levels. Another town I really like is San Miguel de Allende, as well as the nearby town of Guanajuato. Both are beautiful colonial towns in the highlands between Mexico City and Guadalajara. San Miguel has a good size expat community, is famous as an artist colony, and has a reputation as a magical place. I’m looking forward to discovering more places in Mexico when we have the time to make some extended trips and to explore. You might want to check out the Kaderli’s website for their reports of their travels in Mexico and Central America – retireearlylifestyle.com. Thank you for your reply and your interest in our plans.
VisitMexico.com says that “Colima has been named one of the safest and most livable cities in Mexico” so that definitely sounds like a great place to spend some time, especially since you have friends and family there.
I made a note of the other places you recommended as well so that I can look into them more when we start researching additional post-FI destinations.
Let me know what you think about that book if you end up reading it and please keep me posted on your Mexican retirement plans!
I’ve also been to San Miguel de Allende and Guanajuato, although it has been many years ago.
Based on the little I know of Mexico, were I to consider living there these towns would be very high on my list!
Both San Miguel and Guanajuato are gorgeous towns with active expat communities (especially San Miguel). We have several nieces in Guanajuato. You do need to be able to walk a lot to get along well in either place. I think housing costs cover a wide range, with some very expensive places in both.
Jim, I see you spent some time in Ecuador (and have a trip planned this summer). Are you considering moving abroad on a long term basis?
By the way, Jim I’ve really enjoyed your blog and the investment articles. I’ve enjoyed Brandon’s podcasts and hope to hear some more of them.
Hi Jeff…
Yep, walkability and being car-free are definitely part of their charms.
We are thinking of moving abroad a few years down the line. Right now my wife is still working at a job she loves and our daughter is still in school just two hours away in RI.
In all likelihood, she’ll also be living abroad so that might influence where we go. Short of that, Ecuador would be the place were we going right now. Ideally we’d like to spend a year or two in each place and then move on in the slow travel fashion.
Glad you are enjoying my blog! Brandon and I have been talking about doing another podcast together. I also happen to know he’s got one in the works that I am very much looking forward to listening to!
Cheers!
As someone who has lived in Mexico City for almost 17 years, I’d personally avoid living in San Miguel de Allende after retirement. While the downtown is pretty, there is a lot of crime which goes unreported and of course it is full of tourists and expats (which to me is a big negative). Yes, I have been there. The area is very dry so it is mostly a good place to grow nopales (prickly pear cactus and not much else) so early retirees who want to grow their own veg would be have to do quite a lot of watering (hope to find a lot in town that isn’t too expensive. Most city lots have tiny or no gardens/yards in Mexico)
There are many traditional (although non-colonial towns and cities) in the state of Guanajuato that are much prettier and full of friendly people which would probably also be cheaper places to live. You could always take a bus to visit the colonial part of San Miguel on the weekends :-)
Brandon,
I did read the Harry Browne book you suggested. Took some time to finish. Very interesting ideas, though several of the concepts were a bit much for me. Though from the author’s comments to the newer edition, he has changed some of his ideas as well – such as his ideas on marriage. Anyway, it certainly made me think and stretch my perceptions. Any new podcasts in the works?
Jeff
Hey, great to hear from you again, Jeff. I definitely agree some of the concepts in the Harry Browne book were a bit much but the book as a whole changed my mindset quite a bit. As someone who is pursuing early financial independence, I was already challenging the norms relating to work/career/money/etc. but after reading the book, I now find myself challenging everything. I don’t just do something because I’m told to anymore or because that’s the way it’s always been done. I definitely agree with you when you said it made you think and stretch your perceptions.
I actually read the Charles Long book you recommended but forgot to send you a message about it. I ordered it from my library when you recommended it to me and it came in just a week later. I enjoyed it and the conserver lifestyle he described is very appealing, albeit maybe not to the extreme that he described. I haven’t read the Steven Catlin book yet but it is still on my reading list so I’ll hopefully get a chance to read it this summer. I’ll let you know what I think afterwards.
I do have a another episode of the podcast coming up soon, actually. I finished the interview just over a week ago and finished editing the audio yesterday. I’m really excited to get it released so look out for it sometime early next week.
Thanks for letting me know what you thought of the book and I’ll be in touch again soon.
This is a great article and a eye opener. Thank you!!!
I’m glad you enjoyed it! Thank a lot for stopping by and hopefully I’ll hear from you again soon!
Where do you think is the best place in the us to perform geographic arbitrage? If you can in the us…
You definitely can perform geographic arbitrage in the US. For example, I used to work remotely for a company in Boston while living in rural Vermont. My expenses were about half of what they were when I lived in Boston but I was still earning a Boston-level salary.
The scenario I described could be replicated all over the country. Find a job in a big city but work remotely a few hours away in a rural community. That way, you’ll still earn the big city bucks but you can enjoy a much lower cost of living.
Great post. One thing I’d challenge you on: owning a car. I’ve had one since I was 17, and LOVE having a car to get me from point A to point B. Thing is, I want FI more. So I yesterday donated my car to charity, and am now walking/bussing/Zipcar-ing my way around. No repair costs, insurance, gas, oil changes…no saving for a new car. Goodbye Saturn SL1, Hello Carsharing
Trust me, I can’t wait to get rid of the cars. If I never had to own one again, I’d be a happy man.
Rural Vermont isn’t exactly the ideal place to be carless though so we’ll hang on to them for the next two years until we move abroad.
You are really paring down expenses! I’m guessing you know Jacob’s blog, Early Retirement Extreme. Sorry to hear about your car situation–that is really a money suck. I hate biking, but I want to live a sustainable life, and, I don’t want to own an expensive, pain-in-the-butt car. So I do carsharing–this is truly changing my life!
Yes, I’m a big fan of Early Retirement Extreme but I don’t think I’ll ever be as hardcore as Jacob. Living abroad for part of the year will allow me to enjoy a quality of life similar to the one I enjoy now but at a much lower cost.
Did not realize that there is a huge community exist for FI online. A bit embarass at myself for still working when I have almost 1M USD and my living expense (excluding travel) is 1K per month. I spend maybe 8K a year on travel for mileage running, flying parents in business class etc from the miles game hobby. This blog gives me serious encouragement to quit in a few years… When I do quit, I will move back come to cut my living expense further (single), and I take my parents to travel using the miles and points I earn. (took them to Arctic last month, and cross country road trip in Australia.)
You definitely have no reason to be embarrassed. You have saved up almost $1 million and you still keep your expenses low so that’s a great achievement!
I’d love to hear more about your trip to the Arctic. Was it amazing?
Spent two nights at Longyearbyen Radisson Blu using 50000 club Carlson points. (second night free) spent 75000 UA miles for intra Europe ticket from Istanbul to Longyearbyen that I get from mileage running. I did a fairly expensive day trip cruise to a Russian settlement ( over 200 USD) but my parents just walked around in the small town (expensive and they don’t care so much). Also travel to Almaty and Bishkek, Tromso, Slovenia with them on the same trip. Then I traveled to Budapest, Belgrade and then Romania for one more week! Most nights are hostels for me, or club Carlson, two nights using Choice points in Tromso.
use plenty of travel hacking skills in this trip to save a lot of money as we flew all long haul in business class.
While I am into FI, but my personal goal is to travel to every single country in the world.
I derive utility by spending money wisely, I really see no point being wasteful even when I have money. I spend a lot of money in good promotions whenever there exists one, like club Carlson 50000 points per stay in 2011/2012 etc, or buy points from daily getaway in discover America or US airways Grandslam, or US share iles promotion.
While it is nice to retire early, I do think that if I spend 4%, there is still a small chance of ruin, and also, there is a possibility of living the life to fullest – like going to antartica (which is expensive). I want to save up a bit more before I retire officially.
Do u keep track of your Social security benefits? Would u count on that for FI?
Wow, that trip sounds incredible! I can’t believe there’s a Radisson Blu in Longyearbyen.
I also took advantage of the 50K Club Carlson promotions in 2011 and 2012. It’s great that the value of those promotions has doubled for us, since we both have the Club Carlson card now.
I got some Choice points in last year’s Discover America promotion but I didn’t get any more this year because I wasn’t sure I’d use them before they expired.
I don’t keep track of Social Security and I don’t factor that in to my FI calculations. If I do end up getting some benefits, it will just be a nice bonus.
Let me know if you start planning another amazing trip!
It’s the first time in which i’ve seen a budget where costs aren’t ridiculous for (motivated) americans to have.Impressed you manage to keep them so low,it requires optimizing and being happy with simple things.
My costs are quite similar as 27 year old except for rent or a mortgage which I won’t have.Like you I share costs with my SO.
I’ve got rid of the car completely myself which means I take public transport and a 1.5 mile walk daily to work and back.Very worth it in $ savings.
I see you included travel for your activities and a small misc of 50,but how will you account for “have fun” activities like going to the movies,etc.Just curious since my share pre-FI budget looks like this,just for kicks lets assume its in $ :
Utilities-100
Groceries-200
Transport-100
Misc -100
health ins-0 (free here)
On a caribbean island so for fun I use the beach and sea as diversion and spending time with family and friends doing free activities,but i’m pretty introvert so my ideas of diversions are not your average plans and occasionally I will use the misc to buy lunch for colleagues(who return the favor)
FI at 150.000 if I consider using 500 for as my after FI budget,which scares me a bit so I’m still considering if I want to work part time or full time after reaching FI to try to reach at least double this amount to take every worst case scenario into consideration.
Still I convince myself,being able to have your passive income cover your basic expenses will be really worth it.
I can’t wait until we go car-free later this year because that will reduce our expenses even more.
As far as how I fund my “have fun” activities, I have supplemental income I use for that. I’m a professional software developer and over the years I’ve created a few iPhone and web applications that generate a consistent stream of passive income each month. I use that income for my discretionary spending.
That’s great you are able to keep your costs so low while still having a really nice life on a Caribbean island!
Working part time after FI is a great way to supplement your FI savings and is something I’m considering as well (see semiretirement). There are many fun jobs I can think of that I would enjoy doing part time so I may pick up some part-time work after leaving my full-time job this year. We’ll see though…it’s possible I’ll enjoy being jobless even more than I expect I will :)
My wife and I don’t separate our expenses – I think it would be awkward that “I” had paid off “my portion” of “our house” and she needed to keep paying on “her” portion of the house or rent. Multiply that times all the other expense categories….that would seem to lead to some hurt feelings at some point.
In marriage, two shall become one, although I’m sure you’re attempted to get her on your team, it sounds like she’s not joining you yet. Does she see the value of being able to live on air (or close to it!) as your future numbers describe? My wife and I are moving forward together and it’s so much more joyful, I wish that for you and your wife!
Yeah, it’s probably not for everyone but it definitely works for us. It’s good that we make roughly the same amount of money so it’s not awkward in the sense that one person has much less money left over after the essential expenses are paid.
My wife and I are actually more on the same page with our financial goals these days (check out her guest post) and I agree that it’s made the journey much more enjoyable!
Wow this post just clarified so much.
I saw the picture of you and you looked so young I didn’t understand how you could reach FI in such a short time since you just recently seemed to have gotten on the journey.
But planning only for your mandatory expenses makes sense.
Actually that is really motivating because it prompted me to run the numbers again and if I use that assumption FI could be less then 10 yrs.
Right now the number is about 14 yrs.
Thanks so much I have recently caught up on all MMM articles and have been checking others out. I’m currently digging through your archives.
Oh I had a question you seem to be the tax guru for FI so. Can you tell me what the tax implications are if you invest in a regular stock account. So non retirement. My husband wants to know if you get taxes when you pull it out since you already get taxed on the gains. My thought was yes because it will be considered income but can you clarify. Thanks
I’m glad you think I look young, haha! The picture you likely saw was taken a few years ago so I’m 32 now and probably look a bit older (hopefully not much!).
I actually had quite a bit saved up before I got on the journey to FI and thanks to the market run-up over the last few years and the increased supplemental income coming from my side businesses, my “passive” income and theoretical investment income (assuming 4% withdrawal rate) currently covers over 130% of my total expenses. Once we sell our house and lower our expenses even further, an even higher percentage of my expenses will be covered so although I was targeting only the essentials for FI, I’ll likely have everything covered and then some by the time I finally pull the plug on my career.
I agree that planning only for the essentials is very motivating though. Plus, once you have the essentials covered and could theoretically quit, you’ll probably find that you don’t mind your job as much as you did before, as I’m currently discovering now (once you don’t feel trapped by your job, it doesn’t seem so bad after all).
To answer your question, you only get taxed on the money you make from the money in a taxable account. So if you put $10,000 in a taxable account and it pays you $200 worth of dividends and grows to be worth $11,000, you would just be taxed on the $200 worth of dividends (when you receive them) and the $1,000 of capital gains (when you sell the investment). You were already taxed on the $10,000 so you wouldn’t be taxed again. Make sense?
Yes. Thanks so much. I guess I had it wrong. Thanks though my husband is now going to open a vanguard fund. YIPEE!. It will be a taxable one but it still is better then letting his personal stash just sit in a savings account.
Lately I’ve discovered my income is unnecessary as in we could live on just my husbands (we cut down spending , don’t have anymore debt). So we really are banking my entire income. I STILL FELL BLAH about my job. I wish I didn’t feel so trapped. But really nothing is relying on it but every month I stick around is more head start to FI.
However this new fire I feel about FI and personal finance is leaking into my job so maybe it will get better soon. If not I might have to call it quits. We’ll see.
thanks for getting back to me
Since you don’t need your job to survive, hopefully that will make you feel less trapped eventually. If you still hate it after a while, maybe you should use that fact that you don’t actually need to work to take a risk and find something else. FI is great but you shouldn’t be miserable for many years just to get there quicker.
Keep me posted!
If you reached FI by saving up $205,500, where would you invest that to guarantee it would produce $685 per month? I assume that would be in a taxable account since you’d be too young to pull funds from a tax-advantaged account, correct? But how, specifically, would you invest that amount of money to keep it safe and generating enough income to draw 4%?
It seems I have a lot of work to do… My essential expenses are around $3500/month for the wife & I. Heck, our house payment alone (with taxes and insurance) is more than your total monthly expenses. Maybe I need to read Early Retirement Extreme and a few more blog posts to get my brain right. :)
Hi Dave,
This article was more about the mental benefits of not having to work rather than actually retiring early on 200k. It’s amazing how your attitude towards work changes once you pass the point when you actually don’t need to work to survive anymore.
Even though I passed the point where my savings could cover my essential expenses quite a while ago, I’ve decided to keep working and pad my balances a bit more. Since I’ll likely have plenty of buffer by the time I actually pull the plug on work, I plan to just maintain my current portfolio, which consists primarily of low-cost, stock market index funds. Since I could always work again if necessary, I’m happy to take on a bit more risk for higher potential returns.
A lot of my money is in tax-advantage accounts but I plan to build a Roth conversion ladder so that I could access that money early, if needed.
The 4% rule has a failure rate based on overall market movement and time in the market. If you need to cover 20 years the 4% rule is extremely safe. If you need to cover 40-50-60 years because of early FI it starts to get riskier. Why not arrange your investments so you achieve a 4% yield, then you will never need to sell shares and can live an infinite amount of time without working? To boot, invest in some dividend growth stocks and you will get an inflation-busting 6% average annual raise on your income as well!
There’s no difference between having a 4% dividend and withdrawing 4% every year (since the stock price lowers by a corresponding amount every time a dividend payment is made). The difference with a dividend though is you are forced to take that withdrawal (and pay taxes on it) whereas if you’re just selling parts of your portfolio, you can withdraw as little as you need to.
It is a commonly held misconception that the stock prices drops when a dividend is paid out. In fact, the dividends are already built in to the share price. That’s why special dividends temporarily increase the share price only to revert back to previous levels upon pay date.
In addition, at reasonable income levels dividends are taxed at 0% and you get to keep your long term cap gains forever.
Also withdrawing 4% in a bear market guarantees reduced future withdrawals whereas quality dividend stocks continue to pay and increase dividends through bear markets and recessions. Hundreds of stocks maintained and even increased their dividends through the 2008 recession. These are the types of companies that you want to invest in for dividend income!
It doesn’t matter exactly when those payments get factored into the share price (whether it’s when the dividends get paid out or before/after), it just matters that they do. The fact is, issuing dividends definitely doesn’t create wealth for a company so that loss of money has to be reflected in the stock price at some point.
My buddy Jim over at jlcollinsnh.com wrote a post specifically on dividend growth investing and it perfectly highlights why it is a suboptimal strategy.
The biggest risk to an early retiree is running out of money so giving up potential growth in exchange for consistent (maybe), forced taxable payouts is not the optimal choice if your goal is to have your money last for 50+ years.
Well there are brilliant people on both sides of this debate.
I’ll have to disagree with you and continue to collect my (untaxed) qualified dividends without ever needing to sell a share to pay for the bills.
By all means, continue what you’re doing. I’m not saying dividend growth investing is a bad strategy, it’s just not the optimal strategy. At the end of the day, you just have to do what makes you happiest and lets you sleep best at night so if dividends do that for you, absolutely keep going down that path.
Finding this a couple of years later, I had been thinking in the opposite direction regarding post-FI expenses. Because my current saving rate is about 60%, I figured if I did decide to accept part-time work or fixed-term projects, the income would likely fund my living expenses. That would allow my ‘Stash to continue to grow. (Yes, I read Mr. Money Mustache’s blog.)
Either way, the concept of FI – and the shortest path to it – continues to rock my world.
Thanks!
Where do you get a $10/month cellphone plan and $20 (or $40 since it’s your half) of home insurance? Thank you!!
Hi,
I have been reading some of your posts, and jlc and mmm, and I have no idea exactly where to post this question or to whom. My husband and I already live by debt-free principles, although not necessarily 100% minimalist, though I am trying to move us in that direction. Anyway, I am wondering if you or anyone knows how to calculate the impact of this lifestyle on children who reach college age? We have four kids, are car-free, pay low rent, and minimal expenses, and while we won’t necessarily reach FI before they all reach college age, I am wondering if there is a calculator to find the tipping point for income vs. savings vs. eligibility for college financial aid, to help us understand how the balance works. I just don’t want any surprises in that realm. My husband and I both paid most of our way through college, with a little help here and there, and my kids already understand that they have to work for what they want–we do not give them money, so they know that if they want money they go out into the neighborhood and work odd jobs for people who are willing to pay. The idea that they might have to pay their own way through college would not be a surprise to them, but I still want to proceed with knowledge of how all these factors fit together. Any direction you could give us on where to look for how to calculate these factors and their balance would be a huge help.
Thanks!
Good article, MadFientist. I like the geographic arbitrage suggestion as you are right that can massively reduce living expenses and also keep life interesting and fresh. It takes the right kind of spouse to embrace that lifestyle, but if he/she is on board, it really can speed things up.
Yes, I agree we all need just enough house & less stuff. It saves you a ton of money & headache not to have to clean a mansion, insure all the stuff in it, save more money to invest & have more freedom. They say if you invested in Berkshire Hathaway in 1964, you would have $15 million today. Make investing a priority.
Thanks,
Miriam
I had never considered renting housing forever. It would be a lot cheaper than buying a house. I don’t know if I could personally do it. I would really like to have the American Dream and own my own house eventually. I wonder how much the American Dream is played up just to get people to buy homes and not rent.
I’m 19 and I’ve been working for about 2.5 years, and I’ve saved up a good chunk of money. However, I started college this year, and I’m trying to balance tuition payments and the urge to spend my money carelessly. Do you have any tips for cutting down spending? Or how much of my paycheck I should be spending if I make anywhere between $600-$800 a month?
Thanks for aspiring us with the ways of getting financial independence
But I guess following these steps practically a bit harder as it looks in reading.
I really enjoyed this article! The way you broke housing costs down into categories was really helpful as a college student always looking for cheaper housing options. The bonus spreadsheet was also a big help that I think I’ll be using in the future.