Financial Independence is a wonderful thing. I frequently sing its praises, and I am proud to have achieved the milestone for myself and my family. Having attained FI completes half of the FIRE acronym, and I’ve got plans for the RE part soon enough.
I haven’t pulled that trigger yet, though, have I? Why not? After all, by definition, I’ve got Enough. I could have given notice a year ago and maintained our lifestyle indefinitely. But the truth is I’ve been straddling the fence, and each time my toes graze the grass on the other side, I retreat.
I’m still working, but I’m not working for nothing. I’m working for something called Financial Freedom.
What is Financial Freedom?
Financial Independence, Financial Freedom. Six of one, a half dozen of the other?
I don’t think so. I see the terms used interchangeably, but to me, the two term are similar, but represent distinctly different concepts.
Independence in this sense means you can live independently of earned income. Maintaining your current lifestyle, likely a relatively frugal one that allowed you to become financially independent, you can reasonably expect to never run out of money.
Yes, that’s impressive and awesome, and what if, like me, you’re not fully convinced you want to live that same lifestyle indefinitely? What if you want the Freedom to upgrade? What if, years down the road, your wants or your needs balloon unexpectedly?
I don’t know about you, but I can tell you my interests and values have changed drastically as I have grown and aged. I know that my wants are less than they were ten years ago, but I can’t pretend to know what my life will be like in ten or thirty years.
In the midst of another night on call, the shrill chirp of the pager disrupts my slumber, and I know the little plastic beast’s days are numbered. I don’t really want to get up and go, but I do, because it’s my job, and I’m working towards financial freedom. The initial frustration is replaced with a sense of calm and a sly, confident grin. Soon enough, I’ll have the freedom to retire without regret, with the ability to absorb life’s unexpected blows, whether external or self-inflicted.
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Benefits of Financial Freedom
With Financial Independence, you’re more or less locked into your current standard of living. If that’s a barebones existence, that’s where you’ll want to stay. Yes, you may indeed be happy with that way of life for now and forever, but I don’t like to take chances. Building up a cushion is buying insurance against a change of heart or a major curveball from above.
When you have Financial Freedom, you can feel free to do some things you might have never considered when you were on that laser path to FI. For example, you could, without regret:
- Order your favorite menu item, rather than the best value
- Stay next to the beach, instead of four blocks up the street
- Spend a year in western Europe, rather than strictly LCOL destinations
- Get the motorhome with slide-outs and self-leveling features
- Buy the Express Pass at the theme park
- Pay for a babysitter more often
- Share a bottle of Utopias or [insert ridiculously overpriced beverage of choice] with friends
- Pay for the overpriced internet on the flight to see the rest of the game*
*Full disclosure: I just chose not to pay $16.99 for in-flight internet to watch the last quarter and a half. If it had been a tight game, I just might have splurged, but I pretended not to hear the flight attendant’s broadcasted commands just long enough to catch the alma mater take a 21-7 lead before sending my phone into airplane mode, rendering Gamecast frozen in time. [post-write edit: wise choice — the game became a blowout for the good guys in the 4th quarter]
Financial Freedom also means that you can withstand financial challenges that have little to do with choice. The tax laws change, and your “fair share” goes from zero to $10,000 overnight. An ailing relative moves in with you. The Roth conversion ladder is made obsolete with one signature. Your home, outside of the flood plain, floods. You’ll need more than floodpants to keep a smile on your face. Financial freedom ought to do it.
Let’s Talk Numbers.
It’s clear that Financial Freedom means having more than the gold standard of 25 years in annual expenses ordinarily required for FI status. How much more may be difficult to pinpoint, but I think I’ve got a pretty good idea.
We’ve been tracking our spending for a year, and maintaining our cushy lifestyle costs us less than $70,000 a year. There’s a fair amount of fluff, a.k.a. discretionary spending in there, but it’s fluff we’ve chosen to spend money on. The majority, though, is our core expenses.
Let’s say, for the sake of argument, that $40,000 of it is core expenses. That’s housing, food, clothing, a value family vacation, health and other insurances for a middle class family of four. The typical American household spends $50,000, but we know there’s some fluff in there. I also know families who live quite well on less.
With an estimated $40,000 of core expenses in our $70,000 budget, that leaves about $30,000 as fluff. The fluff is our second home, additional vacations (often practically free thanks to travel rewards), hot tub purchase, and various lifestyle choices that we make that cost money.
What if we doubled the fluff? We could order the steak every time. We could travel further, more extravagantly, and more often. We could have dueling hot tubs. We could hire a babysitter, and go drink Utopias with friends in the beachfront rental!
That’s how I’d like to define financial freedom. It’s your core spending + 2x(discretionary spending). For us, that’s annual spending of $40,000 + 2x($30,000) = $100,000 a year. If you could afford to spend double on those things you do to make life a little nicer, you’ve earned a newfound level of freedom. Financial Freedom.
Financial Freedom = 25 x (Core Spending + 2 x (Discretionary Spending))
In our case, using the numbers in the example, FI was achieved with 25 x $70,000 = $1.75 million. Financial Freedom requires 25 x $100,000 = $2.5 million, or about 36x current annual spending. I’ve already worked One More Year since gaining my Independence. With the current timeline, I expect to earn my Freedom, based on this definition, by the summer of 2018.
A Word of Caution
Freedom to spend doesn’t mean you should or will spend all those additional dollars. It means you’ve got enough cash to do so without putting your financial future at risk. A saver at heart who has achieved FI or FF won’t double discretionary spending at the flick of a switch. And that’s a good thing. There is, of course, no end to how much someone could spend in a year.
I haven’t forgotten how I told you to keep special things special and Make it a Treat. I understand the hedonic treadmill and the marginal utility of money. I also know what it’s like to choose not to afford something when I know that we easily can. I don’t want to forever say No out of habit. I’d like to have the Freedom to say Yes when it feels right. I’d like to retire when I’ve hit the nadir on the Likelihood of Regret scale. For me, that will come when I have not just Financial Independence, but also Financial Freedom.
Avoid the Slippery Slope
If you agree with my sentiment, and you strive to achieve a net worth that qualifies you not only as independent but also financially free, you must decide how you will use those additional dollars. If you follow the formula and literally double your discretionary spending to the point where that level of annual expenditure becomes the new norm, you’ve defeated the purpose. You have turned a great thing into a good thing. Your Freedom has been downgraded to Independence.
I suggest you spend a little more, but not a lot. See how it feels to order dessert or tip exceptionally well. Pay the price of admission when you would normally seek out only the free attractions when exploring a new city. Double last year’s donation.
The rest is insurance. I believe in insuring your home and automobiles. Umbrella insurance protects your net worth. Until you are truly financially independent, term life and disability insurance are vital, particularly for those of us with a family.
Financial independence allows you to be self-insured against a financial catastrophe in the case of death or disability, saving you those monthly premiums. Financial Freedom allows you to be self-insured against the cost of unexpected expenses and lifestyle upgrades.
Sometimes, even lifestyle maintenance can be costly. Have you seen the headlines on the rising cost of health insurance? Shame on those money grubbing, filthy rich, devilishly handsome doctors.
Do you see the difference that I see between Financial Independence and Financial Freedom? Have I adequately identified and defined the reason I choose to keep on keeping on? Is this just bad armchair psychology? Take a seat on the sofa, and I’ll see you in the comments.
91 thoughts on “Financial Independence versus Financial Freedom”
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This is a great post! Thank you for the clarification of independence vs freedom. It helped me clarify it in our success story here
This is a great post! Thank you for the clarification of independence vs freedom. It helped me clarify it in our success story here: https://43bluedoors.com/2018/02/11/financial-independents-no-budget-early-retirement/
The problem of financial freedom as described is I don’t think the solution lends itself to changing your ratios. Should I swipe 4% instead of 3%??? Am I “risky” enough?? I think it boils down to a little planning and entrepreneurialism.
I FIRE’d with 2 kids in college one a freshman and one a senior. Both are planned as fixed expenses, an extra $50K put aside (beside what I already saved for them) covers the whole shootin’ match with some leeway, and I don’t think about it. It was a couple months extension before I FIRE’d.
I practiced anesthesia. When I got out of the Navy a couple years after residency (I owed them 2), my wife and I spent a couple years living on beaches in expensive retirement condos rented out by rich people waiting on the day they would take occupancy. I was doing locums retirement. I only took 3-6 month
locums jobs. I made the hospital get me a condo on the beach. My wife and I would drive our cars to the gig and move in. The hospital was happy to do that because it saved them a boat load of cash not sending me back and forth on a plane every week. My wife brought her WOK, laid on the beach, and by 3 months we knew ALL the best restaurants in the area. We had a blast. In the mean time my locums pay was going into the market. I got to experience several different practice styles and practice pitfalls, invaluable. When I settled down I was clear on what I wanted.
My friend who was a retired anesthesiologist, bought a motor home and he drove that to his locum gigs with his wife. Mobile Gas will Pass. The locums food, travel and housing allowance paid for the motor home. He would travel around and if he particularly liked a local he would stay a bit after the gig ended, or maybe move down the road and stay a bit. He never much touched his nest egg till they got tired of the road and sold the motor home a.k.a. a life of entrepreneurial freedom.
You want a year in EU? … fixed expense, 6 months in Maui? fixed expense. You want 10 of these in a 30 year retirement? Fixed expense x 10. Rent that life, don’t buy, just make a plan. It might slow down your FIRE a couple years, but once you make your nut, tailor the rest to your satisfaction and quit. You get to live your life on your terms (aka freedom).
To this point for me quitting has been very Zen. I moved from required daily doing, to the peace of being. Zen comes from the middle Chinese word chan and purports enlightenment is attained through meditation, self contemplation and intuition, not devotion. A job is the arch definition of devotion. I have the freedom to reclaim my time. It’s amazing once you quit how many people have all these plans for your time. My goal is to not have weekends. Weekends are a construct of a work week, so I don’t need them anymore. Probably couldn’t pass a mental status exam half the time, because a Saturday is a good as a Tuesday to a retired guy.
Great post PoF.
I like the differentiation between independent and freedom.
Many FIRE folk are smart, well educated people who have invested a lot of mental energy getting where they are today. The idea that they will spend less in retirement than while working is at best naive, it is unlikely they will be fulfilled by a day full of unemployment television or hanging out at the local mall.
I suspect many will turn their energies towards travel, hobbies, or further education… all of which are likely to cost money.
The 4% rule certainly sells the dream that anyone can retire early. It would be interesting to hear what someone who had lived in Japan for the last 20 years, or in Greece or Spain more recently would make of it.
I suspect that bit of extra padding between independence and freedom in the retirement fund will make for a much smoother ride. I’ve adopted a similar approach myself.
Thank you, Slow Dad.
It’s better safe than sorry in my mind. As long as I’m reasonably happy in my job, I’d much rather work a little “too long” than not long enough.
Cheers!
-PoF
Great post! Thank you for sharing. It’s very useful. Hope to hear more from you.
J.D. Roth at MoneyBoss wrote about this concept another way. He outlined 6 stages of financial freedom. He calls Stage 4: Financial Security. This means your investments generate enough to afford a basic food housing, and medical care, but nothing to spare. Stage 5: Your portfolio generates enough for your current lifestyle, which includes some extras beyond the very basics. Stage 6 is the Abundance Stage (what you call Financial Freedom). This is where your portfolio generates more than your current lifestyle so that you can upgrade your lifestyle, help those in need, or maybe some of both.
The only caveat I’d add is that it is often possible to hit Stage 5 (what you call financial independence with 25X your annual expenses saved) and upgrade your lifestyle over time, albeit more gradually than if you hit stage 6 (financial freedom/Abundance). A lot of people who start at Financial Independence end up dying with more money than they started with.
I like that, and it sounds like something I read, Mysticaltyger. Perhaps JD’s post planted a seed in my mind that led to this post. It wouldn’t be the first time.
Best,
-PoF
Just when I was getting the definition of financial independence down, now you add another one! Ugh! 😉
https://esimoney.com/what-is-financial-independence/
To me, they are the same thing, it’s just what level of financial independence you want. That can be at $30k, $75k, $125k or whatever. But when you have financial independence, you have financial freedom too, at least in my mind.
When we built our FIRE budget, we put in a lot of things we WANTED to do, not just what we HAD to do. So we could probably live on $50k per year, but our budget is closer to $100k a year.
Is that FI or FF? Doesn’t really matter to me. I’m off to play video games anyway… 🙂
To each, his own. The ability to lower the budget without hardship makes having 25x expenses look more like what I describe as financial freedom. Clearly, if you are spending double what your core expenses would be, you’re in great shape to survive a substantial financial blow compared to someone living on a shoestring budget.
Thanks for chiming in!
-PoF
I love your distinction between FI and FF.
Using your definition, I chose to RE this August at age 59 (if that’s considered RE!) at FI rather than FF. In fact, if I had worked two more years, I could have added significantly to my net worth. Based on my income and a substantial bonus I would have received in mid-2018, I could have likely gone from 25x expenses to 29x expenses just by working those two additional years. Foregoing 4x expenses over a two year period probably comes close to the definition of choosing to retire at FI rather than FF.
For me, the decision was based on two factors: First, at work I was alternately bored to tears (at best) and (at worst) felt pressure that I believe was affecting my health. Not a great situation. Second, I considered the amount of quality time I have left in this world. If I assume I have around 20 “quality” years left, then by working another two years I was burning 10% of my remaining quality years. I wasn’t willing to make that trade-off.
I’ve been fortunate to be able – particularly over the past 10 years – to travel fairly extensively and create great experiences and lasting memories with my family. While that doesn’t mean I don’t want to have more experiences and memories in the future, it does mean that I’m OK that I may have to be more conscious of my spending in the future.
Thanks again for the post; it really helped me crystallize my thinking around this topic.
Good Post. Wonder if your calculators should now include that clear distinction. I am on my way to FI but would honestly never consider stop working at that point. Too much risk and too much responsibility. I am not one of those folks who wants to retire into a life of penny pinching.
Very interesting read. I was mentally moving towards FI until I realized I would be bored out of my mind just sitting around the house all day. I’m working towards financial freedom, but I see it a little differently than what you are envisioning I think. I am a busy body and always need to be working on something or solving some problem. For me financial freedom would be leaving the good-paying job am I currently in a moving onto another job that is much more fulfilling but will probably come at quite a cut in pay. If we weren’t FF, we would not feel comfortable doing that. I guess freedom is in the eye of the beholder :-).
Sounds like a plan, Derek! I am similarly a busy body, but I’m not sure I’ll be interested in working for a living once I have my freedom. I could easily spend a lot more time on photography, fitness, food, and family fun. I will still have this blog, though.
Cheers!
-PoF
I like the distinction here, PoF – maybe I’d formulate things a little differently, but I’m 100% with you on the general concept. We’re a Financial Freedom kinda household here, and the “safety cushion” or “insurance” idea is a strongly satisfying one.
Additionally, making the deliberate choice to spend less is very liberating and implies a sense of control over life; spending the same amount of money in a situation where that sum is the strict allowable maximum might well cause someone to feel “poor.”
Thanks for the great and thought-provoking read! (Also: You guys still use pagers?! 🙂 )
I enjoyed this post because although I am several years from even reaching a “barebones” FI, I keep debating what my number should be. So although I have a range I’m shooting for, I have decided to stop worrying about an exact number.
Instead I have been taking steps to transition into the lifestyle I want to have post-FI (or FF). It helps that I have flexibility with my current job and I plan to gradually reduce my base hours over the next few years to balance work with my hobbies.
I also feel more comfortable with this approach because as of right now, my husband has no plans for ER. Therefore, even if my husband did scale back, should would be able to cover many of our basic expenses with his income (though I think he may change his mind as I get closer to FI and continue to cut back my work hours!).
Your post definitely gave me some more thoughts to mull over – thanks!
It reminds me of being back in school–I’d bust my butt all semester to give myself a cushion for the final exam. I’d still study hard and do my best, but knowing that I only needed a 60% to keep my goal grade was a huge stress-reliever.
In retirement, maybe we’ll only spend $40K/year, but wouldn’t it be nice to spend more without worry if good causes arose?
A fellow overachiever, I see. Better safe than sorry!
Best,
-PoF
Yes. You have mentioned the distinction before, but I like how you broke down the logic and how you arrived at a number. I have the same thoughts. You want enough to be self insured against the things that life can throw at you. Even if nothing unexpected happens, I want enough that I can be sure to maintain my independence as I age and my mobility decreases even if I need to hire help.
I expect if we stopped working our lifestyle wouldn’t significantly increase. But I can picture large expenses that I’d want to take advantage of like: a two month cruise, a trip to the Super Bowl (or the once in a lifetime event of your dreams), gifting a family member with a large item. One of the paradoxes of extra time is that you can save money with everyday things like cooking, gardening, etc. But it’s also easy to come up with fun and interesting activities when you have the time to indulge them.
Or World Series Game 7 tickets. I heard those were going for $20,000! What a game, though.
Cheers!
-PoF
When you say that the typical american family spends 50k or that your family spends 70k a year does that include mortgage payments or are those just what I call ‘running expenses?”
Good questions — I am completely debt free. No more mortgage. My ~ $70,000 in annual spending is broken down in great detail here. The $50,000 spent by the average family includes housing.
Best,
-PoF
THX I LOVE YOUR BLOG AND AM A REGULAR READER( SEVERAL TIMES A WEEK) ALTHOUGH DON’T POST OFTEN
Yes, yes, yes this resonates with me! I only discovered the FIRE movement within the last year although have been a diligent saver since finishing residency. Reading all the different blogs I have not felt comfortable with the idea of calculating 25x expenses and calling it good. My gut was to save “more” but your explanation really solidifies what I was thinking. One problem is that we really only tracked our spending the last 2 years (usually we just try to mindfully spend, and save as much as possible).
I would say my husband and I average $50,000-$70,000/yr spending, and have 2.3M saved with student loans and mortgage paid off. We are very frugal now but I admit I would like to loosen the purse strings once we have reached our “number”. Still sorting out what the “number” is going to be , since my plan is to move onto a hobby farm and I literally have no idea what the annual costs of this will be. Until I research more and have a more solid idea of the costs of this, I will continue to sock away as much money as possible. That means this year I get to *enjoy* working overnights Christmas Eve and Christmas day but knowing there is a goal and an end date within the next few years will hopefully make it bearable.
Your blog is incredibly insightful and relevant to us physicians (and others). Keep up the great work!
Happy to help, and our numbers are remarkably similar, LD.
Like you, I’ll be working over Christmas this year. 96 straight hours of call, but it should be the very last Christmas I have to worry about that.
Good luck with the hobby farm! There might be a little bit of income in that hobby, as well.
Mahalo,
-PoF
I forget if I’ve heard the different definitions of FF and FI from JD Roth or Jushua Sheets, but I definitely listened to a podcast about their take on it. I more than likely wouldn’t stay in my career past the FI point, but could possible get to the FF point in a second career which was more hobby than actual work.
Every time I think I’ve had an original thought… the internet proves me wrong.
Interesting distinction. I suppose I have been indirectly considering the same idea. I would consider myself FI at around $600k, but you’ll never see me “retire” on that number unless I am merely replacing outside employment with a side gig of some sort. Mrs. Vigilante and I have set our true, “never-lift-a-finger-again” FI number at about double that, so we would anticipate a 2% SWR without any other source of income (and we will have other sources of income). It’s essentially in case of emergency, but because it allows for much more flexibility in future spending, particularly with unknowns like healthcare costs. I guess that’s financial freedom!
Yes, I suppose you have. My original savings goal was 40x to 50x, but I realized that was probably overkill. But if you don’t mind doing what you’re doing… might as well keep on keepin’ on.
Aloha!
-PoF
The number we’re shooting for (as documented in our FIRE plan: is….wait for it……the ability to withdraw $100,000 a year. My reasoning was similar to yours. I’m not a big fan of dueling hot tubs, I suspect the splash fights would quickly escalate and get out of hand, but I do want to keep more options open than we would have with a lower withdrawal number. We haven’t even settled on where we want to retire yet! We’re exploring various cities and countries and $100k seems like a number that would allow most doors to be open for us. It also allows us to imagine paying for a part of our daughter’s wedding, or buying her a car, or splurging on theoretical grandchildren. I freely admit that shooting for that number is a luxury – if we made significantly less, or if our jobs sucked significantly more I bet we would very quickly be willing to live with fewer options in our future.
It’s a nice round number, isn’t it? If you can’t live well with $100k or less, it’s time to examine where the money is going, and what expenses are truly making you happy, and which can be jettisoned without regret.
Good luck on narrowing down the location, Mrs. BITA. And don’t forget, you don’t have to choose one place. Plenty of early retirees are enjoying the vagabond lifestyle, even with children.
Best,
-PoF
Outstanding PoF. I love the nuance in this article. I may have to steal some of these ideas 😉
I’ve never thought to look at the difference between financial freedom and financial independence. I typically thought that those two were the same things but I’m convinced now that they are not!
One can’t really reach financial freedom without reaching financial independence first. I don’t think I would change my lifestyle significantly if I reach financial freedom because the frugal lifestyle I would adopt to reach financial independence would have become such a habit. Habits are hard to break! At least the frugal habit is a good habit to not break.
What you call it is a matter of semantics, but I like the concept of having More than Enough. If FI = Enough, an increased level of comfort, protection, and possibly happiness can be achieved with what I choose to call Financial Freedom.
Interesting. You pretty much wrote the explanation of why I’m still working. I’ve been FI for a while now, but haven’t been able to completely pull the trigger. This is a war in my head every single day.
The good new is this: I have one more week of full-time work. One. More. Week. After that, it’s 3 day workweeks with 4 day weekends. Hot darn, I’ll finally have some time!
Also, Bears*.
*sorrynotsorry
Hooray for one more week!
Hooray for the Cubbies!
Boo for the Bears. Booooooo.
Aloha!
-PoF
Thanks for addressing this issue. I’ve spent a good number of hours trying to figure out the difference myself and everyone seems to have their own opinions as to what each means and which is “better.” In the end, the idea of “freedom” just resonates with me, in the sense that it’s all about the choice. Do I have to keep working a job which I love, or is it a choice for me (which makes me enjoy it all the more)?
That sounds like a great position to find yourself in: choosing between a couple great options.
Aloha!
-PoF
I agree that FI is often the goal but it isn’t necessarily living a dream life. Once the paychecks stop coming in fear can take over. That forces retirees to spend less so they don’t run out of money thus leading to an even more frugal existence.
The other aspect of all this is of course the hedonic treadmill. Since I have had good success with investing over the years I thought I could “retire” with 500K but when I got there I moved it to 1M. Then I looked at the paltry 40K that might generate and moved it up to 2M or maybe 2.5M. Then when past 3M I wasn’t sure it would be enough if there is a market crash at the start of retirement or if health expenses and educational expenses still soar. The “Number” keeps going up for me, my friends, WCI, and likely PoF too.
Last comment on this is that for the early retiree either returning to work or continuing part time work should be an option or a factor in the planning.
A moving target. Yes, Wealthy Doc, I think many of us are dealing with that. I can say that when I reach my target date / number, I will no longer take call. The pager will be the first thing to go when I’ve got my Freedom.
Mahalo,
-PoF
Great post! So are you going to become the Physician on FFRE now? It’s not quite as catchy as FIRE…Hope you are enjoying your island vacation. Based on your hints from your Sunday Best post, I think I am at the same anesthesia CME conference as you. Cheers!
Physician on FFPRS – Financial Freedom Probably Retire Someday. It just doesn’t have the same caché, does it?
I’m quite sure we’re at the same meeting. Check your e-mail shortly.
Cheers! See you at happy hour?
-PoF
Great post and interesting you have differentiated FI and FF. I personally haven’t done that myself but the way you explained them, it totally makes sense. We are working on achieving FI but sounds like we should really be aiming for financial freedom! The ability to change your current lifestyle is definitely attractive.
If you like the approach, consider working the regular full-time job to FI, then feel free to slow down or switch gears to a different, more fulfilling career as you approach financial freedom. The portfolio should do the heavy lifting at this point.
Aloha,
-PoF
i love your graph, brought a smile on my face. We’re reaching FI soon, but still afraid to pull the plug. Healthcare can be costly. Let’s see how Obamacare goes.
Yes, if health insurance costs $20,000 a year for a family, that is something we’ll have to be prepared to cover.
Mahalo,
-PoF
This is something I have thought about also. I think its smart to have a buffer if possible. A medical or legal issue could really throw things off in a big way if you are cutting it too close. And certainly the larger your family or extended family is, the greater the chance something could eventually happen. In your case, I think its not a bad idea to keep working for a while longer. You’re still young enough and you will probably be glad you banked that extra money. Once you leave, it would probably be hard to go back (mentally) or find another job at the same level and pay you have now.
True story, Arrgo. Medicine is very difficult to return to, particularly a specialty with required procedural skills like anesthesia. It’s best to be very sure before letting those skills lapse.
Aloha!
-PoF
The bigger the portfolio the better! Lucky for me our expenses have been shrinking, not growing. For now Mrs CK enjoys her retirement gig, and we have not had to touch our portfolio. So even though we do not rely on the 4% rule, I think it would have been fine for a flexible retirement like ours.
Given how hard you’ve worked to enter your field, and the work needed to maintain certifications, I think you have sound logic.
Very good, Mr. CK. First name Louis?
A withdrawal-free retirement sounds awesome. Keep living the dream!
Best,
-PoF
I agree with you. And I’d say, the younger you retire, the harder it is to know the expenses in your future. I can crunch the numbers and see how little I could spend per year to be “early retired” for the rest of my life, but I feel like it would be deprivation to decide at age 31 that I’m going to limit myself to X expenses per year for the rest of my life. It’s just not realistic. I’ll take some time off at age 32 and go back to work at age 33. And maybe I’ll do the same exact thing at at 42 if my asset base isn’t where I want it to be. 😀
Which is to say, I don’t think 25x is enough for me personally if my baseline is barebones expenses. My baseline has soem fluff, but certainly not enough to allow for developing new hobbies (or philanthropic activities!) as I grow older..
Right on, TJ. I think we all know that the Trinity study and its 4% SWR are based on a 30-year timeline. We early retirees without death wishes have to plan on living substantially longer. I want to give my portfolio a really good chance of growing in retirement. Financial Freedom makes it highly likely that will happen over the long haul.
Aloha!
-PoF
Well, I am going to contradict Mrs. PIE…..only kidding…..ha ha!
If Bogle is correct (he usually is) about his projections for future expected annual returns in the stock market being ~4% as opposed to 8-10% that is the long term average, then a solid buffer (discretionary or otherwise) makes an awful lot of sense.This is part of our plan. There is a nice summary of the quite simple Bogle expected return formula over at A Wealth of Common Sense blog, hosted by Ben Carlson. Link here:
http://awealthofcommonsense.com/2016/09/the-john-bogle-expected-return-formula/
I enjoy Ben’s blog — thank you for the link. You’ve identified another good reason to overshoot the 25x. Where are all the dissenters!?!
Mahalo,
-PoF
Great analysis PoF. And I like the financial-freedom formula; it makes sense. I think going beyond the 25x benchmark of the 4% rule is a good idea for just about everyone just for the sake of prudence (not necessarily to achieve a true “freedom” as opposed to “independence,” as you put it here), for a host of reasons (e.g., not sure market returns in future decades will be as robust as prior decades; people don’t get the portfolio allocation right and therefore aren’t really within the 4% rule “safe-harbor”, etc.). The question of whether you go further to something like 36x must be resolved on the basis of an individualized cost-benefit analysis. If the pain of continuing on in your job for even another year is extremely high, and your consumption profile is such that you don’t need or want consumption capacity above where you currently are (whether that be 25x or something marginally greater for safety), then continuing on would appear to be a net-loss proposition. But if you generally like where you are in your career and that additional time at work isn’t going to induce extreme pain, and that additional time at work will add meaningful spending capacity, then it makes a lot of sense from a net-benefit analysis. But I do think that in any situation it makes some sense to shoot for something north of 25x just to provide a cushion (either for your own changing consumption desires or for the vagaries of market movements). Great post.
I like your approach, Joe. We all need to decide for ourselves. If work is unbearable, it might be wise to take a break even before you have 25x. Recharge your batteries, then look for a way to earn money that is at least more tolerable.
Aloha!
-PoF
There is one expense line item that is almost always excluded from these discussions: taxes. The higher the amount of expenses required in your retirement, likely be higher amount of tax you are going to pay upstream of those net expenses. You will take distributions from IRAs and sell investments which result in capital gains, generating state and Federal (and maybe local) income taxes.
Sure, you are not going to pay nearly as much tax as you did when you were earning income as an overpaid devilishly handsome anesthesiologist 😉 , but there will be income taxes to pay, perhaps 5 to 15%, or more, of your living expenses.
Great point, Vagabond. The overpaid ridiculously good-looking anesthesiologists (and radiologists) will see an amazing reduction in taxes, but won’t get off scot free in retirement. And the more you spend, the more slikely you are to see a significant tax bill. Depending on how your portfolio is set up, it is possible to pay zero in federal income tax and capital gains taxes, but if you have state income tax, that can be tough to avoid.
Mahalo,
-PoF
I enjoyed the referenced article on taxes in retirement and am happy to say learned quite a bit. I was doing the math in my head and probably overestimated the amount of taxes in retirement. Woohoo ?!
Glad to hear it! When most retirement savings lives in a tax-deferred account, taxes are inevitable. On the other hand, if you’ve got some tax diversification in the portfolio, drawing also from taxable and perhaps Roth accounts, taxes can be very low, at least until RMD’s kick in.
Best,
-PoF
Thanks for putting this down in writing so eloquently. I guess in a way we have been planning for financial freedom – we have been working on predicted future expenses that range from ‘belt tightening’ to ‘high end’. Of course we want to be able to be closer to the ‘high end’ if not right on it. “high end’ allows for more of the discretionary fun spending that you describe. Not over the top, but enough to be able to say ‘yes’ to little splurges every now and again
The little splurges can make life a little happier. An extra $100 a week, which seems like quite a lot, would cost $5,200 a year. For many of us, that’s about a 10% or smaller increase in annual spending.
Cheers!
-PoF
Totally in agreement. Not only from lifestyle splurge aspect, but also a good idea for protection from sequence of return issues. If your right at FI and the market tanked the day after were you really at FI? If your padded to extra expenditures you still likely remain in good shape.
Indeed, FTF. That cushion can do all sorts of wonders, including protecting you from a 30% loss in portfolio value without losing your FI status.
Aloha!
-PoF
So interesting. I was in the MMM forum one day contemplating a little extra work after FI and one of the “retirement police” quickly reminded me that I was clearly “failing FIRE” if I went back and did some consulting! With pensions we are on somewhat of a reverse track than many folks. We will make more than 100K/year when we can collect both pensions and SS (even at a reduced level). So to retire early – we have to spend down some of our retirement accounts now (in addition to rental income). The jobs I choose to take at this point just add to the “freedom” you describe and maybe even the legacy we will leave for our children and charities. We are financially independent but without that much more effort, freedom is possible – so we make that choice too.
It’s so annoying when people are quick to judgment like that — and of course very common when the perpetrator can be anonymous on the internet.
Anyway, you have a great point. The average outcome using the 4% rule after 30 years is to end up with 2.8x what you started. If you start with 36x, you’re likely to end up with much more than that. Time to start making plans for Vicki’s Center For Kids Who Can’t Read Good And Wanna Learn To Do Other Stuff Good Too.
Aloha!
-PoF
I’m generally not a fan of the 25x rule. I think it’s far too aggressive for most. A little buffer money never hurt anyone! 🙂
Back in July, I had thoughts similar to your own…about finding a budget that was comfortable and included flexibility for what lies ahead.
My conclusion was roughly $2 million dollars, or roughly 36 times our projected annual spending of 58k: http://bit.ly/2eWU3R0
36x, you say? I think we’re on to something here, Mr. Tako.
Mahalo,
-PoF
Great post POF. Financial Freedom is way more liberating than bare level of financial independence. Of course, I agree wholeheartedly with your thinking. Even our numbers seem to agree, see here: http://tenfactorialrocks.com/why-10/
Thanks, TFR. Retiring with Financial Freedom makes a growing portfolio in retirement all the more likely. It appears unlikely I’ll have $10! when I retire, but I wouldn’t be surprised to surpass that number within a few years if the markets don’t crap out on us.
Aloha!
-PoF
Love your blog PoF!
I have a question and would like your opinion on how you view capitals gains and distributions in relation to your savings rate.
I reinvest all my gains and distributions, however, I can also to choose to spend this money. Because I choose to “save” this income, could I technically count it with the percentage of my earned income that I save?
What is your opinion?
Thank you, Index Investor.
I look at the total return. Part of that will be dividends and capital gains. If you are working and investing, there is no reason to spend from your investment returns, but money is fungible. If you spend from dividends returned in a taxable account and invest all of your paycheck, it won’t change anything.
In terms of calculating your savings rate, I base it on Earned Income, not investment income. But you can do what works for you.
Best,
-PoF