Financial independence is a great life goal with many tangible and psychological benefits. Before we get into those, it’s important to establish how one determines what it takes to be FI.
It’s difficult to reach a destination if you don’t know how to get there. You need to have a plan. You also need to define what that destination is, exactly.
Finally, what will you do once you arrive? Do you have specific plans or are you just going to wing it? And what’s so special about this place, anyway?
Join me as we set out on this journey to a place called financial independence.
Know Your Spending Needs
First, you need to have some idea of how much money you need each year to support yourself or your family. This includes obvious spending on needs such as food, clothing, and shelter. It should also include spending on insurances, (some) taxes, and perhaps fees paid directly or indirectly to a financial advisor. As for taxes, I would include property taxes of course, and some allotment for income tax, although you will be paying a small fraction of those taxes in retirement compared what you pay now.
I found it was difficult to know what a normal year’s expenses looked like for me, particularly when we had too many homes, some rental income, one-time expenditures related to moving, etc… I’m not sure I’ve had a “normal” year in the last ten, but our expenses seem to have stabilized over the last year or two. I have been using Mint.com to track and categorize expenses and have been quite happy with the app / website. It is really quite powerful and can also be used to track your investments as well.
With about 4 months of expenses tracked, I’m beginning to get a good idea of what a typical year’s worth of expenses might be for us. It seems that every year will have one big expense such as a home improvement project, vehicle purchase, or big vacation. And that’s OK, it just needs to be factored in.
Physicians and pharmacists, Register with Incrowd for the opportunity to earn easy money with quick "microsurveys" tailored to your specialty.
Understand the Safe Withdrawal Rate
Once you’ve got at least a rough idea of what your annual expenses are, you need to decide what percentage of your nest egg you are comfortable spending each year. You can read opinions on this subject of a safe withdrawal rate (SWR) ’til the cows come home. I could devote an entire blog post to SWR and probably will. An oft-cited number of 4% is commonly used, based on a study from Trinity College. You won’t find many scholars recommending a much higher number, and some (such as Wade Pfau) suggest it may be less than 3%.
Unless you’re contemplating retirement in the immediate future, the exact number isn’t terribly important right now. If this is a thought exercise, go ahead and use 4%. You
can call yourself FI when your annual expenses are 4% (or 1/25th) of your nest egg. A different way of calculating the FI number is to multiply your annual expenses by 25. If you’re using a 2.5% withdrawal rate, multiply by 40. For 3%, use 33.3. You get the idea.
It’s important to note that the financial independence equation does not require your current income. You don’t need to replace some percentage of your income in retirement, you need to replace your spending.
Income is certainly important towards achieving FI; the more you earn, the more you can save, and the earlier you can achieve that FI goal. Mr. Money Mustache outlines this very well in his post, “The Shockingly Simple Math Behind Early Retirement” Living below your means = a high savings rate = a quicker path to FI.
So now you know what you need to be financially independent. Hmmm…. it seems to take time and sacrifice, like not spending all of your take-home pay, avoiding or reducing debt, and quite a few years of decent income and savings.
Is it worth it? Yup. Unless you plan on living on Social Security and government cheese. Besides the obvious benefit of being able to retire comfortably, attaining FI has a host of benefits, whether you choose to keep working or not. Such as?
The Benefits of Financial Independence
“I just saved $4,000 on my life and disability insurance!”
You are now self-insured. Because I no longer carry disability or term life insurance, that’s an extra $4000 a year in my pocket (or my boys’ 529 college funds). If illness, injury, or my demise prevent me from working, my family will be OK financially because I’ve saved up enough money.
That is a great feeling, and those insurances no longer cost me $10 or more per day. There are other insurances you will still need or want to carry, like auto, home, malpractice, and perhaps umbrella insurance to protect your precious nest egg.
You are working by choice. You don’t need the paycheck to make ends meet. You may have some additional financial goal you are working towards, like a big boat, vacation home, or charitable aspiration, but working towards them is your choice. You could retire next week and continue to live your current lifestyle.
Similarly, if you are forced out of a job, you won’t be desperate to find a new one. Being FI is like having an awesome no-cost unemployment insurance policy.
You can stand up to “the man”. Some in the blogosphere refer to your FI-sized nest egg as “eff you” money, as in you could extend your middle finger to your boss / manager / CEO if you were unhappy at work. In our world, professionalism is a virtue (and a core competency in residency), so I’ll keep my voice and finger down, but it is comforting to feel that I have the upper hand.
“You want me to do what, now? Work 3 holiday weekends this year? And an occasional post-call day, which we all know will become most post-call days? No thanks, I decline.” No administrator owns you; if the job becomes unbearable, you can walk away. As the venerable Tom Petty once said, “It’s Good To Be King“.
Retirement is Optional
But you still like helping people, despite all the nonsense! Great news, you don’t have to retire. Not now, soon, or ever if you wish. But you can work less.
I worked far too hard to become a doctor and I feel much too young to stop working. But if I were working 60-plus hour workweeks like many of my physician colleagues do, I would strongly consider cutting back. Some careers lend themselves to part time work better than others, but if you are FI and experiencing burnout in your career, you should absolutely explore options to reduce the burden of work.
In my position, I have a good schedule (many days off) but lousy hours (frequent call, long shifts). If I had half as many calls, I would miss fewer family dinners, soccer games, family movie nights, etc…
For the most part, I’m happy with my current work / life balance and I’m not looking to make a change. A few more years of 18-hour days and 3 a.m. labor epidurals may have me thinking differently, so I keep part-time work as an option in the back of my mind.
What other advantages do you see from obtaining financial independence? Would you continue to work in the same capacity if you could afford to do otherwise?
8 thoughts on ““It’s Good To Be King” The Benefits of Financial Independence”
We’ve been contemplating canceling my wife’s disability insurance. She’s a part time ER doc. We basically live off my income. Our net worth is over $3 mil. However, one of our goals is to pay for our 4 kids colleges. Her income helps with that goal. Am I thinking about this wrong? The thought of saving $4k a year in disability premiums is intriguing.
At first blush, one would think so. There’s a great running discussion on exactly this in a post about the half time option. Believe me, I have gone back and forth on the idea. The main thing holding me back is the amount of baseline time and effort that goes into maintaining one’s status as a physician.
Between the continuing medical eduation, maintenance of Board certification, licensure, mandatory and expected meetings, other certifications (CPR, advanced life support, pediatric life support), etc… you have a lot of time and money invested just to be a doctor. When you consider all the requirements, a year or two full time begins to make a lot more sense than two to four years half-time, even if the tax treatment is better in the latter scenario.
I still think about it, thought. If my full time job didn’t have the enviable work / life balance that many of us are seeking, I would be more inclined to slow down.
Isn’t being a doc one of the BEST part time work ever? Choose how many hours you want to work, still get paid well, prestigious occupation, and can help others.
The one thing I wonder about is whether I would want to “get my money’s worth” by working at least as long as I’ve been at school to get my PhD. Ever think about it that way?
Nice article. I’m 36, and a few years behind in the process from where you are. Same profession, similar call schedule (Q3), etc. I’ll definitely be looking at part time when I pay my house off. I’ll most likely be 60-70% of my way to 25X expenses at that point.
Cool, sounds like you’re well on your way to living the life you want to live.