Financial independence is both easier and harder to achieve than most people think. Financial independence is easy if you follow the standard, time-tested formula of long-term saving and investing. But, no one wants to do that. They want financial independence faster and easier, and that is much harder to achieve than most people think.
What Is Financial Independence?
The definition of financial independence is when work becomes optional, and you do not depend on anyone else for any income, or help with expenses. In other words, when your finances are completely under your control.
It is actually quite simple.
Easy Financial Independence
Achieving financial independence is easy and simple… in exactly the same way as losing weight is easy and simple. Just eat less calories than you burn over a long enough period of time. Financial independence is no different. Just spend less money than you earn over a long enough period of time.
You have heard this song a thousand times, and it is always true.
Easy Way How To Be Financially Independent
- Save 10% of your income, preferably as soon as you start working.
- Invest in a well-diversified portfolio tailored to your time frame and risk tolerance.
- Wait a few decades.
- That’s it.
You’ve probably seen the chart so many times you are bored of it, but that doesn’t make the math any less true. There are retirement calculators all over the internet, but the one at Vanguard is simple, and easy to use. The easy way looks a little something like this.
What’s that? You are already over 25 years old and you haven’t saved anything? Just like with weight loss, as you get older your metabolism slows down and you become less active making losing weight harder. Financial independence works the same way (I told you they were the same!)
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Now that you’re older, you’ll have to try a little harder, but the easy way is still the easy way. You just have to save more money.
You can play around with the numbers in the retirement calculator of your choice, but it will work out to needing to save about 20% of your income, when you are 35, and so on, in order to achieve the same outcome that 10% gave you at 25 years old.
Easier Financial Independence with Social Security
Achieving financial independence is even easier if you account for Social Security. You can estimate your Social Security benefit to get some idea of what retirement with Social Security will look like for you.
Will Social Security still be there when it is time for me to retire, you wonder? Well, my dad spent 20+ years saying it wouldn’t be there when he retired, and now he collects it every month. They did move the full retirement age back to 67-years old though.
What does that mean for you? For starters, don’t vote for politicians who want to cut Social Security if you are counting on it for retirement. Second, accept that there will probably be some kind of changes to Social Security income that will make it less beneficial for you. That being said, you probably will still get a meaningful benefit from the program by the time you retire.
How do you account for that in your quest to be financially independent? Put a smaller amount in the retirement calculator for Social Security than is currently expected. That way, you can be prepared, without suffering from the anxiety that may come from assuming nothing.
If you put just $1,000 per month into the retirement calculator above, you can get a conservative estimate of what your financial independence might look like down the road.
With a $1,000 per month Social Security income benefit, the 35-year old would need to save closer to 14% or 15% of their income instead of 20%.
The 25-year old might need just 7% of their salary to retire at 65-years old.
How To Achieve Financial Independence Easily When You Are Older
Once you hit a certain age, financial independence starts to look harder and harder to achieve. The easy way to financial independence is still the same. You need to save as much of your income as you can. The calculator may make it look impossible, but you’ll figure it out.
When I was a professional financial advisor, I had lots of clients who, on paper, could never retire, but in almost every case, it turned out there was a way. Sometimes it took being clever, other times, there were different factors that could be controlled when you are closer to retirement that you wouldn’t want to count on as part of long-term plan.
For some, it was paying off their house by making regular mortgage payments. For others, there was a lump sum buyout by a company doing layoffs that made the difference.
For many, it turns out that making work optional meant being able to work doing something else, or less hours, or more enjoyably. A small amount of income can go a long way toward making retirement savings last, even if that technically isn’t full financial independence.
For others, it turns out their income needs were less than they expected. In the end, there is almost always a way to make retirement work IF you have done at least some saving and investing over your life. So, start now!
(Financial advice is often accused of neglecting low-income Americans, and this is a fair criticism. In this case, if you can’t possibly save because of low income — and NOT because of overspending — there isn’t much you can do. You can’t make money out of thin air, whether it is for retirement, or anything else. You’ll have to make do with Social Security and keep working as long as you can. Make darn sure you are not voting for politicians who cut Social Security. There is no other magical solution. I’m sorry about that. I wish there were.)
Financial Independence The Hard Way
Ironically, when most people have it backwards when they think of the easy way to financial independence. They want it to happen faster. They want a shortcut. They want secret money tricks that will make them financially independent.
All of these things are actually much harder than the easy way to financial independence, which is long-term savings and investing. Don’t confuse faster financial independence with easier financial independence.
Financial Independence Fast
To get financial independence fast requires one of two things. Either a fair amount of good fortune (Hello, PowerBall), or a serious dedication to maximum saving and investing.
Go back to the retirement calculator and change that retirement age to 55. See how much more you have to save to retire early.
Start at age 25 and retiring at 55-years old requires you to save 20% of your income. It is totally doable, but that requires you to keep your expenses lower than are typical for your income.
Starting at age 35, retiring at 55 requires saving nearly 45% of your salary!
Now, both of the above numbers don’t account for Social Security, but because you need to wait until at least 62 to start drawing Social Security, you’ll need to be sure you don’t need it, especially at first.
Retiring at 40, or even 50 years old, requires even more savings. To achieve early retirement extreme scenarios like this requires you dedicating your life to this one goal.
Extreme early retirement gets easier if you have a head start of some kind, whether it is an inheritance, a windfall of some kind, or just being lucky. The Rich Dad, Poor Dad guy had more than a little bit of the latter. Buying houses in Hawaii, not by having some kind of great knowledge, but just by happening to live there, right before cheaper air travel made Hawaii homes and land much more valuable was key to his success. Doing the exact same thing, at the exact same time on the East coast would have led to catastrophe and likely bankruptcy when real estate prices in that region collapsed like never before.
One way to achieve the goal to achieve financial independence retire early, is to figure out a way to minimize expenses in retirement in extreme ways. On top of that list is planning to relocate to somewhere with lower expenses. That might be as simple as moving from New York City to a small town. It might be as much as moving to another country altogether.
Otherwise, super early financial independence takes dedication to saving and investing at an extreme level that most people can’t achieve.
One concept to achieve very early retirement is the FIRE financial independence retire early system. There is an entire Reddit Financial Independence subreddit dedicated to one method to achieve extreme early financial independence. Ironically, a large percentage of the posts are from people dedicated to FIRE retire early principals who are having difficulty being able to achieve FIRE in real life.
Easier Early Financial Independence
If you want financial independence at a very young age, the easiest way to get there is to include some form of ongoing income. Remember that financial independence is about making work optional. A quick turn of phrase, and extremely early financial independence gets a lot easier to achieve.
You see, if you like what you are doing to obtain income, then technically, you are choosing to work. Or, to exactly fit the definition, you are opting to work, thereby being financially independent.
This is the best method for achieving early financial independence, or even normal retirement age financial independence.
The problem with all retirement scenarios is that you have to build up enough money such that you can regularly take the right amount of money from your nest egg for the rest of your life. That requires a fairly large lump sum. However, if you can offset some, or all, of the withdrawals from your retirement funds for any amount of time, the lump sum requirement plummets.
Go back to the retirement calculator one more time. This time cut that number that says, how much income you’ll need in retirement. Drop that to something like 60%, and that extreme early retirement doesn’t look that extreme.
Now, a 35-year old retiring at 55-years old with just a modest Social Security payment only requires saving 20% of your income. That’s much more doable than 45%.
Lump Sum Income For Early Financial Independence
Another way to make extreme early financial independence a reality is with additional lump sum contributions. Saving 20% over 20 years takes time to add up before compound interest can really get going. However, if you had the ability to generate some lump sum investments in your financial independence, those not only add to your nest egg, but they grow immediately.
Finding lump sum income is easier for some. Maybe your parents gift you the maximum IRS gift limit each year as part of their estate planning, or just because they are nice. Each of those contributions can boost your early retirement nest egg and reduce the amount of income savings you need, or the number of years you need to save, or both.
For a lot of people practicing FIRE early independence methods, a side gig is necessary. Whether it is taking on a consulting project on the side, or even driving for Uber or DoorDash, directing that additional income toward your FIRE retirement goes a long way.
I knew one client who got a share of the oil mining rights payments from some land the family had. Those provided a big boost in addition to his regular 401k contributions allowing for a very early retirement.
Temporary Financial Independence
For some people an interesting goal is to achieve a temporary financial independence. Often this is coupled with a desire to achieve something, or to take advantage of a certain window of time.
For example, I knew a couple that wanted to travel America in an RV before they had children. The idea was to be completely financially independent for a period of about three years so that they could tour the US in their RV non-stop. This is much easier to accomplish, both because you can have a definite amount you need ($30,000 per year for 3 years…), and because that amount is much smaller than being financially independent forever ($30,000 plus/or minus, for 35+ years…). It took a lot of work, and emptying out their original savings, but they made it.
Interestingly, I saw them about 18 months later. They had their fill, at least for that time, of traveling and had both gotten jobs and gone back to work. The remaining funds became the foundation of their journey to eventual permanent financial independence.
Another family did the opposite, looking to spend unlimited time with their kids. Both mom and dad sought to not work for the high school years of their two children, representing a period of six years. Their financial independence came courtesy of selling a parent’s house, and careful spending.
Saving for a temporary financial independence period is much easier than saving for retirement or permanent financial independence. Knowing exactly how long you are saving for is much easier than when saving for retirement where you have to account for the fact that you might live longer than planned.
How Much Do I Need To Be Financially Independent?
This is the key question, and it is hard to know for sure. Even temporary financial independence involves a set of unknowns. Most retirement plans work along the lines of estimating a withdrawal that leaves a continuous nest egg behind such that you never run out of money. That involves drawing on the principal, but not too heavily.
For people looking to retire young, the key is to use virtually no principal, thereby ensuring that you will never run out of money.
As a really general rule of thumb, many financial planners use a withdrawal rate of 4% or 5% of principal. Over the long-term a well-diversified portfolio should allow for such a withdrawal rate without draining away principal too quickly when calculated across a chunk of years. (That does not mean that you would never use principal.)
So, if you had $1 million, then you could withdraw $40,000 per year without ever running out of money, no matter how early you retired. For some people, this is good enough. For others, a $40,000 annual withdrawal would not meet the needs of their desired lifestyle.
Again, the key is to balance the amount of income available against the ongoing expenses. Obviously, the lifestyle on $40,000 per year with no mortgage or rent payments is much different than one where you spend $2,000 a month on housing.
Financial Independence Planning
Whatever form of financial independence you are looking for, the key is planning. Knowing how much money you need is key to knowing how much money you have to save and accumulate.