I am financially independent. In terms of raw income into my checking account, it has more than covered my expenses sometimes by a factor two since 2005 except 2008 where I took some losses. For example in 2009 I made about $11000 in capital gains and income. In terms of withdrawal rates I am solidly under 3% and I am approaching 2% as my next big goal. I have enough money for the rest of my life.
I spend about $7000 each year. Note that I spend my money quite differently than do other people. For instance, I spend little on services. I spend little on new things, and I spend comparably more on maintenance and reserve parts.
The issue of me working for a few hours a week sometimes comes up. This does not mean I need the money. In 2009 I made $7000 working for about 200 hours. I am semi-retired in the sense that still work but not in the sense that I need to to make ends meet. The problem here is that the traditional words of “retirement” or “semi-retirement” do not fit well usually being reserved for the 50+ year old who gradually wind down their careers. It would be more accurate to say I am independently wealthy than retired. Think of me as someone who successfully started and sold of a business at age 30 and made off with a bunch of money; only I did not start and sell a business but rather saved the money instead while being entrepreneurial about not spending it.
DW has a full time career, but in principle my investments and my freelancing for a few hours a week could cover her expenses as well. We do not need her money, but one of us do need to work for a few more years. This worker be either her or me or both. Currently it is her.
In a few years, my investment income should cover her completely and so if she wishes to stop working for money, she has the option as well.
I saved this money after making a choice. The choice was either that I could work for money or I could have money working for me. Most people choose to work for money for 30-40 years and then having money work for them during their final years. I figured I wanted more time not working, so I saved an equivalent amount in a handful of years. You can see how much net worth the median household has in terms of age and income by downloading the pdf discussed here. Compared to 2002 numbers which are similar to the 2010 numbers since the market has been flat, I am better off than most groups (high income geriatrics have me beat). It is also interesting to note that few people have the millions of dollars that the experts think that one needs.
next post: Should I go back to work?
42 users responded in " Clarifying our financial situation "
I, for one, have not felt mislead, possibly because I’ve been paying more attention than most?
>under 3% and I am approaching 2%.
Without straining too hard, I know your expenses could be covered with a $100k portfolio by picking on securities with yields over 7%. My own portfolio has an average yield of 7.1%, so it depends on research and risk tolerance.
Would be nice if my personal expenses weren’t 6x yours (house, spouse, and cars), but that’s what comes of choices!
I’ve enjoyed your blog for over a year now, but this is my first comment. I wonder if you would give me your opinion on my situation.
You clearly define financial independence as the ability to cover 100% of expense with completely unearned passive/investment income. I agree with this. Do you also believe that financial independence must include no debt? What about income that is produced with assets that have debt attached to them (e.g. rental property with a mortgage)?
Would you consider me independent, or would I need to shed the debt before reaching this point?
Great blog, I started 12 years ago reading “Your Money or Your Life” by Dominiquez. Instead of holding strong, I went right out and bought too much of everything (twice I cashed out of my homes). I have read so many great books along the way although I could not seem to implement them. Then I came across your blog and the timing could not have been better. Everything aligned and we are slowly getting off the debt train and heading toward a life of simple pleasures. Good thing too, because my beloved husband is becoming weary of working all the time and not seeing the kids much. We have a 2.2 year exit strategy and we are well on our way. We will always work, but not to turn around and pay creditors and bankers. Thanks so much for your work here.
I do have a favor to ask. I understand you do not have kids, but we do …4 of them…all darling. Two of them are exceptional in activities that are expensive. I would love to hear from your readers with kids or get input from you on how to handle investing in their activity vs. investing for us.
Did something trigger this post? A post by another blogger or something that I missed? You don’t have to respond if you’d rather let the issue die but as a long time reader it seems to me that you’ve given plenty of information to have a pretty good idea of your income and expenses.
I was wondering the same thing as Seth.
@Christopher – I could see it both ways. You’re independent in that you don’t need anyone else to pay you for work to have funds to live on. On the other hand, you still owe the banks for the mortgage, so you’re not totally independent yet, if that’s even possible.
@Christopher – I wouldn’t get too hung up on words. Clearly there are many different situations. I am FI because I cover my expenses with financial instruments instead of work. It does require some work to manage the money, but it is not much. I imagine running rental units require more work than that. I don’t think debt is relevant — it is just an additional expense. For instance, if I opened a margin account I would not consider myself financially independent anymore.
@Want to want less – Is it really _investing_ in their activity, that is, do they stand to make money or something equally valuable in the long run from it? Does exceptional mean good enough to get sponsors, eventually? Investing for you will either give you time [for the kids] or more stuff. That much is a given. There is no clear cut answer.
@Seth, Kevin – I get mentioned on a blog or in a forum every few weeks by now. Usually there are a few misunderstandings. It is not unusual when ‘extreme’ meets ‘normal’. Around here people are quite self-selected so you don’t see it and I wouldn’t even see it if I did not pay attention to incoming links.
Christopher, I’ve seen someone define financial independence as having a job and no longer living with their parents. So a wide range of situations can fit in this term. I’d say you’re financially independent now, but if you suddenly lose all your tenants (unlikely), you’re in trouble. Similarly, if Jacob’s investments all plummet to zero (a little more unlikely), he’s in trouble. I’d still say getting out of debt is a good next step, and this will happen automatically as you pay off your mortgages.
I must say it’s much quicker to hit Jacob’s scenario of FI/retirement than the traditional version. The traditional scenario says work for 40-50 years and build up millions to drawdown 4% a year. Most people of course fail in the saving part and have about 60K at retirement.
2. get out of all debt – no payments – no mortgage.
3. start investing in income producing securities.
this is a slooooow process. took a couple of decades with the kids. One child slows financial independence down by years. without the babies we could have done it much faster but then we would have missed the joys of parenthood. warren buffett says you need a snowball and a long hill. discipline + time = the key.
I still work (in my late 40’s now). But there is nice passive income from the investments and work is a lot easier now.
How much is rent at the Rv park? This means you are spending a very little amount to survive (food, shelter, clothing, utilities). Quite impressive!
Rent is 475/month incl. water.
I don’t understand your healthcare situation. You have health insurance through your wife? Or you freeload off the taxpayers?
It seems like health insurance alone would blow your entire yearly budget.
Rent + Health Insurance = $546/month, or $6552/ year. You mean to tell me that you spend $37/month on everything else including food? What about RV insurance, utilities, RV maintenance, car insurance (does your wife drive?), data/phone plans?
He said about so give or take. The rent is split between his wife and him. I scan see jacob spending 7k given this. You are very smart to do this. I dont get why people work to drive their expensive car there and back.
Wolfman, I was wondering the same thing, so perhaps yes… Jacob, you spend just $37/month by yourself + your wife I assume yeah?
Good stuff. Never knew you lived in an RV! Guess they got free Wi-fi?
@Wolfman: If the RV rent is split between Jacob and wife, then Rent + Health Insurance = $3702/ year, so Jacob would have $3300 left, which is ample: A 25kg bag of quality rice lasts you a year and costs about $40; buy onions in 10kg bags at $5-10 maybe 6-8 times a year; that’s $50 per year, say. Likewise, buy flour in bulk and bake your own bread – it’s so cheap and tastes so much better than factory bread. A few months ago, I found a bargain on 3kg cans of jalapenos for $2(!) and bought three; they are already gone now, so I should have bought far more 🙂 Seasonal fruit bought in bulk, like oranges or apples, are super-cheap too. Clothes are almost free; repair torn clothes and buy second hand clothes if at all (here in Sydney, my $10 thongs are super-comfortable, last a year, and are great for walking, running, bushwalking, and even ok for easy rock climbing). Etc. It’s like living the student life, but sensibly, without indebting yourself on alcohol, clothes, gadgets, and all other frills that mostly just give you brief pleasure of satiated lust and thereafter leave you with less money, less space, and less peace of mind.
To clear up some further confusion. Our total expenses are then around 12-14000 each year. This is about a quarter of what the standard “consumer unit”/family spends and since we earn about the same we are able to save 75% of our income. Consequently we need about a quarter in retirement savings. That’s really all there is to the financial situation.
Now, we each pay half of this budget, namely 6-7000 each. I pay my half as described above. DW pays her half by working. Soon I will be able to pay DWs half as well due to compounding returns of my assets.
Now, because I am married I have had to make some compromises. For example, I pay my share of the car. I can afford this now, but if I was working towards FI, I would strongly advise against having a car. Our having a car is hurting DW’s savings rate. She’s okay with that and I’m okay with it hurting mine because I don’t need to save more. I also pay half of our one cell phone even though DW carries it all the time. Same thing. So my current budget is for my current situation. Someone with a 100% aligned ERE spouse rather than a “mere” frugal spouse will be able to do better than I am. I would say about 5000 a year per person or 10000 total.
If I was single, you could argue that my rent would then double, but the first thing I would do would either be to a) move out of California or b) find a room mate. The way I would arrange for b would be to find some kind of shared housing arrangement. Actually if I was single, I’d move into a boat forthwith.
Jacob, thanks for sharing. You’ve made it very simple: average earnings and below average spending leads to early retirement. There is, in my case, an added element of luck. Our house value nearly doubled in the six years we’ve owned it (in Canada). We borrowed to invest (although not a lot) in the market crash. I plan to retire at age 35 in two years, after working for 7 or 8 years.
I’d like to add to the discussion in two ways. First, financial independence, to me, is what Nassim Taleb called F-You money. To paraphrase him, it means being able to say “F*ck you” to your boss before, instead of after, hanging up the phone. I’ll go back to work as a teacher because it’ll allow me to easily live and work overseas, and because I think I’ll love it. But I won’t have to put up with bureaucracy, because I won’t depend on a paycheck.
Second, I have three kids. My wife and I are both frugal, but definitely not extreme. We sacrificed and saved while we were young, before we had kids. But at this point, it’s important to us to eat fresh and healthy (not just rice, ground beef and canned tomatoes), allow the kids to participate in activities and to be comfortable. We don’t view our kids as investments, but we don’t see them as liabilities, either. They’ll have to put up with our wacky life plans, but they’ll never starve or go without and we even have education savings for them (although it’s funded with government money). I apply thinking similar to Jacob’s, when considering spending money on the kids. How far back will it set my goal of financial independence? Is it worth it? Often, it is.
This was the choice I made in late 2008 when I cashed out my company stock and invested it in a high-yield (not junk) bond fund, allowing me to retire at age 45 and live comfortably off its dividends. Instead of me working for my money, my money was now working for me. And it doesn’t get worn out like I did, even while working part-time as I did from 2001-2008!
I will soon be a first time father. Clearly there are some FI folks with kids who read this blog. Can anyone recommend a blogger writing on the issue of FI and children?
I think your method is awesome, and since running across your blog a few months ago, I’m going to try something similar. . . once I finish my Ph.D. Thanks!
@Thad – Social what? 🙂 No, I haven’t. I understand payout will be based on your average earnings. Even if I were to qualify my payouts would be very low since there would be a lot of zero years in there. I hope social security will revert to what it was originally intended as (keeping people from starving in the streets) rather than a redistribution of money from the young to the old. In any way, I’m not counting on it.
Hmm if you made $7000 from working, and your expenses are $7000, then why did you even had to make withdrawals from your portfolio?
Another thing that just doesn’t add up is that you claim to be “retired”, yet your wife keeps on working. Actually by your definition a lot of women who choose to be stay at home moms are actually retired as well…Their husbands simply provide money for them, so in reality and per my definition neither these women nor you are actually retired.
To me you would be considered retired only if both your wife and you stopped working and did only freelancing/living off your investments/pensions.
@ Blogging Banks: I think the difference is Jacob provides his own money instead of his wife.
@Blogging Banks – Because some stocks got overvalued and had to be sold.
Retired-schmetired …I don’t really care what it’s called. How about “independently wealthy”? Would that work by your definition? DW does not provide money for me.
The one thing that keeps me working is not the money but the medical insurance, it is very cheap via my employer. How do you and your wife maintaing insurance is it more expensive or do you even have it?
For all of this discussion about social security, you are taxed on your ‘earned’ income of $7k per year, right? My understanding is that even that small amount of earning keeps you accumulating social security “credits”. You only need 40 to qualify, and the max you can earn in a year is 4 credits. Apparently, you earn the 4 credits once you earn about $4500 in covered earnings.
So, it appears that, like it or not, you are working toward your social security eligibility. Am I wrong about this?
You’ve suggested that your monthly SS payout would be low due to many years of low earnings, but your expenses are also low, so as a percentage of your expenses you may actually do relatively well.
The SS payout is based on the best 35 years of earned income. It’s not clear what the exact formula is, but Jacob’s pretty correct in saying his earned income will average out to be terribly low even if he does qualify… unless he changes his mind and significantly increases his earned income in the future.
George, remember that there is more to the SS benefit formula than the best 35 years of earnings. The rate of wage income replacement goes down as the income being replaced goes up. That is, the “Bend point” in the highest bracket is only 15%, which means that only 15 cents of every dollar of average indexed wages gets replaced for the highest layer of wage earnings.
I worked this out when I retired in 2008 after only 24 years of significant wage earnings. The bunch of zeroes I had to include to get to 35 years of earnings to be averaged did not have a big impact on my likely SS benefit.
Probably. But one never knows. A child could change that scenario a lot.
As always, this is such a source of inspiration. I did not choose this life/lifestyle, but I always thought it could be done…and now I know it can be.
I am in my 50s, and this also makes me–and perhaps others–less fearful about retirement.
I find it a bit depressing that I have a higher net than people twice my age (looking at the median and including equity, though I don’t own a house). Scary to look at how much money people have when home equity is not included.
61+, unemployed. Can’t find work. $3,000/month in annuities for life. No debt. Would you say “sayonara” to working for a living? Your comments are appreciated.
There are many places in the U.S. where $3000/mo can provide for a very comfortable life. If you don’t limit yourself to the U.S., $3000/mo can pay for a life of luxury.
Hence, I see no reason to go back to work.
@More4Less – Are the annuities inflation adjusted? What are your expenses? In particular, what are your medical expenses (how healthy are you?) I could not even come close to spending $3000/month, but for some $3000 is not enough.
No, the annuities are not inflation adjusted. They are immediate fixed annuities; $3,000.00/month for life. My expenses are covered under a frugal regime. Of course, next year I have access to early S.S. benefits (about $1,500.00/month). Health, sort of OK. Still responsible for my own health insurance until 65 (medicare!). The main thing is adjusting to a life without meaningful work and discretionary income. At least, I have a paid roof over my shoulders and a paid car. The reality is: it’s hard to find a good job (or any at all) at my age.
I marvel at your conviction, tenacity and maturity, to go for “the duration” retired! You sound like a very clever chap, but on top of that you seem to have the disposition and testicular fortitude to attempt what many others would consider just plain crazy.
I should follow your blog for “continuing education.” Thanks for any comments you may have down this road.
Thanks for your advice. Good points! Relocation to a cheaper area (now in South Florida) may become a serious consideration. It’s just that trying to sell a house down here right now means losing a lot of money, but if no work comes my way, I may have to do just that, and find a less expensive area.
Reading this blog builds my confidence in saying good bye to the rat race.