Here are the most commonly asked questions which are found on r/financialindependence. Please look through this short list because it is highly likely that your question has already been answered by some very smart people!
The rules can be found here. They’re short, please read them!
It is typically defined as having enough income (from investments, passive businesses, real estate, etc) to pay for your reasonable living expenses for the rest of your life. You have the freedom to do what you want with your time (within reason). Working (full or part time), hobbies which generate income, or other activities are optional at this point.
This specific subreddit focuses on the three knobs controlling getting you to financial independence quickly. Reducing expenses, increasing income, and investing.
The basic tenet of FI is to spend less than you earn and invest the difference into things that earn money for you.
Spend Less/Save More
Minimize taxes to the full extent of the law. Look into 401k/403b/457/IRA/HSA accounts as some examples.
Reduce your living expenses. Smaller homes, apartments, rent a room. Avoid lifestyle creep as your income (hopefully) rises over time.
Reduce transportation costs. Live close to work if possible. Avoid expensive cars – Consider bicycles, used cars, public transportation, etc.
Learn self-sufficiency skills. Beyond the personal satisfaction in achieving something, you’ll save money. Consider cooking, mending clothes, home/automobile/bike repair, woodworking, gardening, etc.
If you’re in school (whether that’s high school, trade school, or college/university), focus on that first. It’s easier to be FI on $50k+/yr than minimum wage. Look carefully at your career path. Is this degree going to pay you back appropriately in the future?
If you have a job, work more/harder/better/smarter. If you have the time, consider working extra hours and/or accepting challenging and long-distance assignments (family commitments permitting).
Negotiate to get paid what you’re worth (see point 2 above)
Be careful about long term decisions
“Future you” may be interested in FI. Part of FI is the flexibility of having choices in the future. Be careful about locking yourself down.
If you’re not positive you want to live in an area, avoid buying a house. Consider renting. Significantly easier to change your mind later.
Many marriages end in divorce. Divorce is expensive. Do what you can to avoid this.
Consider what careers are flexible and which aren’t. Nursing is known as a great career choice for people who move around (there is a need for local nurses in almost every major city in the world). Software engineering can often be done remotely. Other career choices may have less flexibility in location / availability (e.g. stock broker).
Any loan means you are borrowing from “future you”. Be very careful about making your future self pay back a lot of money. Loans for depreciating assets (cars, electronics, etc) in particular are generally bad ideas.
The difficulty of reconciling your FI/ER interests, plans, and priorities with those of your SO is one of the most frequent reasons people seek advice from this sub. If that’s the kind of help you’re looking for, these threads should get you started.
One of the original texts for the FI movement is Your Money or Your Life. Buy a copy, or better yet, rent it from your local library.
The primary writers on FI today are largely bloggers. The sidebar of /r/financialindependence has a number of popular blogs listed. We periodically add new sources of information as they become available.
A couple specific reads:
Of course, there are also great resources elsewhere on Reddit. /r/personalfinance and /r/frugal are very helpful for learning to manage your finances and acquire the frugal skills that are part of the FI mindset.
Short answer: We recommend people use – Savings / (Gross – Taxes)
The Bureau of Economic Analysis formula for “personal savings rate” is described below:
Basically, personal savings rate is defined as (disposable personal income minus personal outlay) divided by disposable personal income. What does this mean? Here is one way to think about it.
gross = taxes + spending + saving
gross – taxes = spending + saving
gross – taxes – spending = saving
The BEA uses “disposable personal income” as their phrase for (gross – taxes). They use “personal outlay” to describe spending. So they phrase personal savings rate as (DPI – personal outlay)/DPI.
Their definition of personal savings rate puts (gross – taxes) in the denominator. To express it using the more simple words:
savings rate = [(gross – tax) – (spending)]/(gross – tax), or (saving)/(gross – tax).
So the BEA has chosen to report personal savings rate as describing essentially what people save out of what they might possibly save after taxes. Thus, someone could theoretically have a 100% savings rate if they had no spending, even though taxes were taken out of their gross.
When you’re posting & asking for information, please look at this checklist (Copy and paste it into your post) and ensure you’re giving the subscribers everything necessary to give you their valuable (or sometimes not valuable) advice. Skip a bit of data if you’re really sure it’s not applicable, but these are often useful to know. If your question is more of a general Personal Finance question (like “What is the 401k contribution limit again?” or “What AA should I have if I want to retire in 20 years?”), then please post this in the Daily Discussion Thread
Life Situation: IRS filing status, number & ages of dependents, and anything else (state/country of residence, age, etc.) you are comfortable sharing.
FIRE Progress: Provide details about where you are on the road to FIRE. If possible, provide expected FI/ER dates.
Gross Salary/Wages: Before any deductions
Yearly Savings Amounts: 401k, HSA, FSA, IRA, insurance, etc. – whatever you have
Other Ordinary Income: Provide sources and any relevant details, the more the better
Rental Income, Actual Expenses, and Depreciation: If these are significant for you
Current expenses: Provide breakdown and relevant details.
For mortgage payments, separate the P&I (which stop when the mortgage is paid) from the T&I (and anything else) which continue as long as you own the property.
Expected ER expenses: (optional, if relevant)
Assets: Amount & description – include current asset allocation plan if you have one
Liabilities: Description, original loan amount, rate, original length, and monthly payment (which should be consistent with a spreadsheet PMT calculation). Add current balance and time remaining if close to final payment.
Specific Question(s): Providing a detailed breakdown is important, so is asking for specific information so we know what kind of help/advice you are looking for.
The short answer: 25 times your annual spending (with caveats)
The long(ish) answer: In 1998, three professors at Trinity University released what became known as the Trinity Study. The study examined the U.S. stock and bond markets over every 15-30 year return period between 1925 and 1995 (the data was recently refreshed in 2009). They concluded that by starting with 4% of your portfolio, and withdrawing that amount (increasing yearly with inflation) every year, you would have a 96% chance to not run out of money during a 30 year period.
4% became known as the Safe Withdrawal Rate (SWR). The nature of the stock market (and historical returns) means that in most cases, the portfolio grew faster than the withdrawal rate. 4% of a portfolio is the amount you can withdraw, or reversing the math, 25x your withdrawal amount is equal to the amount you need to save.
A couple great articles on this topic
People are always worried that the future market will not perform as well as it did in the past (for a variety of reasons which always change). However, we have tools available which increase our chances of staying financially independent:
By taking some of these commonplace assumptions into account, we can be less conservative with the SWR, and use 4% instead of something lower.
The Trinity Study took inflation into account, but it bears repeating: $200,000 now is not the same as $200,000 10 or 20 years from now. Inflation will eat away at your returns at an average rate of about 3% per year (historically it was ~4%, but inflation has been lower for recent years). That is why FIers tend to invest heavily in stocks instead of lower-yielding financial instruments – the average gains of the stock market have historically outpaced inflation. The average annual increase in the value of the U.S. stock market has been 9.5% (various values are found online, this seems the most accurate.. a geometric average since 1928). If you subtract off ~4% lost to inflation historically, you’d see that leaves you 5.5% growth on average. Assuming average (or better years), you should expect your investment value (after inflation) to increase over long periods time. Given the volatility of the market, your actual experience will be likely much better or much worse than that calculation in the short run.
You can greatly increase your chances of “success” (not going broke) through the following:
See this article from from the /r/personalfinance FAQ.
Many people on the sub advocate an indexing strategy rather than investing in individual stocks. A few options below:
There was also a popular post on this subreddit which mentioned commercial real estate.
We try to avoid investment discussions here. The recommended path for savings is located in the /r/personalfinance FAQ. There are always exceptions, but this path will work for most people.
If you have more detailed questions around investing which are not Financial Independence specific questions, please head over to /r/personalfinance or /r/investing.
In general, if your spending before retirement is less than your earnings (by definition, this should be everyone planning on becoming FI), a tax deductible investment account will benefit you in the long run.
Lets assume you’re going to maintain your lifestyle, same level of spending. You’re also heading for FI, so you’re saving a lot. Imagine you’re making $100k gross, you’re being taxed some percentage, you’re spending $50k and saving the remainder.
Tax brackets – http://www.bankrate.com/finance/taxes/tax-brackets.aspx – We will ignore tax complexity of deductions / etc.. in the end the lesson is the same.
As you can see from the above link, assuming you’re married and making $100k total, you have money being taxed in the 10, 15, and 25% tax brackets. ~25k of which is in the 25% tax bracket.
If you save $10k in your 401k, you can deduct that from your taxable income. You now have 15k in the 25% tax bracket. On that $10k, you didn’t have to pay your 25% tax rate. Or, you saved ~$2,500 in taxes.
Now zoom forward 15 years, and you’re retired (ignoring inflation to keep things simple). Assuming you maintain the same lifestyle, you need to withdraw $50k per year from your accounts still.
If you withdrew $50k from your 401k, your income is now $50k (as 401k withdrawals are counted as income). You have money being taxed in the 10%, and 15% tax bracket. You’re no longer being taxed in the 25% bracket at all. Hey look at that! That money you previously were being taxed 25% on is now being taxed at 15%. You’ll never need to pay that extra tax.
While this could be a 50 page document, in the end it’s relatively simple. If you’re saving money, you are most likely paying into higher tax brackets than you will in retirement. So if you can pay taxes later, that’s better for you 🙂
Short answer, no, you’re not locked in. A regularly repeated concern is that 59 1/2 is the standard age in the US for 401K/IRA withdrawals. However, the tax advantages in these accounts shouldn’t be missed. There are a few mechanisms outlined below to access that money early.
Some links on this topic:
Originally posted here:
faq – financialindependence – Reddit