Monthly Archives: July 2016

Work seems to have gotten a bad rap in PF blogs, as many are primarily focused on financial independence and early retirement. Is work really that bad? Has everyone caught the early retirement bug, or just a select few that have loud online voices?

To shed some light on this controversial topic,we decidedtointerview some excellent bloggers and ask them their views on financial independence, work, and everything in between.

We got a diverse set ofresponses,which makes for a great read.

So check out what all 19 had to say about financial independence and share your viewsin the comments below.

Jacob from theCash Cow Couple:

1. What does financial independence mean to you and how are you pursuing it?

Financial independence (FI) is achieved when your passive income streams cover allyour living expenses. Most people include pensions, Social Security, portfolio income (stocks, bonds, etc), and things like rental income from real estate in the passive category.

Its more aboutfreedom than money. Ultimately, its freedom from the 9-5 constraints that plague most Americans.

Were only halfheartedly pursuing FI right now. Neither of us are making as much money as possible, but we do have a high savings rate. Our savings rate will almost always be above 75% for the foreseeable future.

2. Would you rather quickly reach financial independence working a job that you hate or pursue a career that you love and work for many more years?

Even though I created this question, I dont know the answer because its not possible to simultaneouslyexperience both options. Ive definitely chosen the latter in my current situation and I think its a more desirable path (assuming its actually possible to find a career that you love).

Im currently in the middle of my PhD in financial planning/finance, getting paid much less than I could make elsewhere. But its a long term play. I should make a decent income when I graduate, and Ill always have numerous employment options because Im building human capital right now.

I was speaking to one of my professors a few days ago about this very subject. Hes a highly coveted speaker, writer, and consultant who makes good money outside of his academic position. He could leave academia at any time and find higher paid positions in industry, but is not interested in doing so. He told me that another pay increase is irrelevant. He already makes good money and can afford anything that interests him. When I asked about financial independence or early retirement, he chuckled and said something like this

I love what I do, and Id do the same things even if retired. Why would I give upmy currentincome to continue reading,writing, and speaking from home?

For individuals like him (and hopefully me), financial independence almost becomes irrelevant.

3. How much money would you need to stop working and call yourself financially independent? How did you arrive at that amount?

The common rule of thumb that youll hear repeated is the 4% rule. This rule is based on academic research from several years back which suggested that a portfolio could sustain a 4% withdrawal rate for 30 years time, without being depleted. So a $1 million portfolio could provide $40,000 of income each year (adjusted for inflation),for30 years, without being completely depleted.

There are a couple of problems with this, but Ill try to keep it brief. First of all, most of the people talking about the 4% rule on the internet are attempting to retire in their 30s or 40s. If someone is retiring at age 40, they should plan on their portfolio lasting 50+ years. The original research on the 4% rule was based on a 30 year retirement horizon. The portfolio would have been depleted many times with a 50+ year horizon, and the person would be forced back into work.

The second problem is the fact that many experts dont expect equity (stock) returns to continue being close to 10% each year. Some think the equity premium is lowering, and that the stock market is overpriced with respect to company earnings. The result would either be a large correction (less likely, I think) or a period of lower returns moving forward (more likely).

If both of these facts are true (and they might not be),4% is too optimisticwhen designing an early retirement portfolio. Id feel much safer around a 3% withdrawal rate. The result is a rather large increase in required principle. Instead of $1 million, you now need roughly $1.33 million to support that same $40,000 of income.

(the math is easy, just multiply yearly expense by 25 to get required savings for 4%, or multiply by 33.33 to get required savings for a 3% withdrawal rate)

But herein also lies the beauty of frugality. If you can manage tolive on roughly $10,000 as year like us, you only need $333,000 to call yourself financially independent.Even annual expenses of $20k per year only require $665,000.

Of course, living on $10k is shocking to some people, but I think somewhere between $10k and $20k is entirely doable in a low cost of living area, without a mortgage payment. Therefore at the current time, Id consider us financially independent when we are mortgage free, and our investments reach $500,000.

4. What will you do after you are financially independent and free from the constraints of a job?

The same things that I do now, which is why Id rather choose to work a fulfilling career over many years. I enjoy reading, writing, teaching, hanging out with my wife and family, and traveling. I also like being productive, and believe that some form of work is a very healthy thing.

If I do decide to retire from my first career, Id like to sell used cars. I love buying and reselling in general, but used cars can have great margins and they are always in demand.

5. Any other relevant thoughts or advice on the topic?

Understand financial independence before pursuing it. I think many people get caught up in the sexy story of FI, but they dont actually think it through. Sure, having a high savings rate is always recommended. Thats a good part of this blog. But socking away money is completely different than choosing a career based on earning potential alone, or waking up one day and deciding that its time to quit your job simply because you have enough assets to cover your living expenses.

Those are major life decisions, and in complete honesty, I dont think its healthy for some people to stop working. They dont have sufficient hobbies to fill the time and are left void of purpose. This is the dark side of financial independence and the reason that people should do a little soul searching before they make these huge decisions.

There isnt any one size fits all approach to reaching financial independence, but there is a superior path. Figure out what brings you satisfaction and joy in life, then try to design a lifestyle around that. Work doesnt have to be soul crushing. If your current position makes you miserable, save enough to take a year or two off, so that you can find a way to make money doing what you enjoy. Its not all rainbows and butterflies, but I think its possible to find meaningful work and still achieve financial independence along the way.

James fromRetirement Savvy

1. What does financial independence mean to you and how are you pursuing it?

I equatewealthywith financial independence; and I define wealthy as being able to live your chosen lifestyle on passive (e.g. income from defined benefit plans , Social Security benefits, rental property, etc.) income and portfolio income (e.g. defined contribution plans such as 401(k)s, IRAs, etc.) and do not require earned (labor) income. Therefore, I am wealthy when I am financially independent.

Currently, the savings/investment rate in my household on an income of $190,000 is 39%.

2. Would you rather quickly reach financial independence working a job that you hate or pursue a career that you love and work for many more years?

I dont know that it is necessarily a case of choosing one or the other. At least that has not been my experience. My experience is that most people end up in a profession or on a career path through circumstances, some factors within their control, others not.

My suggestion to younger people, Im 47, is to learn and/or receive formal education in two disciplines (my undergraduate degree is a dual major in business administration and communications technology and I also possess an MBA) and pursue a career that you believe you will enjoy. However, recognize that life has a way of throwing many curveballs, hence the suggestion for multiple disciplines. Dont spend too many years chasing a dream job or career. It probably is not as great as you think it will be and you have to be careful not to waste too much time in the pursuit.

Most of us will end up in jobs that we are good at, or at least capable of performing moderately well, and will find sufficient pleasure in that job. I believe most people will be much better served by just going with the flow with respect to which career path they end up on and spend much more energy in cultivating rewarding relationships and attaining personal finance literacy. They both will pay significantly better dividends than a career that you love.

I believe it is a lot better to be sufficiently satisfied with your career and have significant, deep-rooted relationships and financial independence. That way, when you do walk away from the career which will happen at some point, either through choice or circumstances you are in a position to enjoy the relationships and the comfort that comes with being wealthy.

3. How much money would you need to stop working and call yourself financially independent? How did you arrive at that amount?

A quick example, discounting inflation for the moment. Assume a family decides that they want to retire in 20 years and have an annual income of $120,000. Assume, that like me, one spouse is retired from the military and is currently receiving a $20,000/yr. pension; which they project will be $25,000/yr. (COLA increases) in 20 years. Further assume the following factors: neither has a job with a defined benefit plan (traditional pension) and they project that their Social Security benefits will equal $35,000. That gives them a projected income of $60,000 from passive sources.

That leaves them with $60,000 they will need from portfolio income. How large does their portfolio need to be to support withdrawing $60,000 a year and not run out for ~ 30 years? We turn to the 4% rule. That 60,000 x 25 (or 60,000 / .04) gives us an answer of $1,500,000.

Assume they currently have $50,000 in various retirement accounts. The question then becomes, how much do they need to save on a monthly basis (most of us operate financially on a monthly basis) to reach their goal?

Current Principal $50,000

Years Until Retirement 20

Annual Rate of Return Lets assume they are assuming 5%

Annual Contributions $39,390

Result = $1,500,256.21

This family would need to contribute $3,282.50 (39,390 / 12) monthly to reach their goal. Of course, if they change any of the factors, everything changes. Running ahead of pace? Contribute less. Get much better rate of return for a few years? You can lessen the requirement going forward.

4. What will you do after you are financially independent and free from the constraints of a job?

Travel, golf, travel, lift weights, travel, ride bike, travel, hike, volunteer.

Kali fromCommon Sense Millennial

1. What does financial independence mean to you and how are you pursuing it?

To me, financial independence means the ability to live off your investments and assets without being required to draw a paycheck. Ill be financially independent the day I can withdraw enough from my investments to cover my expenses in such a way that I wont outlive that nest egg Im pulling from.

Im saving everything I can, but Im not strongly motivated by the idea of financial independence or at least, Im not in a rush to get there. Ilikeearning an income. I like working, being productive, and having a career.

2. Would you rather quickly reach financial independence working a job that you hate or pursue a career that you love and work for many more years?

Id choose working a career I loved for many years all day, every day. I thrive off challenging myself and feeling useful and productive. If I found ten million dollars tomorrow, I wouldnt just stop working. Sure, maybe the nature of the work would change because I wouldnt berequiredto earn X amount every month, but I would still work.I love what I do.

3. How much money would you need to stop working and call yourself financially independent? How did you arrive at that amount?

I dont know. Again, Im not that worried about reaching financial independence by a certain age. Im in wealth-building mode and will be for the next ten years or so (Im 24). My plan is to save all I can now and start crunching numbers later.

I think this approach works for us because we dont think, okay, we need X amount to have this big of a net worth by this age. Instead, its more like, what we make expenses small amount for discretionary spending = what goes into investments every month. And were always working to increase income so that leftover number is bigger.. which means what we put away is greater.

4. What will you do after you are financially independent and free from the constraints of a job?

Travel more. Experiment with different businesses or income streams. Id love to have the financial freedom to raise, sell, and train horses (its a financially risky venture, which is why I dont do it now). Find our forever home, which for us would be a piece of property somewhere out in the middle of no where that we can run as a small farm. (Yup, Laurie from The Frugal Farmer inspires me!)

5. Any other relevant thoughts or advice on the topic?

Dont make it complicated. If youre living below your means, youre doing a good job and youre on the right track to success.

Similarly, dont beat yourself up for not getting to financial independence in 10 years or less. No matter what Mr. Money Mustache says, the fact is he and his wife made solid six figures and lived off about $30,000 for 7 years to hit financial independence. Thats not an average income so it wont be an average timeframe to FI.

If you and your spouse are making $80,000 stillverygood money and much more than lots of people its not necessarily realistic to think youll be able to put away $70,000 or more for year after year after year for 7 years in the same way.

Thats not said to bash MMM I think his site is a valuable resource but itisto say, dont let anyone elses bravado bum you out and make you feel like youre not good enough or cant make your financial dreams into realities. Be patient with yourself! Start where you are, do what you can with what you have, always work to improve, and you will find your financial success.

1.What does financial independence mean to you and how are you pursuing it?

Financial independence is a tricky one for me. I believe this concept is a consequence of cuts to welfare and powerful economic troubles of the last three decades. People are being forced to take more responsibility for their wealth for better and for worse. Im not pursuing financial independence; rather, financial comfort. As I pay off increasing amounts debt, my only concern is feeling free from debt.

2. Would you rather quickly reach financial independence working a job that you hate or pursue a career that you love and work for many more years?

This is a great question. I would say Im pursuing the latter. If you are looking to reach rapid financial independence, that sets you up with a select number of jobs. Youre looking at finance, oil, or some sort of massive industrial complex. None of these avenues inspire me right now. As such, Im pursuing an advanced degree in psychology and making next to nothing doing it. I wouldnt have it any other way.

3. How much money would you need to stop working and call yourself financially independent? How did you arrive at that amount?

I guess my question would be: Why would you stop working if you love what you do? No wealth level could make me stop Now, if I wasnt pursuing this career path, Id like need to see a number in the tens of millions to stop working and consider myself financially independent. That amount would cover moves, housing, transportation, children, and college educations for my kids.

4. What will you do after you are financially independent and free from the constraints of a job?

Again, thats not necessarily my first goal. Im interested in being free from debt. After Im done with that goal, Ill continue to save and work. My dream is not to be without work just without financial insecurity.

1. What does financial independence mean to you and how are you pursuing it?

The termindependentmeans to be free from outside control; not depending on anothers authority. In that regard, a person cant be financially independent until they are completely free from the constraints of debt. Until all consumer debt, school loans, the mortgage and any other debts are retired a person is not technically independent, even if they have vast wealth. They are still beholden to another party and have obligations that require their money go in a certain direction.

Once those obligations are gone, the individual has total freedom to use their money in any way they desire. That is what my wife and I have found now that we have eliminated all our debts. Financial independence means the freedom to pursue anything you desire with money that is 100% yours.

2. Would you rather quickly reach financial independence working a job that you hate or pursue a career that you love and work for many more years?

The desire and capacity to work is something built into our nature as humans. There can be pleasure and fulfillment found in our work. For me, no amount of money would be worth the job that I dreaded going to each morning when the alarm clock sounded.

There is something to be said for the process of building money over time. Quick fixes dont satisfy in the long run. The stack of money will taste sweeter and will be appreciated more through the effort of consistent and diligent work that a person loves and feels called to.

3. How much money would you need to stop working and call yourself financially independent? How did you arrive at that amount?

I prefer not to use specific dollar amounts. Instead, I see it summed up this way: When the money a person has saved and invested makes more for them in a year than they make for themselves in a year at their job, they are financially independent. (The caveat being of course they have no outstanding debt as I said earlier.)

However, just because a person reaches this point doesnt mean they should automatically stop working. There are other life situations to consider including years to formal retirement age, ones health, lifestyle and future plans.

4. What will you do after you are financially independent and free from the constraints of a job?

My wife and I have really focused and worked hard over the past decade to budget properly, eliminate our debt and grow our investments. Part of that effort included my wife transitioning careers from high school math teacher to CPA. For her that dream career presented an opportunity to earn more and speed up the possibility of becoming financially independent.

The result of all these efforts is that, after 17 years of teaching high school students myself, Ive been able to transition to stay at home dad and personal finance blogger. Because we have reached a level of financial independence, it allowed me, and us, to invest more time in the lives of our four kids.

5. Any other relevant thoughts or advice on the topic?

Only that financial independence isnt the end-all to life. All the money in the world wont cure the emotional or spiritual hurts present in our lives. Nor will it bring true happiness and contentment. Only God can meet those needs in a persons life.

Dee fromColor Me Frugal

1. What does financial independence mean to you and how are you pursuing it?

To us, financial independence means being able to choose when and how we work. Wed like to develop enough passive income streams so that wed have the freedom to choose to quit our relatively well-paying but stressful jobs and pursue a less stressed out life. We are aggressively saving and working hard to pay off our debt to achieve this goal. We live on a small percentage of our income. Currently we put about 15% of our post-tax income into savings, but right now a whopping 40% of our income is going toward our debt repayment because we want to be debt-free so badly (darn student loans!) We also heavily contribute to retirement accounts.

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21 Experts Chatting About Financial Independence | Cash ...