Did you know that it’s possible to structure your life in such a way, that you are able to retire early and live off of your existing assets?
This is what millions of families around the world have already set out to pursue, many already achieving success (or well on their way to.)
But what does this actually mean? How is it possible to retire well before the traditional age of 65, and still be able to get by while maintaining your current lifestyle?
It comes down to making a few structural changes to how you spend your money, and in this article I’m going to cover the concepts in detail – as well as show you how you can get started.
What Is FI/RE?
FI/RE stands for financial independence, retire early, both of which are a core component of this movement.
To become financially independent means that you are able to live off of your assets or investments that you have made. These assets cover all of your living expenses, thus resulting in you being completely self-reliant – you no longer need to work a job to get by and take care of your family’s needs.
The other half of this is early retirement, which let’s be honest – is an idea that is sure to make many people smile!
While not all people that pursue financial independence choose to actually retire, it is still nice to have that option.
Other people transition to work that is more fulfilling or meaningful to them, or switch to volunteer work entirely, as they are able to comfortably take on the reduction in pay.
While this may seem like a dream that is reserved only for those who are already rich, this article will lay out how it can be a possibility for lower income families as well (though admittedly, it will take more time.)
Can Anyone Become Financially Independent?
The answer is yes – even those working minimum wage.
Though let’s be honest, those making less money are certainly at a disadvantage in most areas when it becomes to wealth building.
That being said, there are two parts to financial independence – how much money your investments generate, and how much you need to live off of.
Because people who make less money are accustomed to a less lavish lifestyle, they also need to save and invest significantly less in order to cover that same lifestyle with their investments.
This also means that any improvement in income (through side jobs, business ventures or raises) can significantly accelerate the time it takes to achieve financial independence. Where as an additional $500 a month isn’t much to someone making over $100k a year, it is a significant improvement to someone making only $25k a year.
We’ll go more into the math of it all later.
The Simplified Steps To Financial Independence
After walking through each one of these steps, you should be able to see how this all comes together.
Note that this is not a quick process. When it comes to making investments, the biggest factor in how much money they return is almost always time. Considering that this process can take decades, you are at a significant advantage if you start young – not only will you be able to retire even earlier in life, but you will need to invest less to get there.
That being said, financial independence is still possible, even if you are well into adulthood.
Let’s look over how it’s done.
1. Open A Brokerage Account
Though many people become financially independent through other investment channels (such as real estate), most people pursue financial independence by investing in the stock market.
Most notably, the safest and usually the best performing type of investment is through index funds.
We’ve actually published an article on why index funds make the most sense for almost everyone (but especially parents), and you can view it by clicking here.
I use and recommend Vanguard, as they have some of the lowest fees in the industry.
The idea is that you’ll be investing as much money as you can spare into index funds, and letting these grow on their own over time.
To very quickly illustrate the power of this, if you started investing $100 a month at age 18, you would have $1,151,006.81 by the traditional retirement age of 65 assuming an annual return of 10%.
Most people aren’t aware that $100 a month could make them a millionaire, but that’s the power of index funds, consistency, and a long time horizon.
2. Look For Areas To Cut Expenses
The next step is to take a good hard look at your budget (or make one, if you don’t already have one.)
Look for any and all areas you can cut expenses. What is actually adding value to your life? What could you cut out, and not really miss that much – or replace with something cheaper?
Even for people who take personal finance seriously, they are almost always able to find areas where they can make cuts.
You may also analyze how much value you are getting out of your purchases. Sometimes it’s worth it to spend more money upfront, to avoid monthly costs or replacing the same products over and over again.
The less money you need to cover all of your living expenses, the quicker you’ll be able to retire. Therefore, becoming a bit more frugal and cutting out some unnecessary expenses can really go a long way to retiring more quickly.
3. Invest The Difference
What do you do with all of this new extra money you’ve found?
Why, invest it of course!
Other than reducing the amount of money you need to retire, the other wonderful thing about cutting expenses is that it now gives you more than you can invest into the stock market each month, accelerating the rate in which your investments grow.
There is one exception to this – if you have debt with high interest rates, such as credit card debt. (Long-term loans such as mortgages often have very low interest rates, so this is an exception.)
It is always a better idea to pay down debt that is collecting significant interest, than to invest the same amount of money in the stock market.
Note: Be careful that you don’t treat these newly cut expenses as ‘free spending money’ that you can reallocate to other things that may be wasteful. Most people spend everything they have – and as they have more to spend, their expenses increase accordingly. By investing the extra money straight away, you avoid temptation to take on new expenses impulsively.
4. Look For Ways To Boost Income
Most people can find ways to squeeze out at least a few hundred extra dollars a month.
There are hundreds of different side hustle ideas to try out.
From doing odd jobs for friends, to flipping items you find at thrift stores, to starting some sort of online business, it has never been easier to take your income into your own hands and generate a little bit extra – even without a significant time investment.
This step is most important for those who don’t have very much to invest each month.
If you start investing $200 a month and you’re able to double that to $400 a month, you can get to financial independence far quicker.
And if you keep that income source after retiring from a traditional career, you can quit your job even sooner!
5. Stay Invested – And Reinvest Dividends
When it comes to safer investments such as index funds, your biggest enemy will always be yourself.
Many people jeopardize their financial independence by selling off their funds when the market drops, telling themselves they’ll buy back in later. This is done from a position of fear and uncertainty and is quite natural.
The problem is, nobody is able to time the market or predict what’s going to happen. And those that end up trying usually end up paying the price for it.
The safest thing you can do is to stay invested as long as you can – and even increase your investing as the market drops.
This is akin to purchasing stocks on sale and historically, the market has always recovered.
If you’re new to investing, you’ll receive disbursements from the companies you own – called dividends, usually quarterly.
To maximize your returns in the long run, you should set these to be automatically reinvested into the funds.
Calculating When You Can Retire – The 4% Rule
So, how do you know how much you need to retire?
Most people operate with something called the 4% rule.
The idea is that at your time of retirement, you can safely pull out 4% of your total holdings each year, plus adjusting for inflation as time goes on.
For example, if you had $1,000,000 invested, you could safely pull out and live on $40,000 each year, and still have your nest egg grow.
Therefore, determining when you can retire is based on your annual spending.
For somebody spending only $25,000 a year – certainly possible in many areas of the U.S (especially without work related expenses!), you would need $625,000 invested.
To match the median household income of $67,521 (as of 2020), you would need $1,688,025 invested.
This seems like a lot (and it is), but it is very realistic if you start early and invest as much as you can each month.
Obviously, this sort of lifestyle is not for everyone.
But achieving financial independence really is a lot more simple than most people realize. Cutting expenses and increasing income are easier said than done, but the actual process of it all doesn’t take much time (especially with index funds, that can be managed with less than 30 minutes a month .)
I hope the concept of the FI/RE movement makes sense. If there are any questions that I can answer for you, just let me know.
It’s certainly something worth considering!