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Are We Financially Independent? Risk-Taking or Retirement?

Financial Independence is all the rage in the personal finance blog sphere. I myself have routinely stated it should be one of everyone’s goals. In the past I have even commented rather cryptically that we are financially independent in at least a base sense. But what do I mean? Are we Financially Independent?

Mainstream Definition of Financial Independence

The mainstream definition of financial independence seems to focus on the number of years of income you have saved. I am not sure why because in my experience income has little correlation to your actual bills. What does it matter how much your income is if you can or cannot pay your bills from year to year? Isn’t a requirement of your wealth being self sustaining that it produces more than it expends?

Not only that, in my personal case our household income has been highly volatile. If we used income as a measurement of if we are financially independent the results would change drastically each year. For example is our income measured before or after my wife became a stay at home mom? Is it measured in a year where the market is up so my RSUs do well, or a year like 2008? Measuring Net Worth by itself is variable enough without the target fluctuating as well.  So I will not be measuring my wealth as a percentage of income for the determination of financial independence.

The 4% Rule and Financial Independence

A better definition of financial independence, more widely accepted by the personal finance community, is based on expenses. This makes much more sense as expenses are generally fairly constant year on year. They also have some basis in reality since expenses are tied to well…. your use of the money rather then what you earn. You do not need to replace your income to live, you do have to pay your bills.

The most popular target for financial independence or retirement is the 4% rule. The 4 percent rule basically states that your money will last at least 30 years if you have 25 times expenses or greater. This theory has been statistically studied throughout all the 30 year periods of the US economy and consistently held to be true. It is an aggressive measure of financial independence, as we’ll see later, but it is a good starting point.

So do we Meet the 4% Rule?

So, where are we in respect to this guideline? Well as we’ve discussed before, I will not share exact numbers on this blog. I will however share some percentages and even year equivalents. So here goes. Based on non housing assets we have 22x annual expenses. So by the strict 25x current expenses definition that is a no. However, that is not the end of the story as the question quickly becomes how do you define assets and net worth?

I discussed previously that I do not typically consider my home equity as an asset. However, our mortgage is one of our expenses and just so happens to be similar to local rents. So we could in theory sell our home to release multiple years of expenses. Our yearly expenses would not change as rent would replace mortgage. What would be the impact? We hold another 7x annual expenses in home equity based on a recent appraisal. That brings us to 29 times annual expenses.

So with the selloff of the house we could cross the 4% barrier. However, this is the point where financial independence for the sake of retirement and financial independence for the sake of risk taking part ways. I have no desire to sell my home, and the steps in the next paragraph are even less desirable for me personally. I will not be selling my home so I can retire sooner. However the existence of these options does increase my overall security and ability to take risk which I have spoken regarding previously.  In extreme situations where anything is on the table we could absolutely make this happen. We are not done yet.

Expenses and Financial Independence

If you recall in the past I spoke about the impact of growing expenses on financial needs in retirement.   I mentioned in that article that most studies seem to indicate retirees reduce their expenses not increase.  The thing is, if I’m honest we could cut out another 20% of our costs.   Such a change would bring us to 27-28 x expenses. Well in line with the 4% goal. There are even other bloggers that live on budgets lower then the amount post 20% cut.   So I know both by running my numbers and by bench marking that such a life would be doable. The thing is, for us personally that 20% cut would be one of deprivation. We would have to sacrifice several things we truly enjoy to make that 20% happen. It would not be worth it in that regard. What is 60 years of not working if you’re miserable because you can not buy the things you value?

Risk Taking Financial Independence

At this point we have hit what I consider as kind of a base type of financial independence for Risk Taking. The thing is, even if I was willing to trade miserableness for retirement I’m not sure the 4% rule is sufficient. I.e. even if I prioritized retirement over all else I do not think we are in a position to retire. You see, for longer periods beyond 30 years the 4% has a reduced probability of success. Early Retirement Now has a great series on this where he recommends 3.25% for longer periods. Simply put the 4% rule guarantees after 30 years you will have some money left. However, it does not guarantee you will have all funds left.

If you expect up to 60 years more on this planet, as I potentially have to plan for, then in 30 years from now you again need to meet the 4% rule for another 30 years. That means capital preservation over the first 30 years, which is a much more difficult proposition. I’m largely in agreement with ERN, so in general 3.25% is my bounds for financial independence. That is we will be ok if our net worth multiplied by 3.25% exceeds our annual costs. Even with extreme measures we are not financially independent in regards to this metric since 3.6% (our current risk based number) is greater then 3.25%. So mathematically we are not candidates for early retirement today.

Conclusions to Are we Financially Independent? Risk Taking or Retirement?

I’ll end this with one final comment. Even if that math showed we were ready for early retirement we would not pull the plug. I enjoy my job as it stands today and while we have big plans for retirement they are not executable today even if we had the means. It’s good though to have options and to know that the funds are behind me to weather most any statistically predictable storm.

You never know what the future may hold. An outlier could occur. Even the best plans, even the 4% rule itself, could be voided by something unforeseen. The key is to have a flexible plan and buy yourself many options. That is why I believe we are financially independent from a risk perspective. Because we can now weather the majority of situations and have prepared with the flexibility to adjust to most others.

Are you financially independent? From a retirement perspective? From a risk taking perspective?


  1. The Magic Bean Counter
    The Magic Bean Counter May 1, 2017

    Great post! One of the most important qualities for a person pursuing FI to have is flexibility and it sounds like you have it. I also agree that following closer to a 3% withdrawal rate for 60+ year retirements is important. I need to check out ERN.

    • May 1, 2017

      Thanks. If you like graphs and math you should like his series.

  2. You hit the nail on the head in your last paragraph. Just because you can retire early doesn’t mean you have to AND becoming financially free is more about having OPTIONS.

    Wealth is the ability to fully experience life.

    Thanks for sharing FTF

    • May 1, 2017

      Thanks Erik. We’re definitely on the same page.

  3. Dan
    Dan May 1, 2017

    So many of the FIRE blogs emphasize RE. For me, an engaging job is so much more satisfying than retirement. If you enjoy your job and are well compensated, why would you stop? Health concerns, family emergencies, etc. Too many FIRE bloggers didn’t like their job and project that onto their readership. My opinion is if you don’t like you job, try a few more before you decide to retire.

    Regarding returns in retirement: if I had the time to devote to my portfolio which is largely ETFs, I would issue call options on the underlying ETFs. I would pocket the option premium (less broker fees). The key is to set a strike price high enough so it finishes out of the money most of the time. You set the strike price too high, you don’t sell your option. You set the strike price too low, you churn your portfolio and lose the value between the strike price and settle price. At 5 to 10 cents per option (for 100 shares) I could probably generate an extra 1% if I sold 30 day call options on everything I own (round down to the nearest 100 shares).

    Anyway, my point is that I think my portfolio could generate more in retirement than it does today (assuming I don’t shift my asset allocation to something more conservative in retirement)..

    • May 1, 2017

      I definitely agree. Just because you don’t like your current job doesn’t mean you won’t like working. Most of the early retirement blogger crowds seem to find a different form of work eventually, one they enjoy but is less money focused. I haven’t dabbled in options but there are certainly advantages to covered call positions if you have the time and focus. Thanks for stopping by.

  4. SMM
    SMM May 1, 2017

    I’m very far away from retirement, but I believe that failing to prepare means preparing to fail. Ofcourse my goal like many is to be financially independent at retirement meaning home paid off car(s) paid off, no major loans at all and the ability to spend reasonably freely.

    • May 1, 2017

      SMM, There are some that even do it with the loans intact. I’m not sure I have that type of risk tolerance so I’m with you.

  5. Congrats on reaching the 100 post milestone. It’s a great achievement and I hope to get there too in the near future.

    In terms of Financial Independent, I am in the same crowd that once achieve financial independent, you just bought yourself the option to do what pleases you. You don’t have to work for money and have less financial worries. I am not there yet, but when I do, I will definitely want to be more entrepreneurial and try to build a business that I am passionate about. Of course, I wouldn’t invest my whole life saving on this. I am just doing because it keeps me challenged when I retire.

    • May 1, 2017

      Thanks Leo. One post at a time just like anything else. What type of business are you planning (or is it too global to risk the competition?)?

  6. MyMoneyDesign
    MyMoneyDesign May 1, 2017

    I’m totally on board with what you’re trying to say here. Being FIRE does not mean you have to actually retire. People who think this are missing the point. The bigger reward is that if anything were to happen to you, it wouldn’t matter because you’re financially secure. Your FI funds are like castle wall that can protect you from financial vulnerability. I’m the same way with my goals. I’m not trying to reach the finish line first. I want to be as secure as possible instead.

    • May 1, 2017

      I love the castle wall analogy. Thanks for stopping by.

  7. Amy @ Life Zemplified
    Amy @ Life Zemplified May 1, 2017

    We are not quite to financial independence from a retirement perspective. From a risk perspective yes. Keeps getting better every day. Congrats on your 100th post!

    • May 1, 2017

      Thanks Amy. And yes, every day brings more options in more ways then one.

  8. Mr. Need2save
    Mr. Need2save May 1, 2017

    Congrats on reaching post #100! I enjoy your site and that you’ve challenged me on some of our posts.

    Although I’m not targeting a specific withdrawal rate, I would probably be comfortable in the 3.25% area as you’ve suggested. If something drastic happened and we needed to both stop working, we could make it work. However, that’s not the lifestyle I want in retirement. I enjoy the type of work that I do, but I’m pretty much over working for someone else. Once we retire, I’ll probably dabble in some consulting, teaching, or other work related to software engineering. But I’ll get to choose what is important and meaningful to me.

    • May 1, 2017

      Thanks Mr. Need2Save. Nothing wrong with a second act as an entrepreneur. There is always an option to work in something that trades pay for enjoyment.

  9. Mustard Seed Money
    Mustard Seed Money May 1, 2017

    Congrats on your 100th post!!! Awesome job!!!

    I was talking to a co-worker about having 25x their expenses. They were adament that they needed 100% of their income until I said. Who cares if you have 100% of your income in retirement if you’re spending 120% of it on travel. I think the light bulb turned on for him at that moment 🙂

    • May 2, 2017

      Thanks MSM. I appreciate all your comments over the last 8 months.

      It sounds like your conversation with your coworker got through. I still do not understand why the mainstream continues to talk about percent of income..

  10. Primal Prosperity
    Primal Prosperity May 2, 2017

    I could definitely never have to work again at this point, but it would mean budgeting, and not being able to be generous with friends, family and giving back. I work part time (only 2-3 days per week), and I think it is a perfect sweet spot between full time work and full time retirement… for me, at least. Like you, I like my career… and, I don’t have kids, so I have a lot of free time.

    I’m very much a risk taker though, and even though I work part time, I believe in sabbaticals and mini-retirements where people take time off completely from working for at least a month or more…. even if self employed.

    • May 2, 2017

      Nothing wrong with a sabbatical or mini retirement. My work supports a short sabbatical on top of my 4 weeks a year of vacation. I fully intend to take 2 months off sometime in my kids teen years to drive across the country regardless of where I am in my career.

  11. Jack Catchem
    Jack Catchem May 2, 2017

    I am far from financial independence, but I do adore what I do and am glad I have plenty of time to plan and prepare. Congratulations on the 100th post!

    • May 2, 2017

      Thanks Jack. Your blog makes it very apparent you enjoy your job. I really enjoy the occasional career focused blog if only to see what life would be like had I made different choices.

  12. Grant
    Grant May 2, 2017

    I’m still a few years away but I’m comfortable with the 4% goal. The reason is that rule assumes you don’t earn a drop of income and can’t adjust expenses. Honestly, I would think about going for it at 5%. I am just anxious to be able to work on anything I want without having to worry about how much money I will make. I don’t plan on just hanging it up completely. Just no more leave the house at 7 and get home at 7.

    • May 2, 2017

      A reduced schedule is certainly an alternative path. The question is how many people can do that without becoming self employed? It’s a good gig if you can get it, and something I would consider.
      Thanks for the insights Grant.

  13. Mrs. Groovy
    Mrs. Groovy May 4, 2017

    Happy 100!

    Even at FI + RE and decades older than you, we’re sticking with 2 to 3%. I agree with you that 4% goes out the window if you’re fully retiring at a young age with only investments working for you. But, as you mentioned, you’re not retiring now, you’re in sound financial shape, and you have plenty of options. Congratulations!

  14. Xrayvsn
    Xrayvsn July 29, 2019

    I also dismiss those reports that base financial independence of your income (some say 80% of your current income is what you need in retirement). This gets incredibly ludicrous when you get into the high paying occupations like physicians. I certainly do not need 80% of my current income to survive in retirement.

    I too have initially started with the 4% rule but have become more conservative and have been shooting for the 3.25-3.5% range. That should be very conservative for me and wanting to retire in my early 50s.

    • FullTimeFinance
      FullTimeFinance July 29, 2019

      3.25-3.5% should be secure for any life expectancy starting at 50. Have you decided what you will retire too?

  15. Joe
    Joe July 29, 2019

    The 4% rule is just a baseline. Once you get there, you need to adapt it to your personal situation. I don’t trust 4% either. That’s why I’m working a bit to bring in some active income.
    Once we’re 55, then I’ll trust the 4% rule more.

  16. Xrayvsn
    Xrayvsn July 30, 2019

    Hopefully I can still maintain a blog because that is still enjoyable for me to do and does take up a lot of time. Traveling of course would be nice. Writing a book has been on my bucket list as well. So have a few things that should keep me occupied (and maybe start playing my guitar and piano more than I do now)

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