Quit your job with the powers of discipline and math
There are a number of reasons why someone may choose to pursue financial independence (or FIRE). I personally consider achieving financial independence as a way to achieve the freedom and time I need to pursue meaningful work that interests me while living life on my own terms. For others it provides a way to get out of the rat race and live a life of relative leisure or pursue hobbies. Whatever you reason, achieving financial independence is possible with discipline and a little bit of math.
Where’s the FIRE?
If you’re not familiar with the FIRE (Financial Independence; Retire Early) movement, I’ll summarize it in one sentence: If you can save 25x your annual expenses (or 300x your monthly expenses), you can walk away from your 8-5 job and rely on your investment income to fully cover your expenses indefinitely.
Indefinitely is the operative word here. There is no finite retirement length with FIRE. Theoretically you would die with the same amount of purchasing power you have on the day you quit your job. While there is a good deal of debate on this subject with regards to retirement durations and safe withdrawal rates, that is a topic for another time.
The concept is simple enough, right? Someone living on $40k/year needs to amass a investment war chest of $1 million to quit his day job and maintain his current standard of living until he dies. Daunting? Certainly. But easy enough to grasp.
As it turns out, the “how” of achieving financial independence is pretty straightforward and only depends on two things:
- Savings Rate: The percent of your post-tax income that you save every year. This includes everything contributed to 401(k) plans, IRAs, HSAs, taxable brokerage accounts, and any other compounding investment accounts.
- Income Growth: The inflation-adjusted percent your post-tax income increases each year. This is something often overlooked but as we will see it can have a dramatic impact.
That’s it! Assuming that you earn more than you spend each year, your numerical income doesn’t actually matter in this analysis. Obviously a high income makes it easier to maintain a high savings rate, but someone saving 10% of her income has the same time-to-FIRE regardless of if she makes $30k or $200k.
The Developer and the Mime
To illustrate this, let’s look at two hypothetical aspiring FIRE friends: Pete and Mr. Gigglesworth (MG). Pete is a software developer with a wife and kids living in San Francisco. MG is an entertainer living with 3 roommates in the suburbs of Memphis.
| Metric | Pete | Mr. Gigglesworth |
|---|---|---|
| Occupation | Software Engineer | Entertainer |
| Hobbies | Brunch, attending swim meets | Hiking, ballroom dance, magic tricks |
| Post-Tax Annual Income | $200k | $30k |
| Annual Expenses | $160k | $24k |
| Annual Savings | $40k | $6k |
| Savings Rate | 20% | 20% |
| Amount needed to FIRE | $4M | $600k |
| Time to FIRE | 29.8 Years | 29.8 Years |
Despite differing jobs lifestyles, both Pete and MG save 20% of their incomes and can walk away from work in just under 30 years, albeit with different retirement lifestyles.
The Path for the Rest of Us
What does the tale of Pete and MG mean for the rest of us? Before we get into the numbers, lets talk about our assumptions:
- Investment return: We assume a 7% average annual real return for a 100% equity portfolio.
- Target FIRE Amount: 25x annual savings needed (4% safe withdrawal rate).
- Expenses: Anything not saved is spent. Annual expenses remain constant.
- Inflation: Inflation is real and should always be considered. In this model we account for it by using the historical inflation-adjusted return of the S&P500 index, rather than the total return. This means that our income growth numbers also need to be inflation-adjusted (e.g. annual income growth minus annual inflation rate).
With these assumptions, we can generalize the time it takes to achieve financial independence for anyone:
| Initial Post-Tax Savings Rate | Years to Achieve: 0% Income Growth | Years to Achieve: 5% Income Growth | Years to Achieve: 10% Income Growth | Years to Achieve: 15% Income Growth | Years to Achieve: 20% Income Growth |
|---|---|---|---|---|---|
| 10% | 40.4 | 32.3 | 25.6 | 20.8 | 17.6 |
| 20% | 29.8 | 23.9 | 19.3 | 16.2 | 13.9 |
| 30% | 23.3 | 18.9 | 15.6 | 13.3 | 11.6 |
| 40% | 18.5 | 15.2 | 12.8 | 11.1 | 9.8 |
| 50% | 14.5 | 12.2 | 10.4 | 9.2 | 8.2 |
| 60% | 11.1 | 9.5 | 8.3 | 7.4 | 6.8 |
| 70% | 8.1 | 7.1 | 6.3 | 5.8 | 5.3 |
| 80% | 5.3 | 4.8 | 4.4 | 4.1 | 3.8 |
| 90% | 2.6 | 2.4 | 2.3 | 2.3 | 2.2 |
As you would expect, the biggest factor in time-to-FIRE is savings rate; someone saving 50% of their income can retire much sooner than someone saving 10%. Savings rate is such a meaningful metric because it impacts the total savings amount as well as the rate of accumulation. In other words, a higher savings rate increases the rate of saving money and decreases the amount you need to save.
We can also see, however, that increasing your income (and thus savings rate) can compensate for a lower initial savings rate. Someone starting out savings 10% of their income can cut 15 years off of their fire journey (from 40.4 years down to 25.6) by increasing his income 10% each year, assuming his spending and lifestyle remain constant.
Why Doesn’t Everyone FIRE?
Looking at our chart, someone saving just 10% of her income with 5% raises each year should be able to retire around age 55, ten years before normal retirement age. So why don’t we see more people sailing away in the sunset by their mid-50s? It comes down to our classic FIRE deterrents:
- Not Saving Enough: Due to economic circumstances or lifestyle choices, many people live paycheck-to-paycheck and are unable to save even 10% of their income. People in this bucket need to create or look critically at their budget and find ways to start saving even $100 a month as a starting point.
- Not Investing in Yourself: Even modest yearly gains in income can take years off your FIRE journey. Stagnating at a job and not increasing your earnings potential regularly can mean you end up working until the traditional retirement age.
- Debt: Student loans, auto loans, and big mortgages are all-too-common forms on debt in the US. These debts can have a drain on your income and negatively impact your net worth. Don’t make the mistake of thinking of your primary residence as an asset (if you sell it, where will you live?). Ensure you are not taking on more debt that you need and look critically at your loans and pay off high-interest loans first.
- Lifestyle Creep: As we grow our careers and earn more money, it is all too tempting to increase our spending as well. We buy nicer things, live in bigger houses, and go on more trips. If you are serious about FIRE, find the lifestyle you are comfortable with and stick with it. This will allow you to bank future raises and bring your FIRE date forward.
- Major Life Changes: Significant life events can have a huge impact on your ability to comfortably retire. Getting married and having kids can be great life experiences, but these choices permanently alter your financial situation. If you are building an early retirement plan, ensure you plan for and factor in any future expenses you expect from these major life changes.
- Speculative Investments: Warren Buffet has two famous rules for investing — “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1”. There is no better way to lose money than investing in speculative stocks or commodities (think cryptocurrency). It is far better to invest in equities with reasonable and consistent returns than to gamble on speculative investments in hopes of striking it rich.
So What Do I Do Now?
If you’re someone on the path to FIRE, remember the following:
- Increase your savings rate: This is the best way to achieve your FIRE goals earlier. Find ways to lower your expenses and sock away more money whenever you can. The more frugal you can be the earlier you can retire.
- Increase your earning potential: Side-hustles can be fun, but they are not always the best use of time in terms of creating sustainable income. Instead focus on building you skills and earning potential so you can make more money per hour at your primary job. We’ve seen that 5-10% increases each year can have a dramatic impact on your time-to-FIRE.
- Avoid lifestyle creep: Decide upon the budget/lifestyle you want and stick with it. There is nothing wrong with spending money, but spending needs to be balanced against your desire for financial independence. Once you align on your lifestyle, stick with it as you grow in your career, instead using raises to increase your savings rate.
- Time is your friend: Remember the time-value of money: a dollar saved yesterday is worth more than that same dollar saved today. The longer you have your money invested, the more it will work for you. Use your money to buy time, not things.
We don’t all come from the same place and we all start our journeys at different places; your only real competition is yourself. But financial independence is achievable if you work, save, and invest in yourself. If you’re not where you want to be financially today, make small improvements to get yourself going in the right direction. And if you get discouraged along your journey, remember the words of my favorite Muppet:
It’s not where you start, it’s where you finish.
Rowlf
