Financial Independence (FI) - Assumption vs Reality

Thanks to the likes of Mr. Money Mustache (MMM) and the incredible press coverage he garnered via his blog (https://www.mrmoneymustache.com) for chronicling the seemingly impossible feat of “retiring” at age 30 to raise a family and dabble in interesting side-hustles, FIRE (Financial Independence Retire Early) has become part of everyday vernacular among those in or near peak earning years (Gen X and Y)…ironically.  Workers attracted to this lifestyle goal often cite flexibility, freedom and experiences as more important than stuff.  

 

Much has been written and debated about FIRE.  Today, I want to focus on its variation, FI – Financial Independence.  Like FIRE, FI is defined as having accumulated a net worth 25xs your annual living expenses.  Reason being, research has shown that with net worth 25xs annual expenses and a 50/50 portfolio asset allocation, one can withdraw 4% for the rest of one’s life without running out of money.  (Source: “What is the 4% rule for retirement withdrawals?” Forbes 2023.)  However, unlike FIRE, those aspiring to FI don’t necessarily want to retire.  Rather, they want the financial flexibility and freedom to adopt a life and work that are more aligned with their values.  Unfortunately, based on my experience, FI is equally misunderstood by those who frown upon it as by those who aspire to it.  As is, I’d take this opportunity to separate fact from fiction; assumption from reality.  

 

Assumption 1:  FI is about having a high income.  

Reality 1: FI is about having low expenses.  

Since quite a few high-paid (tech) workers have achieved FI or are working towards it, the assumption is that it’s only attainable with a high income.  (Mr. Money Mustache himself was a software engineer.)  And, yes, it’s easier to achieve FI if you earn more than the average household income of $70K/yr in the US.  (Source: Income in the US – 2021, US Census Bureau).  However, this only tells part of the story.  

 

For example, if Worker A has income of $250K/yr and living expenses of $200K/yr, then Worker A’s savings is $50K/yr, a 20% savings rate.  However, if Worker B has an income of $75K/yr and living expenses of $40K/yr, then Worker B’s savings is $35K/yr, a 45% savings rate.  To progress financially, a low living expenses is a more powerful lever than a high income.  Reason being, 1) if you live on less, you need to save less 2) low living expenses naturally result in high(er) savings.  So, according to the 4% rule, Worker A would need to save $5M to achieve FI, while Worker B only $1M.       

  

 

Assumption 2: FI is a result of deprivation. 

Reality 2: FI is a result of efficiency. 

Whether living on say $40K/yr is about deprivation or efficiency is a matter of perspective.  For some, living on $40K/yr may feel like a deprivation, if not an impossibility, especially in costly coastal cities.  However, for others living on $40K/yr is doable as it requires adopting a lifestyle based on greater (financial) efficiency and creativity.  For example, rather than living in a high-cost big city, pursuants of FI may opt to live in a lower-cost, smaller city adjacent to it.  Rather than driving a new, high-end car, they may choose to hold onto their old car.  Rather than commuting everywhere, they may choose to live in a walkable neighborhood that’s surrounded by preferred amenities.  Rather than going out for lunch, they may opt to pack their lunch, instead.  

 

Interestingly, by choosing a less convenient, but financially more economical/efficient option, FI pursuant inadvertently compound their savings.  For example, by driving an older car, they can save a good deal on insurance premium.  Meanwhile, walking helps preserve health and well-being, which could help advert costly healthcare needs.  For someone who is naturally frugal, living on less is a matter of efficiency versus deprivation.  

 

Assumption 3: FI increases risk.   

Reality 3: FI decreases risk…Or, perhaps swap out one set of risk for another.    

On the surface, it seems foolhardy and irresponsible for someone able-bodied to forego full-time work and a steady paycheck for part-time work and an unsteady paycheck.  What if you run out of money?  What if you incur large unforeseen (medical) expenses?  What if the stock market tanks and sinks your portfolio?  What if…?  What if…?  What if…?  Of course, all these things are possible.  But, are they probable?  For those working full-time and earning a (high) salary, the big risk could be job loss; high expenses or debt load that can become crushing without a job to service it; potential fire sale of assets or foreclosure; etc. Or, perhaps the biggest risk of all is the assumption that a steady pay check offers certainty, dependability and safety.    

 

On many levels, FI pursuant’s low-cost lifestyle helps inoculate them from the risks of economic boom and bust.  First, they don’t really need a high-paying job to support their inexpensive lifestyles.  Second, should their portfolio decline in a downturn, they can either cut expenses further and/or get a part-time job.  Third, because their low-cost lifestyle often includes a certain level of physical exertion (e.g., walking, riding bikes to most places) and requires being savvy with money, the skillsets that had helped them reach FI are also those that will help them maintain FI.      

 

Assumption 4: FI is the opportunity to stop working.   

Reality 4: FI is the opportunity to do your best work.  

One of the biggest misperceptions about FI is that pursuant’s ultimate goal is to stop working.  This is based on the assumption that being able to stop working (for money) naturally results in choosing to do so.  And, that’s not necessarily the case.  Those who are attracted to FI typically value work.  Afterall, it’s work that had helped them reach and maintain FI.  However, unlike the majority of people, those who pursue FI also place tremendous value on financial flexibility and freedom, because this gives them the opportunity to pursue work that aligns with their passion and values.  FI pursuant choose to trade in financial payoff for emotional payoff; consumption for service.        

 

 

Final thoughts…     

Against the backdrop of modern society’s emphasis on hard-work and high consumption, FI stands out as a curiosity, at best, and a counter-culture, at worse.  In highlighting the key assumptions and realities of FI, I’m not trying to convert anyone.  Rather, I want to clarify and illuminate (further) on a sub-culture that many may have read about, but few truly understand, not even those seeking to emulate it.  In short, FI is less about choosing a minimal lifestyle and more about choosing a certain set of values: enough vs more; time vs money; experience vs stuff.   

 

Like ultramarathoning, FI may be too hardcore for most people.  As with most things in life, there are trade-offs.  So, only you can decide whether or not FI is right for you. However, for those (few) who are willing to go the distance, the opportunity to lead a Life of greater flexibility, freedom and integrity may be worth foregoing your weight in gold.