Have you ever dreamed of a 2 month trip across the U.S., visiting every state? Or maybe sitting on a beach with a cocktail and a book, whenever you want? Moving to the mountains?
Or have you ever laid awake on a Sunday night wondering what it’s like to not worry about the work awaiting you Monday morning?
Some people have more than a case of the “Mondays.” They have an uncurable case of the “Monday through Fridays.” Perhaps you have fantasized of tossing your badge in your boss’s face and telling her “I quit.”
In Office Space, corporate burnout Peter has mundane motivations to obtain $1M (a figure with which he can presumably quit work forever). He wants $1M so that he is free to do absolutely nothing. “I’d relax,” he says. “I would sit on my ass all day. I would do nothing.”
Whatever trips your trigger, surely you would love to obtain $1M, become master of your own life, and have the freedom to do whatever you want . . . or do nothing at all. This goal is known as Financial independence (FI for short), and most people achieve it in traditional retirement (in their 60s).
Believe it or not, you can achieve FI much earlier. Some people even reach FI as early as 30! Most middle class families who want to live a comfortable lifestyle but still retire early should expect FI somewhere between 40 and 50.
The Secret Life of FI website specializes in providing practical insight, resources, and easy to follow guidance for middle income Americans to achieve FI while requiring no money managers, no investment knowledge, and very little risk.
What investments count toward your FI number?
You should count all investments, but if your are just starting out, it will simplify the math and method if you exclude the value of your home and future social security payments. Though they can be a factor, I recommend excluding them until you are more mature in your FI journey and/or nearing a retirement decision.
Your basic FI number then should include all before tax investments (401K, HSAs, IRAs) as well as after tax (Bank account, Roth IRAs, and brokerage/stock accounts). Through simple tax management strategies, even in your early retirement, you may even be able to access these accounts, including 401K, tax and penalty free (up to $94K a year in 2024).
Incredible isn’t it? Due to income taxes, you’d have to make $75K to wind up with $60K take-home pay, but if you invest the money and retire early, you have NO earned income, and now you can pay yourself the $75K just referenced, and not lose $15K to Uncle Sam. Keep the $15K invested and let it grow and pay you instead!
In short, it costs you to work long term, and it pays you to retire early. This is the essence of the Secret Life of FI.
If this is new information for you, you are probably already doing the math in your head to figure out what number you need to hit to retire early and live income tax free.
How do you determine your personal FI $ target?
The most common method is to multiply your desired annual retirement budget by 25 (use your current expenses if you don’t know how to estimate). In short, if Peter from Office Space retired on the $1M he fantasized about, he would be able to safely withdraw $40,000/yr to live off and have his $1M last a lifetime. Is $1M enough to sustain your current yearly expenses for life?
Probably not. According to the bureau of Labor Statistics, the average American family’s yearly expenses are $70K. To Safely withdraw $70K from retirement investments, you need to save $1.75M. If you are a higher income family and/or aggressively save and invest early, this figure may be achievable. But most Americans are over spending and under investing.
Don’t worry – you can change your financial fortunes with limited sacrifice. Mr. FI wants to help his readers achieve FI in 15 years or less, but still maintain a normal middle-class lifestyle with the luxury to dine out, take vacations, and NOT budget for minor things like ice cream or the latest PS5 blockbuster.
Mr. FI understands because he himself was a middle income earner who managed to achieve FI on a modest American lifestyle, and played a lot of video games and ate a lot of ice cream along the way. Read the 4 Steps to FI that the FI family took to reach FI to see how you can follow the same path.