Work for freedom…
Keep working…don’t jump off the band wagon
My mom came to visit me this weekend. It’s always nice to spend time with her, particularly as I get older. My parents worked hard my entire life to provide for our family. I remember them hustling us when we were young and unfortunately they did not have much time for their other life interests. Now as they get older, I see them enjoying other activities more. So it always is surprising that when I talk to my mom and tell her I want to retire early that she just looks at me and emphatically says “Why?”
Life is short, relatively
I understand that life is short and without guarantees. That the time we have with our young children is fleeting. That going to work and churning widgets, whatever widget it may be, is not necessarily the end all, be all. So I asked her “Why not?” Her answer was straightforward; you have to work to provide for your family. She is right. We all have an obligation/duty to provide for our loved ones and ourselves so we do not become a burden on the rest of society. So what does it take to get there, to be financially free and able to stop working, well it depends on the definition and you’re spending.
I was thinking of this topic all weekend during my mom’s visit. It interestingly timed with my reading of Tony Robbins’ book “Money: Master The Game” (book review to come soon). In this book Tony describes various levels of financial wealth that include security, vitality, independence, and freedom. Coincidently, today a fellow blogger “Physician on Fire” posted a piece on the same topic “Financial Independence versus Financial Freedom”. So I figured this would be a good place to start assessing what I truly need to stop or at least decrease my current work pace.
Financial Security
This basically is what you need not to get buy without having creditors come after you. This includes the mortgage, utilities, food, transportation, and insurance per Tony. It does not include other expenses such as clothes, CDs (does anyone buy those anymore), or nights out. Easy right?! Well sadly enough, I am not even here from an asset allocation standpoint. For me, security would come at $1.9 million. Now granted I have an expensive mortgage and could decrease this if I wanted to, I also have life insurance, umbrella policies, and disability which can not go away until I am at least financially independent.
Financial Independence
This category includes the above costs plus all other daily living costs. The clothes, restaurant trips, nights out, travel, and basically anything you do on a day-to-day or better yet month-to-month basis. This is easy to figure out if you just keep a budget for a few months. At this level you could retire and I would argue that most people in the Financially Independent Early Retirement movement would retire when financially independent. For most of us who are thinking about this, time is more important then a few material possessions. For me to be financially independent I would need $2.8 million in assets ($12,000 a month). This is even more daunting then the above number for security as my goal is independence in 10 years. Saving $3 million in 10 years would require a much higher savings rate then I am currently undergoing.
Financial Freedom
Freedom is independence plus more stuff. This would mean being able to enjoy most everything you like. I would say that this category equates to how I currently live my life as my High Income allows me to afford my day-to-day living plus spend money on wine, travel, and restaurants when I want. This comes out to $3.25 million ($13,500 a month). For me the difference between Independence and Freedom is not that much ($450,000 in total assets) but would allow for a more comfortable retirement.
So I calculate that I am at:
Security $1.9 million
Independence $2.8 million
Freedom $3.25 million
This is reassuring but also does not account for my desire to be mortgage free by the time I retire which would decrease all of the above calculations by approximately $3,000. Still, if I compare myself to Physician on Fire we can see that my cost of living is by no means frugal. He describes needing $1.75 million for independence (which he already has achieved) and $2.5 million for freedom. His independence comes to my level of security. Once again this demonstrates that lifestyle bloat (which I have definitely endured to some extent- especially with my recent mortgage) can affect how and when you retire.
What do I need to do
So I have 10 years to save at least $2.8 million and pay off my school debt and mortgage (or down size). Is it possible…maybe but it would require some lifestyle changes. After assessing my current situation I suspect I will continue my aggressive savings (last year it was approximately 35% of my take home pay) and plan on going part time at 45. Working 60% would still afford me health benefits, a steady and hefty salary to continue saving and enjoying life as a Financially Free individual, and allow less stress now.
So back to my mother. Without saying it she basically told me to “Suck it up and work”. For now as I am nowhere near even being financially secure, I will “Suck it up”. However, I will not buy into the notion that I have to work until I am 65 years to be a good father and husband. What about you, do you think we should work until old age just to provide more things for our children?
There is no fast way to do it. Just automate it, forget about it, and it will pile up.
True dat! Automate and forget is the best way not to screw up your future.
I need to review your expenses. When someone talks about all the insurance they got I cringe because middle men usually take your money and never give it back (corporations know this and self insure).
I think lowering your expenses is a faster way to retire early. I fully support your goal. Have you looked into travel hacking? It’s a much cheaper way to travel than spending cash.
The most travel hacking I do is using a Southwest companion pass. My wife flies free everywhere we go which is nice. I concur that cutting costs is easier then earning more (a dollar earned is 2 saved?)!
Insurance is not our biggest cost by any means. I have a low cost term life both in and out of work. Work provides me a nice disability plan. Finally, auto insurance is not too expensive because our cars are inexpensive.
The good thing is it sounds like you are aware of your options and have a plan. For me in my mid-40’s, I’ll say the corporate game can start to get old. I’d suggest to start fine tuning some of your lifestyle choices. Question and challenge your expenses. Do you really need to spend that much every month to be happy? Do you always go to an expensive restaurant and how often to you really need to go? With a little effort you can still do many things for less without really giving up much. Its not about giving up everything to save a few dollars but also you are spending a lot of your free time and energy working to pay for all these things. And all these stores, restaurants etc will do anything they can to get you to spend your money there. I’ve got a lot of stuff but value my freedom much more. I don’t mind working, but I don’t really want to commit 40 – 50 hours a week of my life plus commute time to it anymore. Start making adjustments now, and in 10 years and beyond you will be in a much better place.
Yes, sir. I see you subscribe to the theory of FF being something more than FI.
I’d write more, but I’ve got work to do.
Cheers!
-PoF
Nice post.
A couple of points from someone who is already at where you are striving to get:
1) You talk a lot about savings. That is hugely important and you can up your savings rate. 33% of gross would accelerate your journey. A higher savings rate helps you to become "free" sooner because you will have more money sooner but also because (and more importantly) you will need less income going forward. Don’t forget about the return side of this though. I have had a lot of investments that returned 20%, 25%, 33% annually for years and that really helped.
2) If your plan is to continue working part-time long term you will need A LOT less money to downshift. The 4% rule is an attempt to be certain that you can survive but if you have the option of working part time you can make due with less. Personally I’m biased towards continuing working -just not as intensely once you reach FI.
Keep up the blogging!