Being financially independent is everyone’s dream and why wouldn’t it be? Being financially independent means having an ample nest egg and never having to work again. Now, there are many means of achieving this financial milestone but here are the five ways that will get you there the quickest!
Method #1: Traditional Financial Independence
When one is financially independent, it means the person earns enough income to take care of all of their living expenses for the rest of their lives, without the need to be employed or dependent on other people. People in this class have several sources of passive income which is used to pay for all of their day to day needs.
Traditional financial independence can be achieved using different strategies with each of them having their own benefits and downsides. Having a financial plan and budget can help you achieve this. With a plan, you will know exactly what to do with the money you earn during your employment years.
Knowing the figures you make will guide you towards knowing how much you can afford to allocate towards investments. In traditional financial independence and the other four means of retiring early that I will talk about later, it is essential to know how much money you intend on spending upon retirement. Once your passive income matches this expenditure amount then you will be set to give your two weeks notice at work and leave the working world behind. But this math is the easy part, forming the passive income streams is where the challenge lies.
Some of the more popular methods of earning passive income to support your retirement lifestyle include owning a business that is managed for you, being the recipient of dividend payments, collecting a pension and earning rental income.
Method #2: Lean FIRE
For those of you who are unfamiliar with the term FIRE, it is a commonly used phrase in many financial communities to describe early retirement hence the term financial independence/retire early or FIRE. Essentially Financial Independence Retire Early is a situation where you are able to retire before the traditional retirement of 65 or whatever is the norm in your country. Now, some people want to reach this financial milestone quicker and are willing to live lean in their golden years which is know as Lean FIRE.
Typically, those who undertake this approach are people who have less saved up for retirement but are willing to trade off a luxurious retirement lifestyle for the ability to retire now. Certain lifestyle decisions that are common with this financial independence approach include living in low-cost apartments in a low-cost neighborhood, choosing not to have kids, eating at low-cost restaurants or buying cheap food and not taking expensive holiday trips. Many may consider the lean FIRE approach to be undignified, but truly, there’s nothing wrong with it. If you can do what you want while living a minimalist lifestyle, then you’re alright.
If this sounds like something you would be interested in then you may want to know how much you would need to achieve Lean FIRE. Unlike its counterpart Fat FIRE, you don’t need to stack up all the cash in the world.
Your choice of residence would most likely be around the more rural areas, where housing and the lifestyle in general is cheap. To live the lean FIRE life, you should set your sights on working until the age of about 45 years. Hopefully, you would have a minimum of $1,000,000 in after-tax investments that produce a minimum of $40,000 annually in passive income. This is an estimated figure, but numbers around that region will do. If you are not in any debt, then a $40,000 per year income will suffice for a simple, low-spending life with a family of about four in a low-cost area.
In this circumstance, your kids will have to attend public school and you wouldn’t necessarily have the means to take them on international vacations or fancy trips but the good thing about being retired is that you will have the time and energy to spend more quality family time and this is invaluable if you ask me.
If you were concerned that your nest egg was not quite as reliable as you initially intended after retiring, you could do yourself a favor by getting a part-time job to supplement your income. By doing this, you should be able to make an extra $10,000 per year or so, working about 10 hours a week. For a person on a lean FIRE lifestyle, a 25% addition to your passive income would feel like a jackpot!
In terms of a budget, if you were to Lean FIRE with your wife and one child, then you can base it on 200% of the Federal Poverty Limit for a household of three. That annual gross income number would be $41,560. Using a 3% safe withdrawal rate or 3% rate of return, you would, therefore, need a portfolio of $1,385,333 to Lean FIRE with your family.
Method #3: Fat FIRE
Fat FIRE is the direct opposite of lean FIRE. With this approach, you will be able to live life to the fullest during your retirement years without compromising the way you spend. With Fat FIRE, you will find it very easy to live without being employed. This is because the investments you have generate more than enough income to pay for your expensive lifestyle.
Fat FIRE allows you to live in the most expensive cities or neighborhoods anywhere in the world. Such cities have expensive recreational spots, high brow restaurants, an exciting nightlife, private schools and expensive colleges. Having a large nest egg will also allow you to live in an expensive home, send your kids to a private college and give you the means the drive a fancy car.
Unlike lean FIRE, you do not need to cut down on spending to survive. On the contrary, you can actually increase your spending, thanks to the large sums you make from your various sources of passive income.
If your aim is to live the Fat FIRE lifestyle, then do not retire before the age of 40 if you don’t have at least $4,000,000 stashed up in the bank.
Even if you’ve got $2,500,000 after-tax investments, you’ll be able to make about $100,000 annually in gross income or about $75,000 in after-tax income. This is based on a 4% rate of return.
This will work just fine if you and your partner do not have kids.
If you have a family or plan to raise one, and you want to live the Fat FIRE lifestyle, then you should have a minimum of $5,000,000 and generate an income of about $200,000 or more. For this to be possible, you may need to keep working and saving until the age of about 50 or so. Nonetheless, that’s significantly younger than the average retirement age of 65. When you’ve stopped working for money, then you must have as much money saved up as you possibly can. It makes no sense retiring early if you will still worry about making money to pay your daily or monthly bills.
With Fat FIRE, you would be as free as the birds, and you would live like royalty. Like I said earlier, you can buy the best cars, live in the best homes, travel to expensive cities or countries, and send your kids to the best schools.
Also, if there’s something you love doing and it brings you a decent income, then by all means go ahead. There’s nothing wrong with adding to your already established net worth. As you make your first million, it would then become easier to make more millions, since you have more cash to invest and multiply. Keep in mind though, you have to be careful with the investments you make, as investing more does not automatically equate to earning more.
Method #4: Slow FIRE
Slow FIRE is all about following a longer route to early retirement, in exchange for a more convenient path to financial independence. For those chasing Slow FIRE, you will find yourself working at a slower savings rate and this is generally for two reasons.
First, you currently earn a low income meaning that your routine costs make up a large amount of your take home pay leaving little to stash away for early retirement. Essentially, the less you save the longer it will take until you can retire.
The other reason you may want to use the Slow FIRE method is that you do not want to totally sacrifice your current lifestyle to retire a few years early. In essence, you don’t want to give up the items or activities you love. This could be in the form of cars, phones, family vacations etc.
In this case, you are not willing to sacrifice all those enjoyable things of life simply for the sake of saving. This will of course mean that you will be saving money at a slower rate than those willing to sacrifice these pleasures but everyone's retirement path is different and taking the Slow FIRE approach is more than okay!
Method #5: Coasting FIRE
Coasting FIRE is when one invests a lot of money at a young age to the point where they can stop contributions and still achieve their goal of financial independence in the nearer future. The point here is to spike up your savings rate very early during your investing career. You can do this by stacking up funds into tax-advantaged savings accounts. Mathematically, there is a point where the money you invest is sufficient with compound interest to increase to an amount that’s enough for early retirement without the need for more contributions. For compound interests to reach its maximum potential you need to give it time. By starting early, you would not need as much cash invested, since you have a few decades head start. For a person who’s older, he or she would need to invest more, since time is no longer on their side.
Coast FIRE seeks to simultaneously maximize time and investment. If you are able to achieve both of these, then you’re on the right track.
Now let’s go over the numbers so you can truly understand how coasting FIRE works. The 25x rule is the standard rule of thumb for Coast FIRE. For instance, if you wish to make $50,000 annually in retirement income, then you need to save a minimum of $1.25 million in your retirement account.
The 25x rule (or the 4% rule) allows you to withdraw from your nest egg with the assurance that the money you have saved up for your retirement years will last you for the next 30 years of your life.
The Coast FIRE approach allows you to reach your financial independence target faster than the other FIRE movement types. However, it requires you to save at a much higher rate. This could be challenging for most people since most of life’s temptations cost money. It is advisable to continue to monitor and contribute during market downturns to make sure you remain on course.
One major advantage of Coast FIRE is that because you will be investing a large sum of money at a very young, you can maximize the power of time when it comes to growing your investment. Also, starting early can allow you take on more riskier investments, as you have more than enough time to recover from any losses. If you are able to achieve a $100,000 per annum income by the age of 30, then your mission has been accomplished. Coast FIRE can be achieved at any age, but the older you get, the higher the amount of money you will need to invest to reach your target.
And there you have it, 5 ways to achieve financial independence!