I will quickly note this message is targeted toward those able to retire/become financially free extremely early in life. Being able to retire five or so years earlier than your colleagues is great but outside the scope of this framework. Putting in your resignation letter two or three decades before everyone else, however, puts you in a very unique position as it relates to time, money, and abilities.
There’s been a lot of discussion over recent years on how exactly one goes about planning to retire early or become financially free early on in life from the perspective of making sure one has enough money to actually take the leap.
Although there are probably many different ways to think about it and conceptualize it, it really comes down to making sure the passive income your investments are generating on your behalf cover your bills.
Easy enough, right?
Well, easier said than done. I can attest to that.
The Basic Math
So retiring early or becoming financially free quite young, at its core, is not a particularly difficult concept to grasp. You’re just taking the basic idea and math of retirement (being in a position where you no longer have to work because you have non-work income coming in) and speeding it up a couple decades or so.
However, how one goes about generating enough “passive income” so early in life is certainly open to debate.
The usual suspects include (though not exhaustive):
- Generating rent from a portfolio of rental properties.
- Building up a diversified portfolio of index funds and selling off 4% each year, adjusting for inflation.
- Owning some sort of online business that generates passive and ongoing affiliate income or other sales.
- Building a portfolio of high-quality dividend growth stocks that spits out increasing dividend income (my personal choice).
Essentially, what one wants to do is estimate their expenses at a future date. And then it’s simple reverse engineering to figure out how much to save between now and then, assuming some conservative compounding along the way, so that you can have a base of assets large enough to cover those expenses.
So, for instance, you could say that you think you’re going to spend $30,000 per year at 45 years old, which is when you want to quit working. If you’re now 25 years old, you have 20 years to get to that point.
A large camp of people out there believe in the aforementioned 4% safe withdrawal rate. Under that assumption, one would withdraw 4% of their assets every year, adjusting for inflation. If you were going to go that route, a $750,000 portfolio would be necessary to generate $30,000 in investment income in its first year of withdrawals.
Using a compound interest calculator, we then just do a little math. Starting at $0, it would require someone to put away a little over $15,000 per year for 20 years, if this person were compounding the money at 8% annually (compounded 12 times per year). I didn’t factor in taxes, pay raises, or inflation for the sake of simplicity and brevity.
Investing in high-quality dividend growth stocks that generate growing dividend income is my personal approach because I don’t want to have to worry about slowly selling off assets for the rest of my life. Seeing as how the Full-Time Fund‘s yield is over 3.5%, it’s pretty close to the 4% SWR anyway.
Now, one could make arguments for whichever approach they prefer. But that’s not the point of today’s article. And I’m frankly not interested in beating a dead horse. I say to each their own.
Instead, what I’m going to point out is that I’ve learned something, now being in a position where my passive income covers my core personal expenses.
What I’ve learned is that much of the math is moot.
The Math Is Largely Moot
I believe the key to really enjoying early retirement or financial freedom at a very early age is to seek out and conquer challenges regularly – perhaps even daily.
The type of person that is going to succeed at this and be in a position to live off of passive income at a very early age is a very specific type of person, in my view. (I’ve met a lot of engineers doing this. Coincidence?)
This is a person that’s driven and competitive. This is a person that likes to take on challenges and thrives under pressure. This is a person that believes anything is possible. This person eats will, patience, persistence, and perseverance for breakfast.
They’re optimists. They see financial freedom as just one chapter of an otherwise fantastic book. They see being in a relatively well-off position as a way to make not only their dreams come true but the world better, too. Controlling a lot of wealth is as much of a gift as it is a burden.
As such, most people, including myself, that reach Mt. Freedom at an early age aren’t going to just stop climbing mountains.
You’re not going to stop living life, taking on challenges, and impacting the world simply because you’ve got enough change in your pocket to cover your bills indefinitely. If anything, you’re going to be that much more driven with more resources (time, money, and experience) at your disposal.
I’ve always wondered why so many wealthy people – athletes, actors, musicians, CEOs, etc. – kept taking on new projects well after they were extremely wealthy. After all, they could literally do nothing but relax for the rest of their lives.
Why does Michael Jordan want to run a basketball team when he’s a billionaire?
Why would Elon Musk want to build electric cars, solar panels, and rockets when he has enough money for 100 lifetimes?
It took me the perspective gained after reaching the top of the mountain to realize that it’s not very fun to just sit around and do nothing but relax.
Perhaps that’s fun for some people. I wouldn’t know.
But it’s not very fun (at least not all the time) for those that have the intelligence, drive, optimism, will, and patience to become quite wealthy at a young age in the first place.
The view is great from the top of a mountain. No doubt about that. But just as well, you see these other mountains out there. And you know that you have what it takes to climb them. You know there’s more in you. And when you know that, sitting around simply doesn’t cut it.
So one goes about seeking out new challenges and opportunities. And it just so happens that many – or even most – of these challenges and opportunities pay money.
For example, a lot of people that have retired/become financially free early or are otherwise relatively wealthy blog about their perspectives. Yours truly falls in that camp. Mr. Money Mustache is another great example. Many of these people do quite well with their writing, earning enough money from just those activities alone to more than pay their bills. That’s on top of the assets/passive income they’ve already built up.
Others go back to traditional jobs that are totally different than what they were doing before. Jacob from Early Retirement Extreme retired extremely early by adopting a rather extreme lifestyle (get it?) after a career as a physicist, then went back to work as a quant researcher.
I’m actually even considering becoming a part-time personal trainer at some point down the road – more for fun than for money. I enjoy exercising. And I wouldn’t mind being able to motivate and inspire people in a more physical (rather than financial) manner. It’d also serve as great motivation for me to stay in peak form. The fact that I’d probably make pretty good money at it is just icing on an already delicious cake. Although, I wouldn’t really need the money. I wouldn’t need to do it full time. I wouldn’t rely on that check. And if it didn’t work out, I could move on to something else.
Or maybe I never do that. Who knows? But I could if I wanted to. The opportunity is there. And so are many other opportunities – I literally have a dozen different passions that I believe could be monetized. That’s really what this is all about. Financial freedom is about putting yourself in a great position, where you can do just about anything you want. You can live live on your terms.
Financial freedom isn’t necessarily about never working again but rather being able to do what you want, when you want, with whom you want. And that means that if you want to work, you’ll be doing it because you want to rather than because you have to. There’s a big difference there.
And I can almost assure you that you will want to. You will want to see what else you’ve got. You’ll want to continue testing yourself. I don’t believe financial freedom at an early age can truly be fully enjoyed if new challenges aren’t sought out regularly.
So to think that you need to hold firm to the math just doesn’t add up (pun intended).
While I’m in no way advocating straying from the basic math, and I’m certainly not saying that one shouldn’t still save and invest enough to become financially free in the classical sense whereby passive income exceeds expenses, feeling like you need to conform to some exact definition or hit some exact number down to the penny seems unnecessary.
Moreover, I also don’t see the need to have some huge margin of safety whereby your passive income covers your expenses far more than once over. Saving up, say, $1 million when $750,000 would do is overkill if you’re the type of person that’s got what it takes to get to that spot in the first place. To think that someone who’s amassed hundreds of thousands of dollars at a young age will just never go on to seek out other challenges or opportunities that will reward this person with money for their unique passion, skills, and drive seems really crazy to me.
The extra active income this person will make long after they say sayonara to whatever full-time occupation they had on the climb up can be used to further bolster assets/passive income, or the extra money can be used to fund ventures, activities, travel, or philanthropy that the base budget this person is existing under doesn’t allow for. Having enough passive income to cover your basic expenses but choosing to take on unique opportunities that happen to pay money and using that extra money to fund extraordinary expenses doesn’t somehow invalidate your position or the value of being financially free.
In the end, worrying about whether your assets are enough to cover inflation for the next 40 years or whatever is likely just a complete waste of time. If you’re splitting hairs over your your withdrawal rate or think you need to work another six months to hit something on the nose, you’re taking things way too seriously and not seeing what’s ahead.
When I first started writing about my journey to financial freedom, it was somewhat of a niche community. In fact, my old site, Dividend Mantra, likely became as popular as it did because there were just so few people approaching things in the manner I was. Few wanted to share all of their numbers. Dividend growth investing wasn’t as popular as it is now. Frugality was seen as kind of a weird lifestyle. Most people thought the idea of retiring before 60 was reserved for lazy bums – or crazies. And I have an intense passion for all of this that I enjoy sharing. I genuinely enjoy inspiring and motivating those who want to be inspired and motivated.
But the community is much larger these days. A lot of people are tackling the challenge, exchanging ideas, sharing numbers, and inspiring each other. There’s also a lot of back and forth on the math and methods. This is all wonderful.
However, I think that sometimes people are too rigid with their viewpoints. Some people believe you need to have this massive asset base that even exceeds the 4% SWR before you can truly be free. Others believe that if you’re still exchanging time for money in any capacity, you’re no longer truly financially free. It’s as if there’s this membership card that’s revoked or something if you engage in any activity that earns you one penny for your efforts. This is all very, very silly.
For me, the bottom line is this: one is financially free when they’re free from concerns about finances. It’s not so much about hitting $X dollars in portfolio value or passive income. I remember I quit my full-time job back in May 2014 when my portfolio (and the dividend income it generated) was half its current size. So I’ve gone on to double my earnings power in a little over two years without clocking in at a day job one time. As such, I believe that someone who’s climbing Mt. Freedom will, in the end, have to worry about what they’re going to do with all their money, not whether or not they’re going to make it.
I have a picture on my wall that states:
My goal is to create a life I don’t need a vacation from.
That sums it up for me. If you’re living that life, you’ve made it. You’re there. Fortunately, I’m living that life now. But I’m only able to do so because I’ve realized that it’s not about money at all.
However, what you do is up to you. You have to figure out a plan that works for your time horizon, risk tolerance, lifestyle, long-term goals, and abilities. But I think it’s important to be mindful that if you’re really the type of person that’s going to go out and become financially free in your 30s or 40s, you’re very likely going to go on and earn a lot more money over the course of your life. The odds that you never again exchange a minute of your time for a buck are very, very low.
In fact, you very well might go on to earn far more money in the next phase of your life than you did as you marched up Mt. Freedom. You may find that the next mountain you climb is even more lucrative – and I don’t just mean in financial terms.
What do you think? Is the early retirement math moot? Do you plan to continue taking on money-making opportunities, even after you’re financially free?
Thanks for reading.
Image courtesy of: Sura Nualpradid at FreeDigitalPhotos.net.