There is no law requiring you work until retirement age. Technically, there is no law requiring you work at all. But, I will assume you have bills to pay and you work to live (or live to work). In the United States, the average retirement age is 65 for men and 63 for women.
The FI/RE Movement or Financial Independence / Retire Early Movement is for individuals who decide to pursue financial independence as early as possible. In this post, I will cover one way to define financial independence, how to calculate your own FI/RE Number, and how to accelerate your roadmap to FI/RE.
What is Financial Independence?
This is an existential question, like “what is the meaning of life?” I can answer neither of these questions for you. Financial Independence is as much a number as it is a state of mind. As humorist Leo Rosten quipped, “money can’t buy happiness, but neither can poverty.”
For the purposes of this post, however, I will define financial independence mathematically. With this assumption in mind, the easiest way to calculate your financial independence number is to multiply your annual expenses by 25 (or divide them by 4% if you want to apply The Four Percent Rule).
Why 25?
There have been many studies on this assumption, but the simplest explanation is that if you save 25x your annual expenses you can “safely” withdraw up to 4-percent of your invested savings each year of retirement without running out. Everyone’s circumstances are unique. For example, it is possible you might live to 1,000 years old. But it is not very plausible.
As an auditor by trade, I like to play the probability. We can safely assume that 25x your annual expenses is a comfortable financial independence goal for 95% of the population (that doesn’t live to 1,000 years old). For ease, I’ve quickly calculated these assumptions for you in the following figure.
What Is Your FI/RE Number?
According to the US Census Bureau, the average employee will earn $2.7 million in their lifetime. This is more than enough income for most individuals to save enough to reach their FI/RE Number if they choose.
Now that you know how to calculate your financial independence, let’s define what it means to “retire early.” If the average retiree in the United States is over 60 years of age, then let’s assume any age at least 10-years (or earlier) than 60 can be loosely defined as “retiring early.”
For example, both of my parents retired in their 50s. I can safely say that my parents have never heard of the FI/RE Movement and although I have been working and writing in personal finance for nearly a decade, they still think most of what I do is completely made up of fantasy and fake-friends that allegedly “follow” me online. To them, my entire career is a financial catfish.
Despite their doubts and opinions of my “work,” both of my parents still met the technical definition of The FI/RE Movement. This proves at least one thing: you can accidentally reach FI/RE by simply working a traditional 9 to 5 and responsibly saving and investing at least 20-percent of your income every month in a retirement account. Mathematically, it is that simple. Emotionally—and in reality—it is difficult to commit to save 20-percent of your income over a 40-year period of your life.
For simplicity, I use the index funds (VTSAX) recommended by one of my favorite personal finance books by J.L. Collins, The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich Free Life.
For instance, if you wanted to reach $500,000 in Retirement Savings by age 67 and you were able to manage a conservative 7-percent average annual return, here is how much you would need to save each month depending on the age you started.
- Age 20: $127/month
- Age 25: $181/month
- Age 30: $260/month
- Age 35: $379/month
- Age 40: $560/month
- Age 45: $851/month
If you want to further tailor these numbers to your own financial goals, I made a video explaining How to Calculate Your FI/RE Number with free retirement and compound interest calculators available online from Investor.gov.
How Much Do You Need to Retire Early?
Financial Independence / Retire Early will look different for every household. First, I recommend you estimate what your household will define as “financial independence.” As I explained earlier, you can easily and quickly do this by multiplying your annual expenses by 25.
While simple, this step is only the starting point of your negotiations. I like to define my roadmap to financial independence, then I chart a plan to get there.
After you’ve estimated your retirement savings number, you can decide if you want to go the traditional route–working a 40-year career (there is nothing wrong with that), or if you want to accelerate your race to financial independence and retire early, which as we defined in this post, is any age before 50.
Once you’ve estimated your retirement savings number and decided whether you want to retire traditionally or early, you need to start investing monthly or annually to reach your goal. For most individuals, the easiest method is to invest through an index fund (or equivalent conservative, low-fee investment vehicle), like their employer’s 401(k), 403, or 457 plans.
Optionally, you can use a self-directed investment through a broker of your choosing (Vanguard, Fidelity, etc.). If you chose the latter, be sure to keep your fees as low as possible or the investment costs lost to fees might defeat the whole purpose of trying to reach financial independence, early or ever.
The FI/RE Movement is all inclusive. Anyone who wants to participate can choose to join. But remember, there is no law requiring you to work, as there is no law requiring you to retire early. But, if early retirement is a goal of yours, I hope these mostly made-up rules I covered today help define a clear path you can follow on your way to reaching your FI/RE Number.
About The Marcus Garrett
The Marcus Garrett is the #1 bestselling author of Debt Free or Die Trying: How I Buried Myself $30,000 in Debt and Dug My Way Out by Age 30, and the creator behind the series of video courses: FI/RE Accelerator. One of the most frequently asked questions he receives is, “How much debt can I afford on a 30, 50, or $100,000 salary?” Download the answer found in his free resource guide at TheMarcusGarrett.com/Salary