In recent years the “financial independence/retire early” (“FIRE”) movement has risen and gained popularity, starting with a few blogs and spreading outward from there throughout the online world. 813,000 Reddit users subscribe to the main financial independence subreddit (r/financialindependence). Before we get to anything else, it’s worth answering a question some of you might be asking: “What is financial independence?”
Financial Independence: More familiar than You think
Financial independence, simply put, is the ability to live your chosen lifestyle without needing to sell one’s labor, i.e. work. Appreciation and income from your capital, i.e. assets, funds your living expenses if you’re financially independent.
Virtually everyone is familiar with the concept when applied to the independently wealthy. They are financially independent with sufficient wealth to live an upper-class lifestyle. Some “old money” families have invested well and spent prudently over the generations, to the extent they’ve been relieved of the obligation to work for generations. Among the aristocracy there are certain lineages who have been so relieved for centuries.
The same concepts apply to “saving for retirement”, which is what middle-class people are most familiar with. The idea is that you add to your investment portfolio and by a combination of more contributions and growth of the investments it becomes large enough to live off of at some point in the future. The point people usually target is sometime in the sixties, traditionally age 65, though targeting an earlier (fifties) or later (seventies) age for retirement wasn’t too uncommon even when retiring at exactly 65 was much more normal than it is now.
All other things being equal, investing less of your income delays your retirement, and investing more accelerates your retirement. So if you want to retire in your fifties you will need to save a greater proportion of your income than if you want to retire in your seventies.
The greater the Savings, the earlier the Retirement
The “retire early” part of the FIRE movement dares to dream of a retirement age earlier than even the fifties. If we can retire in our fifties, why not our forties? Or even thirties? In principle only a higher savings rate is required to do so, and this gives you a retirement that is not only when you’re old, frail, and less capable of enjoying life, but still young, healthy, and energetic. What’s not to like?
Well, the big trade-off is that as your retirement date accelerates so does the required savings rate. In the famous example from the “Mr. Money Moustache” blog, a 10 percent savings rate means you need to work 51 years until retirement. To accelerate to 32 years you need to save 25%, more than double as much money! To accelerate to 19 years you need to save 45%. To retire in 10 years you need to save 65%!
Saving 65% of your income means you’re spending 35% of it, which implies spending less than half as much as someone who is on track to retire in 50 years. That’ll leave a mark on your lifestyle!
Aggression: the Secret Sauce
However, that’s not the end of the story. As I outlined in my post “Leveraged Stocks for Long-Term Investing”, in the section entitled “Making More Wealth with Less”, simply investing more aggressively can make up for a lower savings rate. In particular, eschewing bonds and accepting the greater volatility of stocks pays off.
If you invested in 100% stocks from 1985 to 2020 you would have needed to contribute $240 per month to reach a balance of $1 million by 2020. On the other hand, if you had invested in 300% stocks (yes, that’s a 100% stock portfolio leveraged 3:1), you would only have needed to contribute $50 per month to reach $1 million by 2020, about a fifth as much!
Applying the same ratio to the savings figures, to retire in 10 years you would only need to save 13% of your income instead of 65%. Suddenly that doesn’t sound so intimidating. The optimal strategy to achieve financial independence, of course, is to invest aggressively and save as much of your income as possible.
One caveat with this is that the optimal asset allocation is 150-300% stocks only over long periods of time stretching decades. Over periods of a decade or less returns and thus the optimal asset allocation vary widely; in a decade like the 2000s you probably wouldn’t be able to retire in 10 years with this strategy, but in a decade like the 2010s you would be able to retire in only a few years. Of course being able to retire only at 40 instead of 30 is hardly the worst fate that could befall you, and by the same token you might be able to retire at 25 instead of 30.
How bad this fate is depends a lot on your chosen career path. FIRE tends to be very popular among people who have a very stressful job with long hours or who have jobs they hate, in unfortunate cases both at the same time. This naturally raises the question: “what career path is best for FIRE”?
Investing: Good for the Young, Poor, and Working Class too!
The real answer is that there isn’t any particular path that’s best for it, aside from the obvious fact that earning more money makes it easier to save. Half of Americans don’t own any stock, inside or outside a retirement account, and that half are disproportionately poor.
The reason is that saving is easier when cutting your spending means cutting back on your daily $5 coffees than when it means going from a decent if modest diet to hard tack and water every day. This is metaphorical, but the fact is the cost in terms of lifestyle for cutting spending by a given percentage is much greater when your budget is already bare-bones.
That’s not to say that poor people can’t save, though! If you make $20,000 a year and save just 2% of your meager income and invest it aggressively that money will help you a lot within a few years. Starting in 1985 that 2% of $20,000, or $30 per month, would have grown to $10,000 by 1995 if invested in an aggressive 300% stock portfolio. That’s not enough to retire on but is easily enough to, for example, go on a vacation that’s luxurious by working poor standards. All that on just 2%!
In addition, the 4% “safe withdrawal rate”, a rule often used for retirement that maximizes the amount you can draw on from your portfolio and still have a virtually 100% chance of not running out of money after 30 years, can be applied more broadly. On a $10,000 portfolio the safe withdrawal rate is $30 per month. That’s not enough to live on, but it’s enough to get a massage every two or three months or take a few group dance classes every month for the rest of your life without needing to dip into your wages that are coming in, a very attractive proposition.
But the financial planning community don’t tend to talk about anything like that, just “retirement”, a goal so far away and so hard to relate to for young or poor people it might as well be a mirage. When told “you need to save 10% of your income or you won’t be able to retire”, most will just shrug and give up on retiring, continuing to spend every penny they make getting some immediate enjoyment out of their life, thinking investing can’t work for them. That’s a misconception we must work to end.
The different Flavors of Financial Independence: from Lean to Fat
Someone on this sort of wage is in what’s called the “leanFIRE” demographic, “lean” referring to their spending levels, normally cut to the bone. From 1985 to 2020 that same $30 per month, just 2% of a $20,000 income, would have grown to $456,000. The safe withdrawal rate on that is close to $20,000 a year. Assuming this hypothetical person started working at 18 that means financial independence is reached at 53, not really that early, but still remarkable.
Withdrawal rates are particularly important for the “leanFIRE” set, because with their spending already cut to the minimum they cannot rely on the simple solution of cutting their spending during bear market years to avoid selling a large number of shares at unfavorable prices. If you can cut your spending in half during bear market years you can withdraw up to 7% without much risk during bull market years.
Better still is if you can “withdraw” using a margin loan, i.e. borrowing against your portfolio, which keeps the entire balance fully invested, enhancing the recovery once the bull market returns. This can be used just during bear market years, but borrowing to fund your spending is a sound strategy, at least in today’s low-interest-rate environment where Interactive Brokers charges 1% and stocks can be expected to return multiples of that. The amount that’s prudent to borrow in total depends on how volatile your portfolio is (margin calls are to be avoided), but for a 100% stock portfolio it’s around 30% of the total balance. For leveraged portfolios it would be correspondingly less, perhaps 10% or less, due to greater volatility.
The opposite of “leanFIRE”, after you pass through what might be called “regular FIRE”, is “fatFIRE”. Fat of course refers to their budget, the idea being to be financially independent without compromising your lifestyle, as is often preached by leanFIRE and even regular FIRE adherents.
Financial Independence to Independently Wealthy
As you might imagine this heavily overlaps with “independently wealthy”, and indeed the rule of thumb on the fatFIRE subreddit is that “fat” is spending of $150,000 per year or more, corresponding to around $4 million and up. By my own estimate this isn’t too far below the $5 million or so needed for a single person to live an upper-class lifestyle in a medium-cost-of-living area. The upper class doesn’t really start, particularly for families, until you get in the $10-20 million range in my view.
The $25 million mark is interesting, because at that level the 4% rule allows you to spend a full $1 million per year. Being able to not only have $1 million but spend $1 million per year for the rest of your life without needing to work is truly rich even at today’s prices.
Cunard’s 118 night Around the World cruise costs $17,000 per person, $60,000 per person for the most luxurious accommodations. Even the premium level is only 6% of $1 million! National Geographic’s 24-day Around the World by Private Jet offering costs $90,000 per person, just another 9% of $1 million. You could do both every year and have $850,000 left over.
For that matter $1 million per year is getting into the range where you could own and operate your own small private jet, though it would be a strain: the operating costs would eat up a majority of that $1 million. Still, if you really wanted to you could do it without much trouble, a sure sign you’re comfortably within the lower part of the upper class.
Perpetual Traveler: Complementing Financial Independence
Another interesting aspect is if you reserve no more than 30% of your spending for housing costs, you have $300,000 to spend on housing. That amounts to $820 per night, easily enough to stay in upscale hotels permanently even before factoring in the discounts you often get for staying weekly or monthly.
Hotel living is surprisingly competitive at almost all levels of housing, particularly if you don’t want to be tied down in a single location. Financially independent people who don’t want to be tied down to their own home may find it the best option. Why be tied down to an apartment when you could just travel to a new place every month? If you’re financially independent it’s not like there’s a job you need to be near, so why not?
Hotel living also complements the “perpetual traveler” lifestyle, where official residency is established in a tax haven country and you never spend enough time in any single country to trigger tax liability. This kind of technique can be used to avoid almost all taxation, and can be used to enhance other forms of personal freedom as well. Are the laws in one country unfavorable for doing something? Just travel to another where the laws are better without needing to compromise your lifestyle.
As an aside this is I believe the best approach to achieving freedom in the modern world, which lacks a single large country that is dependably friendly to (most) individual liberties like America was for most of its history. 2020, the year of lockdown, has demonstrated that in the struggle between liberty and tyranny countries can shift allegiances on a dime. Tying yourself down to any one country makes you unnecessarily vulnerable, assuming you can travel the world without compromising your lifestyle.
If that is your aspiration, then a “digital nomad” career such as programming, blogging, graphic design, among others, might be a sound choice to raise the money needed to achieve financial independence, because the travel-the-world lifestyle can be realized to some extent long before financial independence obviates the need to work.
The Pensioner and the Aristocrat
That isn’t the only lifestyle aspiration financial independence opens up. As Harold Lee pointed out in his fascinating blog post at The Future Primeval (since sadly deleted but still archived), “The Pensioner and the Aristocrat”, the vision painted by Scott Alexander of the utopian life universal basic income will make possible, namely living in a remote mountain cabin in Colorado with your wife and children reading the classics and generating new ideas and discoveries without needing to grub for grades, grants, or citations like academics do today, is perfectly feasible now.
After all, a professional who makes $100,000 or $200,000 per year but lives on $50,000 could retire by middle age very easily. The problem is that a person living with this kind of lifestyle does not have any social status, respect, or prestige, certainly not nearly as much as a practicing doctor or lawyer. So middle class people, ever averse to deviating too far from the mediocre crowd, don’t tend to do it.
This sort of thing used to be much more common, but formerly if one wanted an independent life of the mind one could join academia, which before a few decades ago was not very competitive and wasn’t the domain of “professional self-marketers” (to use David Graeber’s term). This was especially true in the 20th century; before then the aristocracy served this function, which is where all the gentlemen scientists of the 19th century and earlier came from.
The key is that academics and especially aristocrats had a floor of social status below which they could not fall, and to keep that security they had to give up some amount of worldly status-seeking.
Toward Gentlemen Science
Although the social standing of the nobility is not what it once was, the upper class more generally even now engage in science. Aubrey de Grey funds his own research, which was effective enough to kick off widespread scientific interest in ending aging, and Stephen Wolfram funds his own projects, which have included Mathematica and Wolfram Alpha, to name just two examples.
Despite these exceptions, the upper class have become duller since the 19th century, as evidenced by the decline of gentlemen scientists. Compare the eccentricity, interestingness, creativity, and intellectual daring of the Forbes 400 with the old-time aristocracy; the latter blows away the former.
The decline has been steeper still among the middle class. In England downscale (compared to the rich) people who were eccentric and brilliant could often become vicars, which provided them a degree of guaranteed social status, a job that didn’t require too many work hours, and some income with which to plow into their projects.
How this ties into financial independence is that much of the middle to upper income demographic could become gentlemen scholars and scientists by pursuing financial independence. The economic problem has already been solved. Various downscale versions of Aubrey de Grey who don’t care about prestige no doubt are out there, but to become a mass phenomenon like it was in 19th century Britain the problem of social prestige will need to be overcome.
Generational Wealth for early Marriage and Childbearing
Another lifestyle choice financial independence enables is full-time motherhood. After all, if you’re not working outside the home anyway the cost of childbearing in terms of career progression drops to zero. For women retiring early in the forties still renders childbearing difficult, since that is not too long before menopause sets in, but for men the chances are still bright at that point in life if they can find a younger woman.
More promising still is the prospect of enabling early marriage and childbearing among offspring. Once you have achieved financial independence building “generational wealth” is surprisingly easy.
If you keep your portfolio aggressively invested and borrow against it, as opposed to spending it at 4% per year, it keeps compounding at a quick pace over the long term. If you had a $1 million 300% stock portfolio to retire on in 1985 and didn’t touch it, it would be worth $245 million by now. Even an unleveraged 100% stock portfolio would be worth $19 million.
If you had two children upon retirement in 1985, by the time they were 18 in 2003 the portfolio would be worth $5-9 million, and that after a massive bear market! Splitting it evenly among the family of four would give each child $1-2 million at age 18. That gives them $40,000-$80,000 per year without needing to work. If they want a middle-income lifestyle why have a career?
By now their shares would be worth $5-61 million each, supporting $200,000 to $2.4 million per year in spending. Of course this assumes they have no children of their own. If you can live without a career and find a great boy or girl you love, why not have children early in life? The need to establish a career and get income to give the children a standard of living you’re accustomed to is obviated, so the need to delay childbearing disappears.
Indeed, at the more upscale ends of this scale it’s a trivial expense to outsource all the housework and the less-pleasant aspects of child care. The upper class already enjoy all these benefits, and not coincidentally in the United States the “$1 million and higher” income bracket has a higher fertility rate than any other bracket, even “$20,000 and lower”! In fact they are the only such bracket that’s above the replacement rate. The lowest fertility rate is found at around $170,000 per year, squarely in the upper-middle-class trap of needing many years of schooling and long hours of work to make money but not earning enough to easily outsource all the housework and child care or to obviate the need to work.
Generational wealth opens up the salutary possibility of realizing the trade-off between career and family that’s biologically optimal: accelerate childbearing and delay career-building. After all, the ability to work declines much more slowly among women than the ability to bear children. Unless it’s a truly strenuous job, which women don’t tend to want to pursue anyway, there’s little to lose by e.g. starting at 40 after you bear children and retiring at 60 than there is by starting at 20 and then retiring at 40 before you bear children.
The problem with this proposal is that that requires paying for 20 years worth of living expenses before you start your career, when most people don’t have 20 years worth of savings lying around. The financially independent, however, do have it lying around, so those who can make their children financially independent from birth have an advantage.
By accelerating marriage and childbearing to the teenage years one can easily start a career in the thirties or (in the case of the early teens) later twenties. At this level a career more likely would mean being a freelancer, independent contractor, or business owner than a regular employee, since the everyday indignities of not being your own boss often grate on those who don’t have to work.
This sort of life plan is actually biologically optimal; all other things equal the mid to late teens are the best time in life to bear children. Teenage mothers today have worse outcomes than older mothers because they come from backgrounds of poverty. The rich don’t have that problem.
Letting School and College go
For those in the lower levels of “fatFIRE” out-of-pocket costs for educating two children through college are still substantial, possibly costing as much as $1 million total over 22 years. Homeschooling the children and avoiding college is actually optimal financially for the independent, despite even the “fatFIRE” crowd (who tend to be more flexible) being too unimaginative to go outside the school box.
While college is often cited as increasing the earnings of its graduates by $1 million over a 40-year career, that is almost certainly an overestimate. Even so, if you invest the tuition the average college charges in the stock market you would actually earn considerably more than $1 million over 40 years. If you have the money you’re better off investing unless your college is truly cheap or the career is unusually high-paying.
If the credential is desired (e.g. to immigrate as a skilled worker), a college that you can test out of such as Excelsior, Thomas Edison, or Charter Oak is better, or a college like Western Governors University where you can complete a bachelor’s degree in 6 months if you work hard and fast are better options. All of them cost much less than $10,000 total for a bachelor’s degree. Of course if one can get a full-ride merit scholarship or establish residency in a country that has free or cheap college that calculation changes.
There are also a few people who will have such a great experience it’s well worth the money. There is also the prospect of establishing desirable social connections at both elite colleges and elite private K-12 schools. While this is an advantage, the tuition is so high at these places by now you could probably establish connections that are just as good for the same or less money elsewhere.
As you can see there are a variety of possibilities, most of which haven’t even been touched on in this post. For instance, the lifestyle outlined in a previous post of mine that scientific research leads me to suspect might be much better for happiness than what most people lead now is much more viable with financial independence than it is with a normal career.
The middle-class vision of working diligently at a mediocre professional career and then retiring to various mediocre leisure activities in a mediocre house in a mediocre area is not the only or the best choice in life. Even those in the financial independence movement are generally too unimaginative to deviate from that norm; they follow the same paradigm but start the mediocre retirement earlier. Luckily for those of us not content to follow the herd in its middling conformity there are more things in heaven earth than are dreamt of by the middle class’s philosophy.