Strive for financial independence not early retirement

Strive for financial independence not early retirement

Strive for financial independence and not early retirement?

What on earth do you mean?

Are you looking for financial independence?

Are you looking to flat-out retire early?

Is it just semantics between the two terms?

These are simple, straight-forward questions.

Simple questions don’t always have easy answers.  My motto is:  personal finance is personal. 

Stuff like this rolls through my mind often.

Other bloggers and podcasters in the personal finance space think about this stuff as well – and we’ll get into that conversation in a bit.

There are a host of sites and channels that now consume the financial independence subject.  Many others discuss early retirement.  Are they one of the same?  Not to me. 

When combined together, it has been said the Financial Independence Retire Early (FIRE) movement is spreading.  While probably true, running to retirement is not a destination I care to join. 

I believe you should strive for financial independence and not early retirement.

Financial independence provides the right mindset

I’ve never been convinced about the “retirement” element in the FIRE movement.

There are certainly admirable concepts and stories that I enjoy reading about and listening about, from various bloggers and podcasters on the subject of FIRE, but the hype around “retire early” is a total misnomer.  My reasons are very blunt and simple.

One, there are only a handful of people that I know of, in their 30s, 40s, or 50s, who do not work for income at all. 

Two, early retirement as a concept doesn’t make sense for anyone currently busting their a$$ to side-hustle, work multiple jobs, and/or save >50% of their primary salary as they run towards something else.   Anyone that is hard-wired to hustle that hard, that much, that often, is effectively an entrepreneur or one in the making (even if they don’t claim to be).  I might even put yours truly in that entrepreneurial category as this blog has grown in popularity over time.

Three, the most common denominator for the FIRE community is recapturing time or “life energy” as some folks put it.  The fallacy is, what you spend time on today is just as valuable as your time tomorrow, or in retirement.  Meaning, the value derived from experiences, time with others, and much more, is hardly worth more in earlier decades than any senior years, or vice-versa.

This makes, in my opinion, financial independence (whatever that means to you) a very worthwhile and noble pursuit – that is centralized around your life choices. It becomes your lifestyle by design.

The concept of “retire early” is just a footnote.

Financial independence (FI) delivers lifestyle by design

After I wrote about my six phases to financial independence, a path we can all pursue on our own terms, I thought it would be interesting to further explore the concept of lifestyle by design.

Lifestyle by design is arguably an even better term than financial independence since it speaks to the tailored approach you can make your days, weeks, or months using money as your tool. You can work. You don’t have to work. You can volunteer more. You can do pretty much anything you want. 

Whether you wish to live alongside extreme frugality (I don’t), within modest middle-class means like these guidelines suggest, or you aspire for a more luxurious existence, lifestyle by design can help you to engineer the best ways to spend your time.  Ultimately, that’s most of us want…

Over tweets, emails and other in recent weeks, I figured it would be interesting to have a chat with a passionate investor, fellow blogger, and someone who actually took the leap on making his own lifestyle by design choices in recent years.

Dale, welcome back to the site!

Thanks Mark!

Dale, you’ve been on my site before.  You started your Cut The Crap Investing blog and you wrote about your path to changing your lifestyle – quite the journey!

Yeah, I’ve had an ‘interesting journey’ as shared in that post.  From advertising writer and creative director to a second career, to Tangerine as an advisor, to now a blogger and freelance writer – times have certainly changed.

I fully agree with your points above.

I was fortunate to make this leap because my wife still works, and we’ve paid off our house and vehicles.  The personal finance basics allowed this venture, changing my lifestyle by design.

Many a book has been written about “the power of why”.  What’s your take on the FIRE movement and “why” so many 20-, 30- or even 40-somethings strive to leave the workforce?

Great question.

I think that is the big head-scratcher for me.

There is the theme that so many want to leave the workforce because they hate their jobs and they hate the working life. It’s not up to me to tell them how to design their life, but I’d suggest that not liking your job is a very terrible thing.

Instead of leaving the workforce one might try to fix the work problem – find a job that you really like. Get a little bit of Richard Branson in ya. He will suggest that if you hate your job, make plans to leave that job.

Why not have your cake and eat it too? Find a career you like, find a career with purpose. And hopefully that career is well paying (enough).  To your points above, I suspect the FIRE movement is more about entrepreneurial spirit than any hate-on for their corporate life.

In my opinion it will usually take an extended period to pay down your debts and build an investment portfolio to the level that could truly sustain a lasting retirement.

I think that’s phase 4 in your six phases of FI.

Most who seek an early retirement will still need to work for many decades. You obviously don’t want to be unhappy for decades.  Strive for fulfillment.  I’m trying to.

So on the theme of lifestyle by design, fulfillment, the personal finance book Your Money or Your Life popularized some early phases to FI (financial independence):  FI thinking leads to financial intelligence leads to financial integrity leads to financial independence.  What’s your take on those steps or building blocks?

I think the path to financial independence does absolutely happen in stages or phases.

There has to be some initial awareness that something needs to be done. There has to be that awakening. That might happen as the result of complete dissatisfaction or realization that a person or family is moving in the wrong direction financially and perhaps with that life plan. Maybe there’s that ‘enough is enough’ moment?

Once there’s that awakening, then comes the education process. They’ll have to discover what’s going wrong, why it’s going wrong. And then they’ll have to learn how to change their borrowing and spending and then investing behaviours.

I love how that book weaves money and happiness together. It’s a trade-off. It’s about balance.

That’s the premise of the book, framed by the title.  It kind of puts a price tag on life and the things or experiences that we can buy with our money.

I like this bit that the editors wrote in an extensive online overview of the book …

“Aren’t we killing ourselves — our health, our relationships, our sense of joy and wonder — for our jobs? We are sacrificing our lives for money — but it’s happening so slowly we barely notice.”

Money certainly can buy happiness. Money can also buy sadness. Know what makes you happy. Know the costs.

This piece from that same online overview sums up or adds to that thought.

“Financial independence is an experience of freedom at a psychological level. Financial Independence has nothing to do with rich. Financial Independence is the experience of having enough — and then some. The old notion of Financial Independence as being rich forever is not achievable. Enough is. Enough for you may be different from enough from your neighbor– but it will be a figure that is real for you and within your reach.”

I would suggest people find their “enough”.

That leads me to this.  The concept of FI is rooted in the Crossover Point – whereby income from your invested capital surpasses your monthly expenses, the basic necessities of life and various components to fund your lifestyle are covered by investment income.  Is that “enough” or “too much” or “too little” in your opinion?

As per the above quote, I think this is entirely personal. It depends on what you want to do with your life. If you do not want to participate in any income-producing work, then you certainly need your investments and pensions to cover your remaining life income needs (and more if you want to leave a legacy).

Many will take that semi-retirement approach. Perhaps we have enough of a financial cushion from our investments that we have the confidence to leave full-time work for part-time work. One might consider themselves “Financially Independent” if their portfolio income covers a portfolio of spending needs, and then part-time income covers the remaining financial needs?

Of course that’s called semi-retired. Is that FI?

I’d suggest that it is a form FI or “enough”. 

It’s “Findependence” as author and blogger Jonathan Chevreau put it well.

It’s FIWOOT as you frame it.

I am in FIWOOT mode. I like that mode.

That said, looking at our bank accounts over the last several months it appears that my wife and I have enough by way of her working full-time and the additions from my portfolio. I used some portfolio income to take my daughter to the UK last month. But several thousands of dollars has also pooled in my RRSP account. I guess I don’t need it for now.

You know Mark, I never really had much of a money plan, I had a life plan. I valued life experiences (family and health) way more than money and making money.  I guess I had some lifestyle by design all along.

So maybe it’s not FI but LI – Life Independence.

My cousin in England works part time, she’s an accountant/bookkeeper. She has work independence, life independence. But she spends every penny, on life. She travels every chance she gets. Several major trips a year. For her, money buys the experiences that travel can bring.

My cousin practices LINR. Life Independence Never Retire.

So many acronyms!  Kidding aside, I’m personally a huge fan (and in active pursuit as you know) of FI.  Hence the post!  What are your thoughts on FI vs. RE?  Should really anyone under age 50 strive to retire?

Ha, I just wrote on that on Seeking Alpha. What would it really take to retire? If you link to that article you’ll find a great site that details what it costs to retire in the US, state by state. Google search will help Canadians discover the true cost of retirement as well.

As controversial in some respects as that post might be, I think many people actually underestimate how much it costs to retire, and what size of portfolio is needed to sustain a lasting retirement. They might be playing with FIRE. Of course the earlier we retire the greater the longevity risks.

All said, a high-earner with an aggressive savings rate who takes on a higher risk portfolio might be able to build a sizeable portfolio in 20 years. I’d suggest building in a very big buffer though. Life can throw us some surprises.

Can anyone achieve FIRE?  (i.e., high salary, middle, low?)

Not sure about low income Mark.  You can only cut back expenses so far.

Certainly anyone who makes a decent or even average salary might be able to retire early, if early is sub- 60 let’s say.

It’s not always what you make, but what you keep, and then how you invest.

Therefore, it’s a combination of good income + high savings rate + cutting back on expenses.  Invest the difference wisely.  That’s the simple formula for FI as you well know. 

As someone who is semi-retired, my advice would be to others striving for FI:

1. Have a consistent, regular investing schedule.
2. Strive to max out your registered accounts first (TFSAs and RRSPs in Canada; 401(k) and Roth IRAs in the U.S.).
3. Rinse and repeat as much as you can.

 I like your straight-forward Better Way to Budget.

What’s your take on many FIRE devotees focusing on the “4% rule”?

You touched on this concept in your six phases to FI post.

I think it’s a great starting point.  A reminder to everyone thought, as a former advisor, it’s just a benchmark and a way to calculate ‘how much you need’ and then again how much you can spend.

And while we’re on the subject, a reminder it can fall apart just as quickly.

There are too many moving parts to retirement funding. I think it may be more beneficial to quickly deplete one bucket and save another bucket, or delay to government programs like Canada Pension Plan (CPP) or Old Age Security (OAS) to help you sustain that “rule”.

I know you wrote a valuable post about when to take your Canada Pension Plan (CPP) here.

A good financial plan goes beyond any rigid spend rate.

Lastly Dale, many FIRE bloggers seems to be renters.  I think that’s great since not everyone should own nor needs to own a home to realize their life plan.  Do you believe being a renter can help accelerate financial independence for many people?

I think you can get there either way. Certainly equity tied up in a home can change cashflow.

You definitely don’t need to be homeowner to reach financial independence.  Many would argue that it might become more predictable or attainable if they rent instead of buy. Buying and maintaining a home is very expensive. There’s no guarantee that the home will pay off as an investment. It might not be a massive contributor to our net wealth.

(Mark:  I shared the definitive answer to the mortgage paydown vs. investing debate here.)

Speaking for ourselves, our investments are typically liquid whereas our home (and other real estate is mostly illiquid).  That’s a big factor you need to consider.

Strive for Financial Independence (FI) – which is really your lifestyle by design

We all have choices.  That’s my message.

If “early retirement” is what you’re seeking, who am I to tell that’s wrong?!  Go for it.  Don’t let such semantics for any terms bother you.

I know when it comes to our financial plan, we’re striving for financial independence and not any retirement.  I hope to always work.  This will keep my body and mind active.  It will keep me engaged.  It will keep me socially connected. 

Financial independence will offer choices. That’s both exciting and motivating to me.  We’re on a path to make financial independence happen in a few short years.

The term retirement on the other hand sounds outdated and boring.

Are you a fan of financial independence or retirement or both?  Is it just semantics?  If you have achieved FI what advice do you have for GenX (me) or GenY?  If you’re in GenX or GenY – what are you striving for?