Am I financially independent? (And does it matter?)

Am I financially independent? (And does it matter?)

It's been two years since I last looked at my overall financial situation to determine whether I have the resources to meet my goals. In those two years, much has changed.

I sold my condo and bought a home in the country. I repurchased Get Rich Slowly. I invested in not one but three other businesses. The stock market has bounced around, I've begun part-time work at the family business, and I've made many other minor adjustments to my daily life.

With all of these fluctuations, I'm naturally left to wonder: Am I still financially independent?

As I've mentioned many times, financial freedom exists along a continuum. For the sake of this article, I'm discussing the fifth stage of FI, the point at which investment income supports standard of living.

[The Stages of Financial Freedom]

At the end of 2016, I was FI (but only just). What about at the end of 2018? Do I still have enough saved to fund my future indefinitely? Let's find out.

The Raw Numbers

Here are raw numbers that describe my financial fitness:

  • My net worth at the end of 2018 was $1.33 million. If I liquidated everything that I owned, I'd be left with a pile of cash worth that much money.
  • My investment accounts contain $680,000. Of this, $275,000 is in regular investments and $405,000 is in tax-advantaged retirement accounts that cannot be accessed (except with penalties) until I turn 59-1/2, which is in just under a decade. (My non-liquid assets are worth $654,000.)
  • My lifestyle currently costs me about $5000 per month (or $60,000 per year). Because everything has been in a state of flux for so long, this is just a guesstimate. I'll have a much clearer idea of my cost of living at the end of March, after I've kept detailed records for three months.

These are the basics. There are some numbers that aren't reflected here, of course. Any increased value to my home from recent remodeling isn't shown here, nor is the value of my business. These numbers don't include potential Social Security income or inheritance because both of these are wildcards.

As I mentioned last winter, my brothers and I were surprised to discover that my mom is a millionaire — at least on paper. In theory, some of that wealth will transfer to me in the future. (In theory.) Meanwhile, the Social Security website shows that if I wait to take benefits until I'm age 70 (which is only twenty years from now!), I'll qualify for payments of $2050 per month. If I take benefits at age 67, I'll get $1653 per month.

My current Social Security projection

But again, these are both wildcards. They're not part of my current wealth, so while I do think about them, I don't include them in plans or calculations. (I think it's a mistake to ever include potential, unrealized money in your financial plans. Don't include potential raises, potential bonuses, potential proceeds from sales. I've seen far too many people get into trouble with this sort of thinking. Serious trouble.)

Back of the Napkin Math

With these basic numbers, we can take a number of different approaches to determine how prepared I am to pursue my goals. Quick “back of the napkin” map says no, I am not financially independent. I have financial security, but not financial independence.

  • Using the four percent rule of thumb for retirement savings, I'm nowhere near financially independent. This guideline says that, in general, it's safe to withdraw 4% from your investment portfolio each year without risk of running out of money. My investment portfolio is worth $680,000. That would sustain $27,200 in spending, not $60,000. Even if I were to use a 4.5% safe-withdrawal rate and include my investments in start-up businesses, I could still support only $37,300 in annual spending.
  • If I take the same approach and apply it to my net worth — which I'm okay with but most people are reluctant to do — things look better. If my entire net worth were invested in stocks and bonds, it could theoretically support $53,200 in annual spending — or $59,850 if I were to use a 4.5% withdrawal rate. That's just $150 shy of my $60,000 annual expenses.

In short, it's clear that I am not financially independent anymore. With liberal definitions and assumptions, I fall just shy (by about $12 per month). With more traditional assumptions, I'm not even halfway there!

Five Quick Retirement Calculators

So, back-of-napkin math says I'm no longer financially independent. But what about more sophisticated approaches to my situation? What do retirement calculators say?

Before we take a look, let me re-iterate that most retirement calculators suck. They're truly awful. Most use current income to computer how much you need to save for retirement. This is idiotic. Current income has nothing to do with retirement spending.

The brilliant Michael Kitces has messaged me in the past to point out that, from a practical perspective, there is a correlation between current income and retirement spending. This is incidental, though, and doesn't excuse the methodology. For savvy money managers — those who save a lot — current income is a terrible predictor of retirement spending. The worst, most simplistic retirement calculators prohibit users from entering parameters like “I save half my income” or “I want to retire by 40”.

Fortunately, there are good retirement calculators out there. I decided to enter my current numbers into five calculators that I've used (and liked) in the past. Because each calculator is based on different assumptions, and because each calculator emphasizes different parameters, they each provide different results.

  • cFIREsim looks like a complete mess, but if you're willing to muddle through the shitty interface you can get some sophisticated results. cFIREsim shows that my current investment portfolio could support $27,538 in annual spending with a 95% success rate. (It'd support my actual current spending with only a 20% success rate.) If I include Social Security starting at age 67 and a theoretical inheritance, I could support $45,413 in annual spending. The downside to this tool? There's no way to factor in non-investment assets.
  • FIRECalc 3.0 analyzes past market performance to predict future retirement success. In my case, it suggests that my current investment portfolio only has a 10% chance of lasting until I turn 80. If I base my calculations on net worth instead, there's an 83% chance it'll last that long. Note that the basic FIREcalc model uses only three variables. To gain greater sophistication, navigate with the easy-to-miss buttons near the top of the page. (With this calculator, if I delay accessing my investment portfolio for a decade, there an 80% chance my money will last until 80. There's a 90% chance if I include Social Security starting at 67.)
  • The early retirement calculator from NetWorthify doesn't work for me. It's not sophisticated enough to handle my situation. It's useful for folks with positive saving rates, however.
  • The retirement income calculator from T. Rowe Price shows that I should only spend $2000 per month if I want my investments to last until age 95. Playing with the assumptions shows that with even a modest monthly income — from this website and/or my family's box factory, say — I'm in good shape.
  • Bankrate's retirement income calculator says my savings are enough to support $3000 of spending per month. If I can delay touching my savings by a decade, then I have enough to support my current standard of living.

As you can see, these basic retirement calculators yield similar results to my back-of-the-napkin math. Right now, I am not financially independent. If I want to maintain my current standard of living, I need to earn more. If I don't want to earn more, I need to lower my standard of living.

Ideally, I'd do both.

More Than Money

Now, here's the thing: These retirement tools are all better than average but they each have weaknesses. They're ugly. They're unsophisticated. They have limited functionality. For my money, the three best retirement calculators — the ones I actually use — are the Personal Capital retirement planner, OnTrajectory, and NewRetirement. For the rest of this week, we'll take a closer look at these three tools. I suspect, however, they're going to tell me the same thing: I am not financially independent.

But you know what? Financial independence has never been one of my goals. I've been adopted by the FIRE movement — for which I am grateful — and I've written a lot on the subject, but my actual goal has always been a happy, purpose-filled life. If I manage to achieve financial independence along the way, great. If not, that's fine too.

To me, achieving FIRE is a meaningless goal. Like getting out of debt, financial independence should be considered a side effect of your actions and choices, not a primary aim.

To me, the more important question is: Am I leading a happy, purpose-filled life? Yes. Yes, I am. I have a good life and I like to believe I'm doing good work. Although I no longer have financial independence, I do have a sizable nest egg, a level of wealth that most people never reach.

I am a lucky man.

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Dave @ Accidental FIRE
Dave @ Accidental FIRE
1 year ago

Well, you may not be FI but with the knowledge of all things financial that you have, and your discipline, I don’t think you have much to worry about. Just that fact that you’re hyper-aware of where you fall on the spectrum is reason enough to know you’ll be able to handle anything that comes your way. Knowledge and self-awareness of one’s financial standing would solve the financial problems of so many people.

Steveark
Steveark
1 year ago

You will be totally super fat FI way before you are my age. And I hope you continue blogging at least that long because nobody does it better. Wait, you’ll never be my age. You know what I mean.

Frogdancer Jones
Frogdancer Jones
1 year ago

The social security system you have in the US is interesting. In Australia, we have a flat-rate old age pension, paid to either singles or couples. It’s means-tested, so of course not everyone gets it.

Dana
Dana
1 year ago

Social Security is not a retirement fund. It’s a retirement supplement. Unfortunately, the government’s done a terrible job explaining this to people, just like they don’t explain how it works. (Lots of folks think they are literally paying into a retirement account of their very own. Nope. Social Security taxes fund current retirees’ checks just like federal income taxes fund the military.) Probably a major reason why the program is in so much trouble now, and it’s about to get worse.

{ in·deed·a·bly }
{ in·deed·a·bly }
1 year ago

“To me, achieving FIRE is a meaningless goal. Like getting out of debt, financial independence should be considered a side effect of your actions and choices, not a primary aim.”

Well said. Financial Independence is an enabler, a milestone along your journey. It isn’t a destination.

Pete
Pete
1 year ago

“Am I leading a happy, purpose-filled life?” Yes, exactly that. Have funds for the various, potential problems which may arise, but if it all works out, you’re FI a lot earlier than most. The names/terms don’t matter at all. We love to be able to define things; but it just isn’t necessary in this case.

S.G.
S.G.
1 year ago

I never put it to an actual napkin, but I put those numbers together in my head for you awhile ago and reached a similar conclusion. I was a little worried about you if you didn’t make a change, so I’m glad to see that you’re aware of the misalignment.

Honestly, I think you will also build a much better blog being back in that space and writing about your journey back to FI. Nothing is more boring than an FIRE blogger who loses touch.

Sequentialkady
Sequentialkady
1 year ago

I’m not financially independent, but I am secure. I could say “f-off!” leave my job (which I love) and have 6-7 months to find the next thing. However, that would crash and burn my current retirement plans. I’m a public sector employee (year 19 starts in May) and the rules I’m grandfathered in under say that if I work 30 consecutive years in a PERS position, I can retire at 30 years 1 day and take my full pension — 75% pay of my 3 consecutive highest years of pay — regardless of age. In my case that would be… Read more »

Spencer for Hire
Spencer for Hire
1 year ago

Its funny you mentioned financial independence being a meaningless goal. I have been going through tough times at work and relishing the thought of FI. Its my version of running a surf shop on a beach in Hawaii. However, the more I thought about it the more I felt it was a hollow goal as it was my way from running from a problem. The type of people who read this blog will get to FI through the way they live life and ultimately its our purposes in life that give us meaning rather than our net worth. I do… Read more »

Goldendog777
Goldendog777
1 year ago

I’m a long-time reader but 1st time poster. I was so obsessed with FIRE for years since I disliked my job. But I always felt that there had to be something more to life than just saving a pile of money and quitting. I did recently quit my job in December and we are only at stage 4 (security). I decided to go back to school to become a registered dietician and my hubby is pursuing a music degree. We couldn’t be happier with our choices. We intend to do work we enjoy for a long time. So, like you,… Read more »

JanBo
JanBo
1 year ago

FI is a state of mind, not a line in the calculator. It gives you the chance to breathe and do what you want with your life. Yes, there are the hard core, most of whom had an amazing salaries out of college and started blogs when blogs were new. They, like you, were young. My reading is that a number of them went back to work in one way or another because of the saying, “you are really irrelevant unless you are contributing.” They want to discuss serious things with serious people, and that is tough in this world… Read more »

olga
olga
1 year ago

I love your last paragraph. In a way, I also sort glad to hear you are slightly removed from FI, that makes your posts more relate-able to me. “Close, but not there”, “rather still work part-time anyway”, AND live a meaningful life. That. Money allows you to do that. Definitely more so than lack thereof. Thank you for sharing. Gosh, this is exactly why I keep coming here since pretty much its inception.

Ella
Ella
1 year ago

JD, Thank you for the honesty and reflection shared in this post. Your stages of financial freedom have been a great guide for thinking about FI as a path rather than an end point. I also appreciate that you see FI as part of living a fulfilled life that contributes to others. Please continue your excellent work with GRS.

zzzzzz
zzzzzz
1 year ago

Not considering Social Security is a very conservative position to take. It would literally take an act of Congress for it to not be there for you.

IOW, you are closer than you think to FI.

An inheritance from your mom, OTOH, is not something to count on. Medical and long term care costs often drain peoples’ finances as they age.

Treo
Treo
1 year ago
Reply to  zzzzzz

Counting on the United States staying solvent is frankly a very non-conservative position. It’s all been working out so far, but all it will take is for China to make the margin call…

Big-D
Big-D
1 year ago

First, I congratulate you on your net worth, and thanks for being open about such topics. It was funny an article was posted last week on ESI about net worth. https://esimoney.com/how-do-you-define-net-worth/ The comments went almost rabid about why a FI site was posting about net worth (because high net worth doesn’t equal FI). Here you are proving the example of what commenters were saying (not the ESI article, but the comments section which was off topic). My comment there and is the same I will say here is that net worth is not the tool to use when measuring FI.… Read more »

Omar Bodden
Omar Bodden
1 year ago

Glad you are back JD your articles are a real treat I found your site in 2007 and by 2011 I owned my own home by age 23 , you where my first and the only source of financial advise in my youth and left an impact on my life thank you for sharing your journey with us !

Lisa
Lisa
1 year ago

Hi J.D,

Well done on being open about such topics and would like to add my few cents here. Becoming financially independent takes time proper planning prior to your retirement age. I am about to retire and daily visit and study different guides on how to become financially independent after retirement and saving taxes on this income. This leads me to many great resources like this one, which helped me learn how to minimize retirement taxes. Overall a very informative post and useful takeaways to know how to become financially independent. Thanks for sharing.

Bonnie
Bonnie
1 year ago

Hello! I’m glad you’re back, as I always enjoyed your writing style, transparency, and your quest. The Road to Financial Freedom breakdown you posted was helpful and personally disappointing for me. Although our net worth looks okay on paper, most of our assets are non-liquid and have tricky tax implications. Over the last two years, due to a number of circumstances, we have slipped from Stability to Solvency. That’s not where I want to be at this stage of the game, but I needed to see it, so thank you! I have one questions though: When you said, “even if… Read more »

Bonnie
Bonnie
1 year ago
Reply to  J.D. Roth

Okay. Thank you for the explanation.

BuccOhhh
BuccOhhh
1 year ago

I have used all of the retirement calculators you mentioned in your article. The best one by far that I have found is Pralana’s (http://www.pralanaretirementcalculator.com/). It costs $99 but if you need something heavy duty this is the one. I have no financial interest in Pralana — I just wanted to share something very good with my fellow readers who may be looking for a comprehensive retirement app.

Hazel
Hazel
1 year ago

Raw, honest, humble, and without judgement or sanctimony. This post feels like you’re really finding and defining your voice in the evolved world of blogging and return to GRS.

Meredith Karter
Meredith Karter
1 year ago

I love your last paragraph. In a way, I also sort glad to hear you are slightly removed from FI, that makes your posts more relate-able to me. “Close, but not there”, “rather still work part-time anyway”, AND live a meaningful life. That. Money allows you to do that. Definitely more so than lack thereof. Thank you for sharing. Gosh, this is exactly why I keep coming here since pretty much its inception.

indio
indio
1 year ago

@JD For some reason, I checked this site today and I’m totally confused. Can you pls help me with the chronology? Since you’re putting so much public info out there, I’m assuming you’re OK with personal questions. Sold getrichslowly site. Got a divorce. Wanted an urban life so moved to the “big” city. Fire’d or semi-retired. Started new blog. And now you’ve come full circle and bought back getrichslowly, working at family business again and moved back to suburban/rural lifestyle. I’m sure a lot has happened in between that I missed. Here’s the question, you were so convinced that you… Read more »

Indio
Indio
1 year ago
Reply to  J.D. Roth

Yes, we all grow and change over time. If you do a post about history, it would be fun to read the different perspectives from everyone involved in it – you, Kris, Kim, etc. I used to wake up early Sunday mornings to read the reader profiles, which were my favorite posts. Was desperate to learn from others and not make the same financial mistakes. My other favorite GRS section, were Kris’ posts about growing food and preserving it. Having a family to feed, ideas on how to keep expenses low were useful to me. Money Boss blog never really… Read more »

Indio
Indio
1 year ago

PS. you should configure blog so someone can follow comments with an email alert.

Greenbacks Magnet
Greenbacks Magnet
1 year ago

I like that back of the napkin math. No excuse why anyone can see the numbers, as no Excel required. As someone on the path to FI, it is good to remember why I am doing it in the first place and that others agree that it is not just about th money, but the freedom. Freedom to do what you want, when, and without worrying about how much.

Thanks,
Miriam

Papa Foxtrot
Papa Foxtrot
1 year ago

It is very sad that a large number of people are still within stage 0, 40% of Americans cannot pay $400 suddenly. I see math most of the time when talking about personal finance, but we all still require emotional motivation to gain financial independence. In fact, some financial advisers like Dave Ramsey say trying to do the math and find the most optimal amount to invest for retirement is irrelevant, just putting money in is relevant.

Paula Pant
Paula Pant
1 year ago

“With liberal definitions and assumptions, I fall just shy (by about $12 per month).”

JD, if shit ever hits the fan in your life, I’ll send you $12 a month. 🙂

JSon
JSon
1 year ago

Loved your comment, “I am a lucky man.” As for me- I started in Stability two years ago- and had never heard of FIRE or even seriously considered financial independence. For me, I liked to work and mostly liked the work I was doing. The hours were long- hour commute on both ends and a 12 hour, 6 day a week job- often with calls in the middle of the night. Suddenly (at 57) found myself out of work and doing so much needed retirement planning. So, in a matter of months, I went from Stability through Agency and Security… Read more »

SL
SL
5 months ago

Great article. I’m relatively new to this site and finance blogs in general, but I cannot agree enough that most retirement calculators are horrible. They consist mostly of black boxes that spit out generic non-helpful outputs based on assumptions without explanation. I was messing around with one on a major brokerage firm’s site once and it was complete garbage. I changed assumptions and the outputs were not at all consistent with the changes. I hope no one is actually relying on those things. I’m curious enough to check out some of the calculators that are referenced, but my retirement plan… Read more »

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