Are your golden handcuffs too tight? Working a full-time job sucks, but you don’t have to. Imagine being able to choose what you do every day based on how much happiness it will bring you rather than how much money. You won’t ‘wake up’ when you’re 75 and wonder what you’ve done with your life. Instead, you’ll *know*, because you have chosen your path and dictated everything you have done. You have done what makes you happy, be it raising your children full-time, travelling the world, perfecting renaissance skills, or sailing across oceans. You are here for a short time, and you’re dying soon. Why waste your time doing things you don’t want to do? Imagine following all of your dreams, whatever they are. You could do absolutely anything within your budget. You will no longer be dictated by what will pay the bills. People live this way because they have earned this freedom through Financial Independence. They rely on no one for their money. Are your handcuffs feeling tighter now? Then let’s unlock them, together.

## There is Another Way! Free Yourself!

If you feel trapped due to bills, wants, needs (many actually being mislabelled ‘wants’) and other responsibilities, then the truth is blunt: You spend too much money. If you’re living pay check to pay check, you spend too much money. If you don’t have at least one years worth of expenses saved up, then you spend too much money.

Unfortunately, most people accept working until retirement at a ripe old age, as if it’s a way of life, since so many around them do it. Well, I scoff at that. This is a self-imposed prison, and the guards are your bad spending habits. Get rid of the guards, and you can walk right out of the prison. We had no problem surviving, or rather THRIVING, before money was created, and we don’t need it to live now. At any point, you could walk into a forest and start living off the land as our evolutionary ancestors have done in the past. Though, in our modern world, money can be utilized as a tool to help you flourish. I’d like to help every reader here know that you don’t have to work until you’re 65 to retire, left with no energy to carry out any of your ambitions. After all, you just spent the better part of your life working hard for someone else. But if you retire in your 20s or 30s, you’d have your entire life energy to put behind you into accomplishing anything you desire. I am empathetic towards anyone who has voluntarily imprisoned themselves because of their ignorance. I can’t imagine how depressing it must be to think that running on that mouse wheel is the ONLY option. THAT IS NOT TRUE! Not only do you not have to work a job for 40 years, but it isn’t even the only way to earn money. In fact, it’s one of the worst. Starting a business, or creating passive income streams are two paths to much higher levels of wealth. Here’s how you can achieve your financial independence.

You can buy the key to your handcuffs for $500,000. For some, this may be more, and others less. It all depends on the amount of money you decide you need in a year. $500,000 will give you an annual income of $15,000 per year, with safety margins. Another way of estimating this number is multiplying your required annual income by 33. That is the cost of your key. It is possible that rather than one day depleting the $500,000, it will actually grow (thank you safety margins)! And some, myself included, will continue to bring in money in very enjoyable ways after reaching financial independence. Jacob, from Early Retirement Extreme, retired at age 33 and his savings are still growing. He expects to be a millionaire soon.

## The Math: Achieving Financial Independence

The math behind reaching financial independence is truly simple. You can calculate how much you need to save based on your savings rate, and your safe withdrawal rate. That’s it. Only two important variables which everything else can be calculated from.

Your savings rate is calculated by savings/income.

The safe withdrawal rate is the safe percentage of your investments you can draw per year without running out. It is pretty unanimous that this number sits around 4%. Aiming for lower rates is better, but will take longer.

I will demonstrate with an example before explaining.

Suppose your savings rate is 70%, and you have determined that you feel comfortable with a 4% safe withdrawal rate. That means you are spending 30% of your income. With a SWR of 4%, you need to save 0.3/0.04 = 7.5 times your annual income to cover those expenses. You are saving 70% of your annual income per year, so that takes 7.5/0.7 = 10.7 years. Compound interest at 8% annually will shorten this period to 8.04 years. Compound interest is great, but more helpful to long-term savers.

As you can see, your income does not matter, but a high income helps increase your savings rate. For example, saving 75% while making $10,000 per year will allow you to retire in the same amount of time as someone saving 75% making $1,000,000 per year, but the person making $1,000,000 has more opportunities to slash ludicrous expenses.

I made a graph in Excel for you. It shows you how long it will take to retire based on your savings rate and safe withdrawal rate. It accounts for compound interest at 8% annually.

You can calculate the two extremes of the savings rate in your head. If you have a 0% (or negative, like far too many people in debt) savings rate, you will never become financially independent. You are spending all of your money. If you have a 100% (or higher) savings rate, you can retire right now. You don’t need money. Congratulations! You are self sufficient. It gets more interesting when you look at all the saving rates between 0% and 100%. Assuming your money grows with inflation, if you save 50% of your money, you can work every other year or 6 months per year to cover all of your expenses. If you save 90% of your money, you only need to work 1 year to take 9 years off! I prefer to work for a few consecutive years to grow my savings to a point where I never need to work again, but it’s your choice.

Here is the magic formula that formed the basis for the graph:

where:

F = years until financially independent

r = interest rate, compounded once annually

w = safe withdrawal rate

s = savings rate

Example Use:

How long will it take to retire with a 75% savings rate, a 4% safe withdrawal rate, compounding at 8% annually?

You can play with this formula to your hearts content solving for unknowns while trying different known variables. IE: Plug in how many years you want to be financially independent in, using a 3% SWR, compounding at 10% and solve for s to see how much you need to save! Perhaps only the math whizzes will do this. 🙂

In summary,

- Choose the safe withdrawal rate you feel comfortable with. I recommend 3% or 4%.
- Do whatever you can do increase your savings rate (reduce expenses, increase income)
- Save 25-33x (25 = 1/.04, 33 = 1/.03) the income you want to have when you stop working and you will have enough money to live off the interest from it.
- This amount of money is popularly known as “F*ck you Money”, as that is what you can say to your boss next time he rejects your vacation request.

## Parting Thoughts

Everyone wants your money, but you traded a portion of your limited life energy for that money, so don’t give it away easily. When purchasing things, always consider the impact on your goal towards financial independence. Remember, a $50 monthly cellphone bill requires $15,000 ($50 x 12 months x 25) in savings to become financially independent of it. Always weigh the benefits of the purchase against your freedom, as that is what the money could otherwise fund.

This is a major goal in my life right now, and I am positive that I will be creating more posts about reaching financial independence. This will be a prevailing topic in my blog.

You all deserve to have a good life!

[…] Financial Independence: The Key to Your Golden Handcuffs […]

You could probably mash interest rate and SWR together to simplify further – but, of course, you’d have to assume that people want to ‘die broke’ or whatever.

Interesting graph – it’s great to see it presented visually. You could just copy/paste this if someone asked “how much should I save?”.

The interest rate and SWR need to be seperated in order to be able to make an estimate using higher interest during the saving years, and a lower withdrawal rate during the ‘retirement’ phase. If they were mashed together, that would be assuming a growth rate of your SWR, right?

Thanks for your comment!

The other way to become financially independent: buy rental properties. They require a bit more management than stocks, but (if you buy right) can yield higher returns, enabling you to quit your day job much more quickly.

You are completely right Paula. Though, the only place stocks were mentioned on this page are in your comment! I do in fact recommend investing in real estate and I am beginning myself. Some people choose to build up a number of rentals and live off of the provided cashflow from that.

Nice article, but don’t you have to adjust for inflation of your expenses? Over a 40 year retirement even 2% inflation would more than double your annual spending. I suppose you could argue that your investment returns will increase as well, but that depends heavily on the investment strategy.

VERY good point Michael! You’re right: If I save $1,000,000 (and using a 4% SWR), I will get $40,000 every year, but will that $40,000 be able to provide the same life for me for over 50 years? The answer is no! It will be able to buy less, just like a quarter can no longer get you into the movies. Inflation can be a bitch.

I’ve already begun a blog post that talks about this. You should choose investments that grow with inflation while offering a return on top of that!

Hi Chris, Stumbled on your site today. Great post. As Micheal points outs inflation is a huge problem for early retirees. I am from India where inflation hovers around 8-10%!! Under such circumstances early retirement is dangerous and near impossible.

I have a suite of retirement calculators in my site which includes an early retirement extreme calculator which is of course the same as the perpetuity calculator you have outlined. Please do take a look.

Happy thanksgiving.

Pattu

[…] We live in a finite universe, depressing as that may seem.A new entrant this week, Chris Fuller at Life With A Brain. We like his blog’s title, and the body of work he backs it up with is not awful. Chris runs […]

excellent information. i bookmarked it for future reference. thanks a lot!

Great post, really enjoyed it!

— Kathaleen

You guys are too kind, thanks.