Why am I pursuing financial independence?
Financial independence, retire early (FIRE) is a personal finance movement that started around 10 years ago.
What is inancial independence, retire early (FIRE)?
What is financial independence (FI)?
At its root, financial independence is achieved when you are no longer dependent on anyone including your current job to support yourself financially and maintain your current lifestyle.
How can you achieve this?
-Save a large portion of your take-home pay and decrease your monthly expenses. It is not unusual for someone pursuing financial independence to save from 5o to 70 percent of their take-home pay. They achieved this by drastically cutting back on their expenses, either through espousing minimalism, frugality, or a combination of both.
-Thereafter you build an investment portfolio composed of various investments that will be 25 to 30 times your yearly living expenses. This is known as your FIRE number.
-Annually you will withdraw 4% from your investment portfolio to cover your living expenses. This is known as the 4% rule. This rule is based on a 1994 study published by William Bengen with the aim to determine a safe withdrawal rate. The study proved that even in a recession when you withdraw 4% from your portfolio, you will not run out of money in 30 years.
Subsequently, in 1998, three professors from Trinity University published a paper that reaffirmed the 4% rule proposed by Bengen colloquially known as the “Trinity Study.” When a portfolio that’s 50/50 stocks to bonds, taking into account inflation, a withdrawal rate of 3% is more feasible.
Using the findings from this study, you can calculate your FIRE number.
FIRE number = 25 x your annual expenses
In America, the average living expenses are around $50,000 per year. The average American will need to achieve FI is: $50,000 x 25 = $1, 250,000.
The overall tenet of FIRE is that you are not required to work your job to maintain your lifestyle, When you reached FI, you can make work optional.
You can even choose to not work at all, this is where the retiring early (RE) comes in. There are a lot of you out there that asks, “Why do I want to retire when I LOVE my job?” Well, once you achieved financial independence then you can choose to work full-time, part-time, or PRN.
The feeling that you are choosing to work rather than you have to work is liberating. If you don’t want to work, then you have the option to quit.
The possibilities are endless at this point, you are free to pursue your hobbies, passion project, volunteer, travel, etc.
Misceptions with FIRE
Since FIRE is making its way toward the mainstream, there are a lot of misconceptions, misunderstandings, and skewed narratives.
Misconception #1: FIRE is only reserved for high-income earners
Well if you’re a pharmacist or other high-paying professionals then it will be easier and faster to achieve FI.
This doesn’t mean that when your salary is low you cannot achieve FI. This will require more on your effort, you may have to stick to a stricter budget, and seek out other means to boost your income.
But, in my opinion, FIRE is achievable at any income level.
Misconception #2: I don’t want to retire early
When you’re on the journey to pursue FI, you don’t have to retire early if you don’t want to. Reaching FI can help you have options.
You can retire early if you wanted to, you can go to PRN (as needed), part-time, switch careers, or pursue other endeavors, with or without earning money. The possibilities are endless.
The RE part of FIRE in my opinion is where you are in control of your destiny. You are regaining control back of your life!
If you chose to stay with your current job, you are no longer bound by fears, the fear of getting fired, the fear of getting reprimanded by your boss. You’re in a different state of mind, you are free!
When it comes to how to invest the money in your portfolio, the number one thing to focus on is to focus on long-term investing and staying the course.
The best way to invest in index funds.
You can choose to invest in broad-market mutual funds or exchange-traded funds (ETF).
One of the most important things to focus on when choosing your index funds is the fees and tax implications.
You want to choose low-cost index funds and I recommend the three-fund portfolio setup, see more details here.
When you are pursuing something, you need to know the “why.” The reason why I want to pursue and achieve FI is so that I can make my job as a pharmacist optional.
I believe that work will be more enjoyable when I don’t have to financially depend on the income from my job to sustain my lifestyle.
I will feel empowered to cut back on my hours and choose to work as a PRN pharmacist. And when the timing is right, I will choose to walk away from it all and go on full FIRE mode and pursue my other goals in life.