Why It Pays to Be Financially Independent (Whether You Retire Early or Not)

(FI) is a great life goal with many tangible and psychological benefits. Before we get into those, it’s important to establish how one determines what it takes to be FI.

Know Your Spending Needs

First, you need to have some idea of how much money you need each year to support yourself or your family. This includes obvious spending on needs such as food, clothing, and shelter. It should also include spending on insurances, (some) taxes, and perhaps fees paid directly or indirectly to a financial advisor. As for taxes, I would include property taxes of course, and some allotment for income tax, although you will be paying a small fraction in retirement compared what you pay now.

I found it was difficult to know what a normal year’s expenses looked like for me, particularly when we had too many homes, some rental income, one-time expenditures related to moving, etc... I’m not sure I’ve had a “normal” year in the last 10, but our expenses seem to have stabilized over the last year or two.

With about eight months of expenses tracked, I’m beginning to get a good idea of what a typical year’s worth of expenses might be for us. It seems that every year will have one big expense such as a home improvement project, vehicle purchase, or big vacation. And that’s OK, it just needs to be factored in.

Understand the Safe Withdrawal Rate

Once you’ve got at least a rough idea of what your annual expenses are, you need to decide what percentage of your nest egg you are comfortable spending each year. You can read opinions on this subject of a safe withdrawal rate (SWR) ‘til the cows come home. I could devote an entire blog post to SWR and probably will. An oft-cited number of 4% is commonly used, based on a study from Trinity College. You won’t find many scholars recommending a much higher number, and some (such as Wade Pfau) suggest it may be less than 3%.

Unless you’re contemplating retirement in the immediate future, the exact number isn’t terribly important right now. If this is a thought exercise, go ahead and use 4%. You can call yourself FI when your annual expenses are 4% (or 1/25th) of your nest egg. A different way of calculating the FI number is to multiply your annual expenses by 25. If you’re using a 2.5% withdrawal rate, multiply by 40. For 3%, use 33.3. You get the idea.

It’s important to note that the financial independence equation does not require your current income. You don’t need to replace some percentage of your income in retirement, you need to replace your spending. Income is certainly important towards achieving FI; the more you earn, the more you can save, and the earlier you can achieve that FI goal. Mr. Money Mustache outlines this very well in his post, “The Shockingly Simple Math Behind Early Retirement.” Living below your means = a high savings rate = a quicker path to FI.

So now you know what you need to be financially independent. Hmmm.... it seems to take time and sacrifice, like not spending all of your take-home pay, avoiding or reducing debt, and quite a few years of decent income and savings. Is it worth it? Yup. Unless you plan on living on Social Security and government cheese. Besides the obvious benefit of being able to retire comfortably, attaining FI has a host of benefits, whether you choose to keep working or not. Such as?

“I just saved $4,000 on my life and disability insurance!”

You are now self-insured. Because I no longer carry these insurance products, that’s an extra $4,000 a year in my pocket (or my boys’ 529 college funds). If illness, injury, or my ultimate demise prevent me from working, my family will be in good shape financially because I’ve saved up enough money. That is a great feeling, and those insurances no longer cost me $10 or more per day. There are other insurances you will still need or want to carry, like auto, home, malpractice, and perhaps umbrella insurance to protect your precious nest egg.

You are working by choice. You don’t need the paycheck to make ends meet. You may have some additional financial goal you are working towards, like a big boat, vacation home, or charitable aspiration, but working towards them is your choice. You could retire next week and continue to live your current lifestyle. Similarly, if you are forced out of a job, you won’t be desperate to find a new one. Being FI is like having an awesome no-cost unemployment insurance policy.

You can stand up to “the man.” Some people like to refer to your FI-sized nest egg as “eff you” money, as in you could extend your middle finger to your boss/manager/CEO if you were unhappy at work. In our world, professionalism is a virtue (and a core competency in residency), so I’ll keep my voice and finger down, but it is comforting to know that I have the upper hand.

“You want me to do what, now? Work three holiday weekends this year? And an occasional post-call day, which we all know will become most post-call days? No thanks, I decline.” No administrator owns you; if the job becomes unbearable, you can walk away. As the venerable Tom Petty once said, “It’s Good to Be King.”

But you still like helping people, despite all the nonsense! Great news, you don’t have to retire. Not now, soon, or ever if you wish. But you can work less. I worked far too hard to become a doctor and I feel much too young to stop working. But if I were working 60-plus hour workweeks like many of my colleagues do, I would strongly consider cutting back. Some careers lend themselves to part-time work better than others, but if you are FI and experiencing burnout in your career, you should absolutely explore options to reduce the burden of work.

In my position, I have a good schedule (many days off) but lousy hours (frequent call, long shifts). If I had half as many calls, I would miss fewer family dinners, soccer games, family movie nights, etc... For the most part, I’m happy with my current work/life balance and I’m not looking to make a change. A few more years of 18-hour days and 3 a.m. labor epidurals may have me thinking differently, so I keep part-time work as an option in the back of my mind.

Having achieved financial independence, I have options, and the financial stability to choose any of them.