Financial independence is not just for the "rich" or wealthy
Though early financial independence is not a luxury designed only for high income earners, there is no getting around the fact that higher incomes make the whole early FI process quicker.
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A few weeks ago we received a comment to our September budget article from a young reader who was impressed with our plan of financial independence and early retirement, but quickly grew disappointed once she saw our relatively high income.
It is true that my wife and I enjoy a fairly high level of income, but do our salaries make it seem like retirement NEEDS a high income?
In September, my wife and I had a combined income just shy of $12,000. The commenter reported a combined income between her and her husband of $4,000. Surely, $8,000 makes a huge difference in early retirement, right? Honestly, yes, yes it does. But, does someone NEED to bring in $12-grand a month to retire early?
Before I continue, a word about the difference between retirement and financial independence.
I admit to using these terms fairly interchangeably throughout this blog, but the difference between the two is actually quite profound. What my wife and I are doing - similar to other "early retirees", is we are becoming financially independent early in life. This means that we don't HAVE to work for a paycheck to maintain our lifestyles - though we can if we personally choose to. Our wealth, acquired over a number of years of aggressive saving, has built up enough of a stash to support our lifestyles without the need for full-time jobs.
And in general, I prefer to use the term "financial independence", rather than "retirement", as I believe that term is a much more accurate description of our planned lifestyle after full-time work.
Though early financial independence is not a luxury designed only for high-income earners, there is no getting around the fact that higher incomes make the whole early FI process quicker. However, that is not to say we NEED a high level of income before becoming financially independent early in life.
I've read similar comments both here on this blog as well as on others, like "Sure, if I pulled in $250,000 a year, I could retire early too", or "If you want to retire in your mid 30's, all you have to do is make hundreds of thousands of dollars per year."
Umm, no, that's not the way it works.
I love her comment, and it set the wheels spinning in my head once again about how influential our income is in our early financial independence plans. I have written before about the importance of saving and how income alone doesn't really make you rich. It can, but it's not automatic. Allow me to explain.
Is our high income enabling our early "retirement"?
Yes and no. A high level of income is definitely enabling our ability to quit our full-time jobs next this year. We could not quit this damn quickly (after changing our lifestyle just a couple years ago) if my wife and I made significantly lower salaries. There is no question that our incomes are enabling our ridiculously early financial independence schedule, and I would be a damn fool not to recognize that.
After all, both my wife and I want out, and out fast.
However, there is more to financial independence than high incomes. My wife and I certainly would never be able to quit next year if we kept our previous spending habits in place either - even with our same salaries. Neither of us maxed out our 401ks at work. We weren't throwing money into our brokerage account like mad. We went out to eat more often than we do now and even scheduled in more expensive "date nights" every month where dropping $100 for a meal was the norm.
We also drove two cars - one of which was a gas-guzzling Honda Ridgeline. I commuted into an office every day instead of working from home. We paid for expensive cable television, hired a pool guy to keep our backyard swimming pool clean and also sent our dogs to daycare to the tune of around $400 a month. Not exactly a sensible lifestyle.
This point is important: While our high salaries are definitely enabling us to reach FI quickly, the underlying foundation of our ability to FIRE is a combination of income and saving. Had we not made these changes in our spending habits a couple of years ago, FI would be nothing but a prayer for us, some amorphous bright fog in the distant future.
There is one other element that makes next year possible: our anticipated spending rate post-retirement, which is very, very low (around $30,000 a year). As I discussed in my Our Next Life article series, we will be selling virtually everything that we have and buying an RV to live in around the country. We will travel, find cheap land and live very, very inexpensively while enjoying this beautiful and wondrous country of ours.
Financial independence was, for many, many years, just a prayer. I'm thankful to have enjoyed fairly high salaries all my life, but I also had very little to show for it for all those years. I wasted the large majority of my income every year, and that habit killed my chances of upgrading my level of happiness for the first decade of full-time work life. Time lost. I might as well have made half as much and saved the majority of it.
The bottom line: There are many people who have reached financial independence on far less than what my wife and I bring in every month, and FI looks different to everyone. It doesn't necessarily mean that you're simply "done working" for the rest of your life, or that your most productive years are behind you. Don't let the retirement police bamboozle you.
There are any number of ways to design your FI lifestyle around what works best for you. For example, maybe FI means taking on some part-time work every now and then for some additional income. Or, maybe house sitting abroad is your game. Others live an insanely low cost-of-living lifestyle in vans (Van Life, baby!). Believe it or not, there are a LOT of people who travel the country in a van and love every minute of it with only a mere fraction of our net worth.
While these lifestyles won't be best suited for everyone, the larger point is that "retirement" does not need to look like the traditional American-approved picture of living without a job. There are so many lifestyles out there - don't be afraid to explore your options.
What would we do if we made less money?
Let's face it, we live in the lap of luxury. We have everything that we could possibly want and need, plus some. The backyard pool is outrageously unnecessary. Our glass-sharded fire pit is completely frivolous. The 1600 sqft home that we live in is way too damn big for our needs.
Of course, we bought all this before we decided to retire early. But still, it's all unnecessary "stuff".
Let's say that we brought home significantly less money than we do now because one of us lost our jobs or suffered through the worst demotion in the history of corporate America. How would we manage our early retirement?
First, the easy part - we move. We already live in a very inexpensive part of the country, making our city a prime spot for future early retirees. Dry air, mild winters, sunny skies and a low cost of living. We'd move into an apartment or small house somewhere in town, perhaps closer to my wife's work, to avoid the expenses of our unnecessary homestead compound.
Next, we would sell our Cadillac CTS and buy something small and cheap with excellent gas mileage, like a Honda Fit or something similar. I would probably keep my motorcycle because the mileage on that sucker beats 99% of the cars on the road today. For the record, we had considered selling the CTS in the past, but in the end, our early retirement plans made that idea less beneficial in our situation - after all, we are selling everything next year anyway.
Then, we downsize even further. We have an extra refrigerator in the garage that we don't really need. An extra couch here, backyard patio furniture there. I could easily lose some of my computer equipment that I currently enjoy in excess of what I need to get my job done.
We streamline our lives down to only those things that we need or genuinely bring us happiness, continue saving as much as we possibly can, but we still plan to reach FI early. Maybe "early" in this case means five years down the road. Maybe 10. It probably wouldn't be next year.
The important point to remember is that while our schedule for early financial independence would certainly change, our ability to reach FI early need not be affected. Our goals remain the same. The only thing that changes is our schedule.
The truth is pretty remarkable - I don't care how much you make, if you don't save, you're probably won't be quitting early. Making lots of money is great and can definitely push up your early financial independence schedule, but unless that money is saved through a sensible lifestyle, early financial independence will remain just a dream.