I’m not a numbers person.
It’s not that I don’t understand numbers; it’s just that they don’t motivate me.
When I hear numbers like $250,000 invested or 40% to financial independence, I think, “That sounds great… but what does that actually mean for my life RIGHT NOW?”
Without this understanding, it all feels like Monopoly money.
FI180 created an initial set of FI milestones (e.g. half FI, Flex FI, FI, etc.) that were popularized by the ChooseFI podcast. While these surely motivate some people, to me, they are just numbers on a page.
The main reason I don’t find them motivating is that I have to dig under the layers to figure out what they mean for my life. A secondary reason is that early retirement isn’t my primary goal.
I recently decided that I wanted to create new financial independence milestones. These new milestones would motivate, inspire and help me keep tabs on the impact that financial freedom has on my life today.
To do that, I started with research on motivation.
What Really Motivates Us
My favorite framework about motivating change comes from the book “Switch: How to Change Things When Change is Hard.” I wrote about this framework in a previous post about how I got motivated to actually pursue financial independence.
Here is a quick overview. The book uses the analogy of an elephant and a rider. The elephant is our emotional mind while the rider is our rational mind. Our rational mind might “know” what to do to reach our goal, but it’s our emotional mind that inspires us to take action. Without that, there’s unlikely to be any movement.
Using an elephant (rather than a horse or other animal) is important. Elephants are massive creatures that weigh approximately 40-60 times more than a full-grown person.
It is not easy to tell an elephant what to do. The rider could tell the elephant where to go all he wants, but if the elephant doesn’t want to move in that direction, the rider is out of luck.
The rider (our rational mind) cannot just push the elephant (our emotional mind) forward using logic and numbers. Knowing something rationally is incomplete.
Our emotional minds need to feel a desire to change and like the change is both possible and worth it.
The Traditional Financial Independence Milestones Don’t Motivate Me
These are the traditional FI milestones.
- F-You Money = 10% of your FI number
- Half FI = 50% of your FI number
- Lean FI = where you can cover your necessary expenses with passive income (~70% of your FI number)
- Flex FI = 20x your annual expenses saved or 80% of your FI number
- FI = 25x your annual expenses saved or 100% of your FI number
- Fat FI = 30x your annual expenses saved or 120% of your FI number
I like that this framework took a first step to articulate that financial independence isn’t an all or nothing concept. I have found having F-You Money to be incredibly freeing and empowering.
However, I’m now in the seemingly never-ending no-man’s-land between F-You Money and Half FI. This is a long slog.
For someone whose goal isn’t early retirement in the near future, these milestones leave something to be desired.
I want to be motivated by milestones earlier on the journey. They should also help me to understand the types of decisions I can make today to take hold of the freedom I already have, like a progress bar in the gamification of FI.
As many of you know, our goal is not full early retirement in the short-term. As such, we are particularly interested in the following concepts:
- Coast FI – Coast FI is when you have enough money currently invested in the market that if you left it to grow, you could retire at a traditional age financially independent.
- Semi-retirement – Semi-retirement is when you can cover a portion of your expenses with passive income. You then cover the gap through either a part-time job or passion projects.
- Enjoyable Active Income – Enjoyable active income is when you can generate income from activities that you find completely enjoyable. I want to find work that I’d enjoy doing even if I was already financially independent. If I find this, early retirement wouldn’t be necessary.
Better FI Milestones: Connecting the Numbers to their Meaning
In order to create better milestones, I first needed to connect the numbers to their meaning for my life today. Then, I can incorporate the financial independence concepts that aren’t geared toward early retirement.
I will use the story of a hypothetical woman named Chelsea as an example.
Here are a few things to know about Chelsea.
- Chelsea is single.
- Chelsea currently has $350,000 in her investment accounts.
- She spends $35,000/year.
- She is 35 years old.
- Her FI number if $1 million (because she’s using the safer 3.5% withdrawal rate).
- She makes $80,000 from her full-time job.
Chelsea is Already Coast FI
For Chelsea to have a fully funded retirement at 65 (without adding or subtracting from the investments), she’d only need to have $231,000 invested at her age.
After having $231,000 invested, Chelsea would only need to cover her annual expenses ($35,000) until she turns 65.
If she didn’t want to retire early and was happy in her current job, she could, at this point, decide to stay with her employer but reduce her hours to focus on her life outside of work.
The idea of coast FI is often characterized as having two buckets of money: one for a traditional retirement, and one for everything prior to that. While this is one popular way of thinking about financial independence, we believe that this concept is another version of the two-stage retirement plan.
Two-stage retirement plans often focus on saving your money now and living your life to the fullest later after your money grows to a specific number. With this approach, you wouldn’t touch your invested assets until much later in life.
Because we believe that FI is a many-phased journey, Coast FI is only a mile-marker along the journey. It’s not our main focus or goal.
I’d like to suggest a different way of approaching this, that includes looking at the cashflow that a portfolio can sustainably generate along the journey.
Chelsea Could Sustainably Generate $12,250/year from her Portfolio
Chelsea is fairly conservative financially, so she isn’t comfortable using the 4% safe withdrawal rate. She would prefer to use the safer 3.5% withdrawal rate, given the long time horizon she might expect to withdraw funds. If she withdraws 3.5% of her assets per year, she would have the confidence that this wouldn’t deplete any of her assets.
With a 3.5% safe withdrawal rate and $350,000 invested, Chelsea could begin to safely withdraw $12,250 each year from her portfolio without depleting her assets.
Because of this passive income from her portfolio, Chelsea would only need to generate $22,750 of active income to cover her annual expenses.
This is still a significant amount of money. She wants to continue to save but realizes she doesn’t need to work quite as hard. She decides to ask her employer if she can work 80% (reducing her income to $64,000).
Chelsea Increases Cash Flow from Rental Property Investments
Over the next few years, Chelsea finally saves up enough for a down payment for a triplex that will provide her with $1,000/month in net cash flow. This asset is now providing her with an additional $12,000/year.
During this period, Chelsea has also grown her investment portfolio to $400,000. She could now safely withdraw $14,000 without depleting her assets.
With her passive income from her portfolio and cash flow from her rental property ($26,000 total), she only needs $9,000 per year in active income.
This allows her to reduce her hours to 60% at her day job, for a salary of $48,000/year. She uses her extra time to start a side hustle.
Chelsea Generates Enjoyable Active Income from her Side Hustle
Chelsea has always been creative and had considered starting an Etsy store. She uses her newly found free time to start creating Etsy Printables and other artwork to sell. After the first year, she’s generated $5,000 in net revenue.
She finds that she really enjoys this and would like to focus more time on the business. Pursuing a photography business interests her as well.
Over the course of the year, her investments continued to grow and she reached the $450,000 mark. This means that she could safely withdraw $15,750 without depleting her assets.
With the passive income from her portfolio ($15,750), the cash flow from her rental property ($12,000), and her enjoyable active income ($5,000), she could cover almost all of her expenses. The gap is now only $2,250.
She feels confident that she could continue to increase the income from her own businesses. She decides to take the leap into entrepreneurship and a semi-retired lifestyle.
Once people take the leap to semi-retirement and/or entrepreneurship, they often find that they make more money than they expected. While it’s true that many businesses fail, businesses that are started as a side hustle are more likely to be successful in the long term.
While the details of this example are fictional and there’s no certainty in the stock market return, this story helps illustrate how financial independence is not an all or nothing concept.
Chelsea didn’t need to be fully financially independent before reducing her hours to 80% or 60% or taking the leap into entrepreneurship and semi-retirement. Financial freedom is incremental, and she makes these lifestyle shifts well before she reaches full financial independence.
Translating Incremental Financial Freedom into New Milestones
Instead of focusing on a percentage to financial independence, our milestones focus on the amount of active income we would need to generate per year. This feels more concrete, and I am confident that it will enable us to take hold of our financial freedom earlier and in more incremental ways.
Our New Financial Independence Milestones
- Net Worth Zero – For people with student loans or other consumer debt, building your net worth up to $0 is a huge accomplishment! Once you reach zero, this means that the majority of the money is now being invested in your future rather than paying for your past.
- $100K Invested – Your first $100K is the hardest because the vast majority of the gains come directly from the money that you put in. As you accumulate assets, your gains come from both contributions and appreciation.
- Coast FI – This is when you have the amount you need to retire comfortably at standard retirement age without adding any additional money to your retirement accounts.
- $40K Active Income Needed – Depending on your expenses you may not need this milestone (or if you have higher expenses, you could choose to start at $50K or higher). You hit this milestone when passive income or cash flow will cover all except $40,000 of your expenses. Using a safe withdrawal rate that matches your risk tolerance (ours is 3.5%), you can determine how much passive income your portfolio will generate.
- $30K Active Income Needed – When passive income or cash flow will cover all except $30,000 of expenses.
- $20K Active Income Needed
- $10K Active Income Needed
- $0 Active Income Needed – You’ve reached full financial independence
How these Milestones will Facilitate our Journey
These milestones tell us how our lives can be impacted right now – not how far away we are from some distant future.
Knowing how much active income we still need to produce gives us something concrete to work toward. We then have three levers to pull:
- Grow our investment portfolio to support a larger withdrawal
- Build up our cashflow through additional rental properties or other cash flow focused investments
- Focus on increasing enjoyable active income
We are already at Coast FI. At this point, we could stop contributing to our investments if we wanted to retire at a traditional retirement age. If we did this, we could reduce our income to cover only our annual expenses.
This is not a decision we plan to make since the amount feels higher than we’d like to cover with active income indefinitely. This knowledge helped me to understand the incremental financial freedom I already have. Because of this, I started working part-time earlier this year.
We are planning to invest in real estate in the near future. The benefit of real estate is that it generates significant and consistent cash flow. Given the research we’ve done, we believe we’ll find a rental property to provide us with $1,000-2,000 of monthly cash flow. Once we take this step, our active income needed would be reduced by $12,000-24,000/year.
We are also actively building up additional businesses outside of our day jobs. Once we start to make income from these side hustles, we will consider it to be Enjoyable Active Income.
When we are confident that we can close the gap between the active income needed and our side hustle income, we could safely take the leap to entrepreneurship.
This will enable our version of semi-retirement and a location independent lifestyle before we reach full financial independence.
These new financial independence milestones are helping us to grab hold of the financial freedom we already have along the journey to financial independence.