Definition of Financial Indendence

D

DavidS980

Confused about dryer sheets
Joined
Feb 18, 2015
Messages
6
Hi All,

I am a recent early retiree. I currently have 30% more interest and dividend income than my annual expenses. I reinvest the surplus in order to compound it.

I wrestle with the real definition of what true financial independence is. I've read multiple times that it is when your passive income eclipses your expenses. The problem I have with this is that there is no wiggle room.

Does anyone have an opinion on this or their own definition? How do you know if you truly have enough?
 
That definition is about right, except we don't limit ourselves to dividend only income, rather total investable/liquid assets.

You have to decide how much you need to pad your annual expenses to give yourself the lifestyle you want or the wriggle room you want.

Many of us figure once your investments reach around 25x desired annual expenses including taxes, you are FI, as theoretically you can live off that amount even with inflation adjustments - well for 30 years at least. Some folks like a higher number.

I define it as no longer needing to work for a living.
 
My definition of FI is "I can maintain my desired lifestyle without w*rking and with a probability of not outliving my money that is acceptable to me".
 
I agree with the basic definition "when your passive income is sufficient to meet your expenses". Of course everyone has different expense levels, different timeframes, higher or lower risk tolerance, and of course sources of that income (pension, savings, SS as examples).

It is also when you cross the point that you are not working because you have to.
 
I don't know if there is an official definition. Assets 25 times earnings, for instance, does not fit us at all as our portfolio is only 12 times annual expenses, yet our annual income is almost three times our expenses.

I think Audreyh1's last sentence sums it up, or, I don't know how to define it, but I sure know it when I see it.
 
Thanks for all of the responses. They are pretty insightful. When I looked at my own situation, I tried to determine if I was actually F.I. My dividends and interest on an annual basis are 30% greater than all of my annual expenses on average. If I don't have an emergency, I reinvest the 30%. I often wonder if the 30% is large enough of a cushion on an annual basis for emergencies that I haven't accounted for. Currently, I set aside money each year for new cars, home repairs such as roof and appliances and vacations. The total amount of my annual expenses are about 2.3% of my portfolio (not including my home). My portfolio is 60stock/40bond. Am I missing anything?
 
Rustic23 said:
our portfolio is only 12 times annual expenses, yet our annual income is almost three times our expenses.
Click to expand...

This means you're making a 25% return on your portfolio? Or do you have another mean of income other than your portfolio?
 
enginerd said:
This means you're making a 25% return on your portfolio? Or do you have another mean of income other than your portfolio?
Click to expand...

Actually what I mean is that if my portfolio dividends are $100, I'm only spending $70 and reinvesting the other $30 to grow my dividend stream over time. If I have a major unforeseen issue in a certain year, my plan would be to use the other $30 in dividends that I didn't spend that year.

The entire portfolio averages about 7% per year total return.
 
I have been thinking about this a lot. If by "financial independence" you mean to be "free from money worries" or "free from work," then it is unachievable, or rather, only achievable if you have the right mindset. There are no guarantees, thus there is always something to worry about. Social security is the closest thing to guaranteed income, but it is not enough to make anyone feel "financially independent." All investments are subject to risk and potential loss.

For me "financial independence" would mean having certain income equal to at least 200% of my expected expenses. Will this ever happen? Not likely. No investment will ever be certain enough for me to avoid worrying (or any investment that safe is not going to pay me enough to live off of!).

So "financial independence," is as much mindset as anything else. Some people can be financially independent with enough money to allow them to work at a job they like, but which does not pay enough to support their whole lifestyle. Some people well on their way to dying with a big pot of money left over for their heirs may never feel financially independent, because they know that the market could take that wealth away over night.

Someone with a modest pension may feel financially independent because it covers their expenses, all the while blissfully unaware that BigCo's pension fund is about to go bust.

I've started thinking of my goals in terms of risk. Having the financial and other resources (wealth, insurance, skills, health, etc.) to support a standard of living that gives me some degree of freedom. Not necessarily freedom to quit working entirely, but freedom to choose where and when I work.
 
Does anyone have an opinion on this or their own definition? How do you know if you truly have enough?
Click to expand...
Humble opinion-----
The uncertainty is age... When you will die.
It appears to me, that most of our members recognize independence as meaning we should be able to live on the interest/income from our capital assets...keeping those asset dollars intact. In other words, at age 95, that capital will still be there, providing income for whatever the needs. After death the capital becomes an inheritance.

For the most part, independence seems to ignore the national plan for security for all citizens... under the title of welfare.

Under that kind of Financial independence... (without "welfare") a person of my age, nearing 80... would have to calculate the long term cost of nursing home care... For two persons (man and wife)... a "safe" "financial independence" amount might be 2 persons times 5 years of nursing home @100K/yr would be a capital amount of $1,000,000. To insure this to age 95,,, $3,000,000.

And all of that, would require that the current capital assets... at your current age, would provide income to age 80... while maintaining the intiial capital amount.
-------------------------------------------------------------
So assume reitrement at age 50 and excluding government support.
Assets/Worth $3 Million
Interest/income @ 3.3% = $100K/yr. for 30 years to age 80. and then 15 years in the nursing home @ $100K/yr.
Your kids inherit $3 million dollars... less taxes of course. :)

That's not us... we're poor, but we still trust our government. Social Security, and in the cae that we live forever, what's left of mdicaid.

Had we chosen to be "safe", instead of retiring at age 65, when we might have attained that $3M nest egg, we chose to retire early at age 53... and those twelve "extra years" have been fabulous.

Safe retirement is a matter of the your own perception of risk/reward.

This was our formula for our idea of "financial independence".
http://www.early-retirement.org/forums/f27/sharing-23-years-of-frugal-retirement-62251.html
 
Last edited:
DavidS980 said:
I wrestle with the real definition of what true financial independence is. I've read multiple times that it is when your passive income eclipses your expenses. The problem I have with this is that there is no wiggle room.
Click to expand...

I think the above is a pretty good general rule of thumb. However, these things vary by individual as do many others 'rules' such as:

1. Invest for dividends or growth

2. Collect Social Security early at 62 or wait until one is 70 (for some reason collecting it at one's full retirement age is not a big part of the discussion, IMHO)

3. What is the max age of early retirement? As a late bloomer in ER, I have been told by several people here that I don't count. :confused: Thankfully, they have stopped this criticism since they now have many other reasons to nail my hide to the wall. :D
 
I think you are FI by any reasonable risk assessment. I base that conclusion on your stated 2.3% withdraw rate. I am fiscally conservative like almost all on this site, so 4% seems too risky! as you approach 3% withdraw rate a level of comfort is achieved. Your rate is approaching 2%, with a 60/40 portfolio. I suspect your equity is in low cost broad-based index funds, based on your other characteristics. The more probable and real risk in your scenario is not running out of money but that your heirs will face a large inheritance tax bill. Congratulations on your achievement, enjoy it.


Sent from my iPad using Early Retirement Forum
 
If you have 30 percent more coming in than your planned expenses (which includes big ticket purchases) for a 2.3 withdrawal rate, I think that is more than enough for the "wiggle room" you want.
 
I think OP is financially independent by a large margin. Most people declare financial independence when they THINK that they have enough money to live for the rest of their life without ever working. Where or not they are truly financially independent is another story.

OP has 30% more income/dividends than needed, not even touch the principal. If that is not financial independence, I don't know what will be.
 
Rustic23 said:
I don't know if there is an official definition. Assets 25 times earnings, for instance, does not fit us at all as our portfolio is only 12 times annual expenses, yet our annual income is almost three times our expenses.

I think Audreyh1's last sentence sums it up, or, I don't know how to define it, but I sure know it when I see it.
Click to expand...
If you have a pension or annuity and/or social security covering some of your annual income needs, then the 25x would only be for remaining expenses that the other income streams don't cover.
 
Which Roger said:
My definition of FI is "I can maintain my desired lifestyle without w*rking and with a probability of not outliving my money that is acceptable to me".
Click to expand...


+1!


Sent from my iPad using Early Retirement Forum
 
Which Roger said:
My definition of FI is "I can maintain my desired lifestyle without w*rking and with a probability of not outliving my money that is acceptable to me".
Click to expand...
+2. But FI is whatever you say it is...until your plan fails.
 
flyingaway said:
I think OP is financially independent by a large margin. Most people declare financial independence when they THINK that they have enough money to live for the rest of their life without ever working. Where or not they are truly financially independent is another story.

OP has 30% more income/dividends than needed, not even touch the principal. If that is not financial independence, I don't know what will be.
Click to expand...

+1!
 
All the bills get paid and there's more money in the portfolio than there was at the beginning of the year.
 
I'm surprised nobody has mentioned FIRECALC, which takes into consideration how many years you likely have left, if you expect SS benefits, your AA, and other stuff.

How about this for a Definition of Financial Independence: When FIRECALC gives me a (high enough)* success rate.

* Don't want to get into that debate!
 
Totoro said:
When chances of running out of money by a certain age are << than the chance of living to that age?
Click to expand...
It's the definition of "<<" that usually is "discussed", but point wasn't as important in this discussion.
 
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