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Defining Financial Independence (FI)
Old 08-08-2013, 12:26 PM   #1
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Defining Financial Independence (FI)

I'm interested in how others would define FI in quantifiable terms. I know it can be defined as having enough money to last for the rest of your life. But in more specific terms, I'd say it's having a portfolio worth 50 times your annual expenses. OK it may really be 25 or 40, but to be cautions, I'd tend to say more like 50. Many posters post here that they are FI, and I'm curious what definition you use.
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Old 08-08-2013, 12:40 PM   #2
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There are a lot of variables beside portfolio. Two people with equal portfolios but if one has a mortgage free million dollar house, to me that person would be more FI.

Plus there are passive income streams, business valuations, and annuities (including pensions and Social Security).

I think FI means not having to generate earned income any longer, even after budgeting for worst case disability and medical expenses.
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Old 08-08-2013, 12:42 PM   #3
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It depends on age, risk tolerance (both in how aggressively you invest and the probability you are willing to accept of going broke before you die), sources of income outside of your portfolio, your age, your life expectancy, etc. So everyone's answer will be different.

But if you make some assumptions: 30 year retirement, low (single-digit %) probability of running out of money, roughly 60/40 investment mix, and constant annual expenses, I would go with about 28X, which is a 3.5% withdrawal rate.
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Old 08-08-2013, 12:47 PM   #4
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Instead of a "number" or a multiple of expenses, I tend to think of FI as having income streams adequate to meet my needs into the indefinite future (understanding that anything can change - heck, there could be an extinction event such as a comet, but, I digress).

So, for me, I have a modest pension, DW's SS, "access" to my own SS (probably at 70), and withdrawals from my nest egg. I'm belt, suspenders, elastic waist band kind of guy. So, I also have back-ups to these flows. For instance, I could sell primary residence and move to much lower COL area.

Others on the forum depend almost exclusively on withdrawals from their nest egg. Won't speak for them, but that would not make me feel FI. In short, FI can only be defined by each individual for him/her self IMO. But, YMMV.
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Old 08-08-2013, 12:56 PM   #5
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In it's simplest terms - FI means you have enough money (income streams, nest egg, whatever) to not need to work for income. How much of a buffer will be debated here forever... Some folks are fine with 90% success on firecalc... others want 200%. But as long as they are comfortable with the "I don't need a paycheck to pay my expenses" they are FI.
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Old 08-08-2013, 01:00 PM   #6
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When I worked, "or else" was the main motivator. That is, "do this or else" . For me financial independence was when "or else" transformed from being a worry to becoming an opportunity. It turned out to be around 25x our budget.
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Old 08-08-2013, 01:02 PM   #7
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Quote:
Originally Posted by David1961 View Post
I'm interested in how others would define FI in quantifiable terms. I know it can be defined as having enough money to last for the rest of your life. But in more specific terms, I'd say it's having a portfolio worth 50 times your annual expenses. OK it may really be 25 or 40, but to be cautions, I'd tend to say more like 50. Many posters post here that they are FI, and I'm curious what definition you use.
For me, being FI means that I have enough that (without ever working again) I no longer need to ever worry about being hungry or homeless, no matter how long I might live. Being a worrier at heart, it would take more than one might think to keep me from worrying.

Your definition would more than fit those requirements, for me, with money left over. I am thinking maybe 30? A lot depends on how much "slop" there is in one's spending, that could be cut out without materially affecting one's wellbeing and happiness.
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Old 08-08-2013, 01:09 PM   #8
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As I am trying to hold a WR of 3.5%, that means the ratio of 1/0.035 = 29X. If someone can do 50X, great for him, but I think that is overkill. Here's why.

At 2% WR, if your investment just barely keep up with inflation, you will deplete it in 50 years. At 3.5%, you will deplete it in 29 years. The latter is good enough for me. And when I throw in SS (hope they will not deny it to me, because they call me "rich"), then there's my safety margin.

And if someone has to pay his mortgage or rent out of that 3.5% WR, it's OK too. Why would it matter? All that means is that that person is spending some of his money on housing, while someone else could have used the same money for travel, or going to the casino, or whatever. Same WR, same level of FI.

PS. If a person has a substantial pension, his portfolio can be smaller as he only needs to supplement his pension. Of course, if the pension is large enough to live on (and is COLA'ed), then he can be FI with not much more than some emergency funds.

PPS. Oops! The above is true if his pension is not with Detroit!
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Old 08-08-2013, 01:17 PM   #9
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My multiplier has been 25X. But FI has meant so much more to me then $. I believe that when people become FI and work their priorities change. They go from I want to be successful to we want to be successful. Getting joy from the people around you being successful becomes more satisfying then their personal agenda's.

Unless their greedy basta'ds then they just attract other of their kind and can be a real motivator to move on and be FIRE!

I am currently working but have more $ then I have ever had. I don't need to work but enjoy it. One day I my priorities will change and my wife and I will just start doing something different.
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Old 08-08-2013, 01:27 PM   #10
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My definition of FI is a lot like Rodi's and Koolau's (and a few others). I do not see it as a having a portfolio whose value is a multiple of one's expenses or even a nice, low SWR. or an early retiree such as me, I do not have unfettered access to my entire portfolio (i.e. can't withdraw from my IRA yet) so I have to live off only my taxable accounts. So, should the denominator of my SWR include my IRA or exclude it for the time being? Once I do have unfettered access to the IRA, I would surely include it in my SWR.

Then there are the rest of what I call my "reinforcements" such as my frozen company pension and Social Security. Those additional, external income streams will lessen the need to use my portfolio's income to cover my expenses. In fact, those two income sources may cover all of my expenses at some point so my SWR could drop to zero! Wow, wouldn't that be fun, reinvesting all of my portolio's dividends and not spending a dime from them? This is why the SWR for me is a moving target, one which will likely rise in the next 9 years before decreasing after that.
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Old 08-08-2013, 01:30 PM   #11
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In it's simplest terms - FI means you have enough money (income streams, nest egg, whatever) to not need to work for income. How much of a buffer will be debated here forever... Some folks are fine with 90% success on firecalc... others want 200%. But as long as they are comfortable with the "I don't need a paycheck to pay my expenses" they are FI.
I agree entirely with this.
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Old 08-08-2013, 01:38 PM   #12
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Wow, wouldn't that be fun, reinvesting all of my portfolio's dividends and not spending a dime from them?
Dang! And I called myself scroogy.
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Old 08-08-2013, 02:11 PM   #13
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Dang! And I called myself scroogy.
It's all relative NW. I reinvest all interest and dividends, and live only on my pension. However, the proof is in the details. If you had my portfolio to live on solely, you would throw your hands up in the air, give up and say you never ever will be able to retire.
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Old 08-08-2013, 02:38 PM   #14
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I defined FI as having enough money to fund our lifestyle (all costs - healthcare, housing and taxes) using an SWR methodology of our choice. For us, SWR was 4% of current portfolio value. SS will be gravy.
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Old 08-08-2013, 05:17 PM   #15
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Originally Posted by David1961 View Post
I'm interested in how others would define FI in quantifiable terms. I know it can be defined as having enough money to last for the rest of your life. But in more specific terms, I'd say it's having a portfolio worth 50 times your annual expenses. OK it may really be 25 or 40, but to be cautions, I'd tend to say more like 50. Many posters post here that they are FI, and I'm curious what definition you use.
The old saying was; the rich are worth their weight in gold. The rich don't need to work, as their money works for them.

But as gold has run up, I define it as; rich or FI = 50 time yearly expenses.
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Old 08-08-2013, 05:24 PM   #16
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I have really struggled with defining FI for our family (me and DW in our late 30's and 2 young children). I struggle because we have our needs covered based on a 3% swr but not our wants. How important are the wants? Important enough that I am willing to work into my early 40's but not important enough to pay long term disability and insure my salary (I'm in healthcare and my hands are my bread/butter). I went through this thought process early this year before cancelling my long term disability insurance.

Thereore, I consider myself "entry level" FI. Please don't burst my bubble.
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Old 08-08-2013, 05:49 PM   #17
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How about anyone with pension (+SS) > living expenses?
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Old 08-08-2013, 06:56 PM   #18
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How about Pensions + annuities + all interests from all investments + SS > all expenses ?

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How about anyone with pension (+SS) > living expenses?
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Old 08-08-2013, 07:19 PM   #19
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How about changing "all interests from all investments" to "all distributions from all investments" to include dividends and other distributions.
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Old 08-08-2013, 07:21 PM   #20
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My multiplier is anywhere from 1 (asteroid) to 60 (kibbles and bits).

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