Last updated in June 2022. Originally written in May 2022.
I’m aiming to be financially independent by 35. I’m writing this in 2022 so the goal is to make it within 7 years by December 2029.
Being financially independent means that my savings could support me for the rest of my life without my having to earn a single extra dollar.
Financial independence and early retirement are often conjoined in the popular FIRE (Financial Independence, Retire Early) movement, but they’re two separate things.
I’m not sure whether I’ll retire early or what retirement, let alone early retirement, even means nowadays.
If I reach financial independence but continue to work on this blog, am I retired?
What if I volunteer at a food bank? Am I retired then?
Is it about making money? If I make some income from an activity, then I’m not retired, but if I do it for free, then I am?
People online get their tighty-whities in a bunch fighting over what early retirement means and who is and isn’t retired depending on the work they choose to do or not do once they’re financially independent.
For this reason, I’ll try to avoid talking about “early retirement” and will instead focus on the financial independence aspect.
Here’s a 1,000-foot view of my plan:
That’s it. Simple. (Though simple doesn’t mean easy.)
If you’re just starting down the road to financial independence and are looking for guidance, check out my Personal Finance Basics series. It’ll teach you all you need to know. (For free, of course.)
The details of the plan are murkier and will be figured out closer to my financial independence date. This includes:
I covered this in detail in How will I know when I’ve saved enough to retire?
My wife and I are currently aiming to have a portfolio worth $1.4 million before declaring ourselves financially independent. Our home equity is excluded from this value.
Why $1.4 million?
Because it’s 35 times our target annual expenses of $40,000 and puts our annual withdrawal rate at 2.85%.
This means we could withdraw 2.85% of our portfolio’s value every year and never run out of money.
$40,000 × 35 = $1,400,000
$40,000 / $1,400,000 = .0285 and .0285 × 100 = 2.85%. Or, more simply, 1 ÷ 35 = 2.85%
More commonly used multipliers for financial independence are 25 (4% rule) or 30 times one’s annual expenses, but I’m a bit more pessimistic when it comes to finances.
Then again, none of this is set in stone—we plan and the Universe laughs. 🙂 We have our destination set, but we’ll have to take things as they come and adjust accordingly.
There are a couple different ways I can split my portfolio.
These numbers are accurate as of March 2022.
Here it is by bucket:
|Cash (savings & checking accounts)||0.5%||I’m trying to hold little in cash to maximize my investments. Why no emergency fund? See here.|
|401k||22.8%||I max this out every year.|
|HSA||2.6%||I max this out every year.|
|Roth IRA||5.6%||I max this out every year through the backdoor Roth.|
|Taxable investments||68.5%||This bucket’s a bit of a mess as I’ll show below.|
Here it is by investment:
|Total stock market fund||67.6%||I’ve got VTSAX in my taxable account and Roth IRA, VFFSX in my 401k, and SPTM and FXAIX in my HSA. The choices in my 401k and HSA were based on what was offered in my plan.|
|Individual stocks||31.5%||This includes AMZN, AAPL, WMT, U, NFLX, MSFT, SQ, PYPL, FB, V, MA, ATVI, and ABNB.|
|VGSLX||0.9%||This is a Vanguard REIT that’s in my Roth IRA.|
This excludes the house my wife and I bought in Central Texas in 2021 (both the equity and the remaining debt in the mortgage) and my wife’s net worth.
Because I got bored and undisciplined and thought to myself, “Let’s have a go at beating the market.” Bad idea. I’d be about $18,000 richer if I had remained disciplined and invested in total stock market funds.
The worst part is that I already knew this. And even more embarrassing is that I didn’t realize how bad it had gotten until I checked some time in 2021. 31% of my portfolio in individual stocks?! Tsk, tsk.
You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basketcase and I couldn’t help myself. So maybe I learned not to do it again, but I already knew that.
I guess there’s some lessons some of us have to learn firsthand.
The plan is to stop buying individual stocks and sell these once my income is low to avoid paying too much capital gains tax.
? days, ? hours, and ? minutes until Dec. 31, 2029