Financially Independent Retire Early

Why You Likely Won’t Be Financially Independent and Retire by 40

The greatest obsession when it comes to internet personal finance blogging is retiring early, or being “financially independent, retiring early (FiRE).”

Countless bloggers have reach cult like status with this simple idea of being totally financially freed from your job and current lifestyle. Sadly I am going to be the voice of reason to why you’re likely not going to retire by 40.

First we have to talk about the people who are financially independent and have retired early (or claimed to be). Usually the story goes like this, “I’m a normal person, but I made it happen, I’m not enslaved to a job.. I’m retired.”

Then you dig into their story more, intrigued by the concept of being freed from your shackles of life. Then things start to crumble. Many have spouses that work (but they assure us they work because they want to), others have had windfalls via real estate, and some downplay their once far above average income (that they massively saved). Almost always, there is a missing piece to their story. Something doesn’t feel quite right, but we want to believe in their story.

They tell stories of being frugal, being smarter, and being “above it all.”

So let’s reflect, what does it actually take to retire by 40 for the “Average Joe”.

Well the “Average Joe” makes $51,939 in income a year, but let’s call it $52,000. Placing an effective tax rate is tricky, but since I’m negating the idea of retiring early, I’ll be conservative at 25% (Social security, federal, state, local, etc).

So that $52,000 becomes $39,000 a year or $3,250 a month take home.

Let’s imagine you want to retire at 40 and provide yourself a similar income ($39,000 a year). I use the full $39,000 income ignoring what you would be saving, because you likely would have added cost via health insurance (likely obtained on health exchange in the US). Using the 4% withdrawal rule, we can back into the number we need to save first. .04x = $39,000, x = $975,000. Roughly a million dollars. 

Now let’s imagine this average Joe is the most frugal person you ever met and invests half of his take home at a net 5% return (8% – 3% for inflation), how long would he have to work? Between 25 and 26 years. Even longer if Joe pays down his mortgage at any point (since he requires an 8% return, not 3-5%)

Now you might be saying, if I start working at age 22, that still isn’t a bad gig, retiring at 47-48 years old. The problem with that however is that there are a few completely overlooked aspects to Joe’s plan.

  • The plan ignores the fact that Joe will likely have a family, increasing his costs and decreasing his savings capacity
  • This plan has a large “gray spot” when it comes to health insurance, even with the exchanges it’s likely going to be a considerable amount of cost per year once retired.
  • The plan makes a major bet that an 8% return (5% real) can be obtained
  • The plan ignores the opportunity costs in that Joe pays a lot via irreplaceable living/experiences between the ages 22 and 47 by being so extremely frugal.

Even while saving literally half of every dollar he makes (making him arguably “Above Average Joe”), it’s more likely Joe will end up retiring closer to the 50-60 age range.

Now it’s very possible that you do indeed make more than $39,000 a year take home ($52,000 pre-tax), but let’s not forget that the example above would imply that you live on $19,500 a year. Living on less than $30k a year is hard enough, but less than $20k?

The truth is, you need to be above the average (either via windfalls or income) to have any chance of being financially independent and retiring early. Can it be done? Of course it can. Especially if you are a two income household.

I’m not saying there aren’t ways of using special tactics to help your chances, but the simply truth is that you need to be relatively above average to make your goal of retiring extremely early viable. Something like:

  • An income in the $80-$150k range (not the $50-$70k range)
  • A windfall of couple hundred grand via real estate to boost you years ahead (highly speculative, very risky)
  • A spouse that works
  • Some sort of side income to slow the bleeding during retirement (maybe $10-15k/year)

That last bullet/point is one that hits me hardest though, because people tend to just want a “hobby income” that provides them with a little income. If you live on $20k a year, but can make $10k via your fun hobby, then you suddenly only need half as much. It seems like a no-brainer, until you face the harsh reality that it’s very hard to find a $10k a year “fun hobby” job. Not to mention that’s not really retirement. So many bloggers make this “hobby income” part of their model.

Notice I didn’t talk about being frugal very much in this article.  I assume you’re already an extremely frugal individual. If you’re not living frugally though, be prepared to either work a lot longer or require a much larger income.

Personal Notes:
As for myself personally, I am fortunate to have an above average income (*knock on wood*).  Do I have the personal goal of retiring early? Yes and no.

I would love the freedom to do whatever I please (and in some ways, “retire”), but I’m only willing to sacrifice so much. Perhaps I could live on $20k a year and save every penny otherwise, but I have goals outside escaping my job. As it currently stands (with the job I currently occupy), I would rather strike a balance between being frugal and being financially secure. I’m currently 28 aiming for the goal of having $750k by age 40 (and perfectly on track to do so). Could I have a million by 40? Maybe, but not without sacrificing a lot of traveling and quality of life from age 28 until age 40.

As many of you have read, I am on track to buy a 1 bedroom house in the attempt to build wealth. I’m taking action to be frugal and save, but I’m also traveling and plan on continuing my traveling.

One final note: If my job was bad enough to inspire me to go into saving martyr mode, I would largely be looking for a more enjoyable career. Why work 15, 20, 25, 30, or more years in a career (or even a field) that you constantly dream about when you can escape.


2 thoughts on “Why You Likely Won’t Be Financially Independent and Retire by 40

  1. Thank you for writing this entry. The copious humblebrags of various FiRE blogs cloud the facts, math and sometimes reason. It sometimes reminds me of new gamblers defending a betting strategy. On paper (or in MATlab,) it looks like it has a reasonable chance of success. In practise, not so much.

    Like you, I wonder if instead of trying to focus so much on retiring early, people might invest some energy into finding a job they love. Perhaps if someone is goal-oriented though, they lives lack direction without a master plan. Or they cannot be happy unless they are suppressing some desire or delaying gratification.

    1. Probably the best reply I’ve ever had on any of my blogs, you completely nailed it.

      The analogy of “gamblers defending a betting strategy” is exactly how it feels. In some ways it’s a “fake it until you make it” situation. The people bragging the most are also getting the most followers, the more extreme the more lucrative. As funny as it is, they become FiRE through just the idea/though/talking of FiRE, and not through the principles of saving / investing. Who needs to worry about returns when you have a blog potentially bringing in more income than you already need in a given year.

      When people are trying to save 75% of their income and saying “I don’t like my job, I want out by years,” I view it as a call for help.

      Thank you for your comment — Hope you stick around.

Leave a Reply

Your email address will not be published. Required fields are marked *