Building on my prior post, to achieve financial independence, meaning being able to live off your accumulated assets without any other income, you need roughly 9,000 times your daily expenses.

The 4% “safe withdrawal rate” rule means that you can generally withdraw 4% of your investment portfolio per year, in perpetuity, without running out of money. This should not be taken as 100% assured, but is more likely to result in a much greater portfolio balance decades in the future rather than running out of money.

Based on the 4% guideline we can say that you need 25× your annual expenses, or 300× your monthly expenses, or 9,125× your daily expenses (rounded to 9,000× here for simplicity). The bulk of this money should be invested in equities, such as the Vanguard Total World Stock Market index fund. This could alternately be split between their U.S. fund and International fund for the same result with slightly lower fees, or restricted to U.S. stocks only if you want to bet on continued prosperity in the United States.

The 9,000× rule means that if your expenses are $100 per day, you need $900,000 invested to be financially independent. If you buy a $5 coffee everyday, you need $45,000 invested to sustain this habit in perpetuity. If you average $25 per day on food expenses (eating out, groceries, etc.), you need $225,000 just to account for this.

The 9,000× rule is more useful when looking at day-to-day recurring habitual expenses. If you smoke two packs of cigarettes per day at $6 per pack, you need $108,000 to cover this. (You may need extra money to account for increased health insurance premiums, reduced life expectancy, and worse health.)

If you are considering monthly bills, the 300× rule is simpler. If your rent is $1,200 per month, multiply by 300 to see that you need $360,000 invested to be financially independent with respect only to this expense.

The 9,000× rule can be quite useful for putting into perspective how much those “little” daily expenses are actually costing you. When Alex Trebek peddles whole life insurance as costing “less than 35¢ per day,” actually, the cost is closer to $3,150 with respect to financial independence, which is bleak indeed for an insurance policy that may have a maximum payout of $5,000 or less. A habit like dining out for lunch instead of packing a lunch could easily mean you need an extra $50,000 invested just to achieve financial independence. This is why there is such an emphasis on frugality in the financial independence / retire early (FIRE) community.

The 300× rule is based on a generally accepted conjecture that withdrawing a maximum of 4% of your investment portfolio per year will result in a 95%+ probability of the portfolio sustaining itself indefinitely. Therefore, this means you need 25× your annual expenses or 25×12 = 300× your monthly expenses. In many cases the 300× rule is conservative and you will wind up with far more money decades in the future thanks to market returns. At the same time, it is also U.S.-centric in that it relies on the U.S. stock market and U.S. dollar as being exceptionally favorable as compared to many other countries’ stock markets and currencies (e.g., Japan’s “lost decade”).

How can you apply the 300× rule to your life as you move toward financial independence? Here are several concerns and principles:

  1. Frugality is key. If you are paying $100 per month for cable TV, you need an extra $30,000 (300×) invested to support this bill in perpetuity. If your monthly expenses decline from $3,333.33 to $3,233.33, cutting the cord means you can be financially independent with $970,000 instead of $1,000,000 invested.
  2. Investments, types of accounts, and management fees matter. Putting most of your money in index funds of the whole global or U.S. stock market is vital, while a bond market index fund is also an important component to reduce volatility. Even if you are retiring early, tax-advantaged retirement accounts are beneficial—they save income taxes (sometimes, payroll taxes too), and you will certainly still require U.S. dollars at Age 59.5 and older. Using index funds with management fees of less than 0.1% per year is much better than 0.5% or 1.0% per year.
  3. In the first decade of early retirement, being willing to adjust your lifestyle based on the performance of the stock market is critical, to minimize sequence-of-returns risk. If the next Great Recession happens early in retirement, your portfolio might be cut in half in value, requiring you to be more frugal and perhaps even partially come out of retirement. But, if this happens after 20 years of great returns, it won’t affect you as much.
  4. Financial independence means, by definition, not being required to earn money to sustain your financial needs for the remainder of your natural life. Conceptually, this is similar to an endowment that funds a university or organization’s operations through its investment returns, providing financial strength and long-term stability to the institution. This is why a whopping 300× your average monthly expenses may be required, rather than a more modest amount like five years living expenses or a six-month emergency fund.
  5. Although financial independence is often conflated with early retirement, the more flexible you are about having a “soft retirement,” the less money you need. For example, if you can continue working as a consultant, in the gig economy, or other part-time job, or acquire one if needed (i.e., when threatened by sequence-of-returns risk due to the next Great Recession happening in your first decade of early retirement), the probability of your success increases.
  6. Cost of living is vitally important. You cannot expect to continue owning a new car or living in the San Francisco Bay Area. Instead, driving a “beater” car and moving to a low cost-of-living country or lower cost-of-living U.S. state is desirable (preferably, one without state income tax). Every dollar you can trim from your monthly expenses is $300 less needed in your investment accounts. You can achieve financial independence far earlier if you “downgrade” to a smaller home and become accustomed to living with less space and fewer possessions.
  7. Many people think they desire to fully quit their job and be unemployed, but what you may really want is more autonomy and flexibility while working from home and/or working fewer hours per week. Rather than going from $100,000 earned income to zero earned income per year, consider going from $100,000 to $25,000. There are a plethora of massive tax tax benefits to having a modest earned income instead of zero earned income, particularly with children. You may qualify for a sizable Earned Income Tax Credit (EITC) from the IRS. You could have your health insurance fully paid for by the U.S. federal government via the Health Insurance Marketplace and Advance Premium Tax Credit, and, due to having a high-deductible health plan, be able to contribute to an advantageous Health Savings Account. There are even stories of millionaires collecting housing subsidies, state benefits, and USDA SNAP benefits (food stamps) due to their low income, if these programs fail to look at accumulated assets. Although many consider this a social injustice, it may be in accordance with the terms of these programs. Because many benefits require some earned income but not zero earned income nor high earned income, quitting work “cold turkey” can have a high cost.

The 300× rule can be demoralizing due to the huge amount of assets required for financial independence. Even something as basic as a $13.99 monthly Netflix subscription costs a whopping $4,197 to fund in perpetuity. But, the flip side is that the 300× rule can motivate you to lower your bills and be more frugal. For example, if you can cut $1,000 a month from your housing bill, that is instantly $300,000 less you need to accumulate toward financial independence. This encourages a worldview oriented toward a more simple, austere life rather than costly, disingenuous displays of opulence. As we know, many people who appear to be doing well financially actually have a negative net worth and are up to their ears in debt.

We always hear about the importance of starting early to save for retirement. This yields several questions:

  1. Why start early? Why can’t you just focus on your bills now and “catch up” later when you are earning more money?
  2. What does “save” mean? Does this mean putting money in a savings account?
  3. What is “retirement”? Is retirement something you do at Age 65? If I love working, does that mean I don’t need to save?

The truth is that both “saving” and “retirement” are misnomers. The key is to invest for financial independence. This means having enough assets to cover your living expenses without having to work again. This might include having enough money to support your significant other and family, too. Whether you “retire” in the traditional sense or not is your choice.

Why start early? There are two big reasons:

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Financial independence (FI) means having enough financial assets that you could live the rest of your life without working. Bloggers frequently use the FIRE acronym which stands for [become] financially independent and retire early. Such a life might be pictured as living off capital gains from one’s investments without reducing the principle, much like how a university or non-profit foundation lives off its endowment in perpetuity (albeit, often subsidized with tuition, sales, donations, etc.).

If FI means not touching the principle, this means you could live to 100 and your original investment would still be there (even when adjusting for inflation). This requires a combination of frugal living and large amounts of accumulated assets. You might be able to achieve FI with just a quarter million in assets if they live in a low-cost-of-living area, behave frugally, and invest in the stock market at-large (e.g., an S&P 500 index fund). Although there is luck involved (e.g., what the market does), one can certainly influence their income, investing, and spending. (On the other hand, if one chooses to avoid stocks entirely, it would be difficult or impossible to achieve FI with bonds or Treasury bills, due to their low propensity for growth.)

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