How You Can Maintain Financial Independence

If you have achieved some level of financial independence are you comfortable you can maintain it for the long run?

There are varying levels of financial independence.  Perhaps you have you achieved some level of financial independence but really wonder whether you can stay financially independent for the long run.  I recently achieved the goals I put in place to stop working but I have since established a different set of goals to make sure I can maintain my financial independence for the long run and in different economic and market conditions.  

My Initial Goals for Achieving Financial Independence

I had a list of financial goals that I wanted to accomplish before declaring that I achieved a basic level of financial independence.  Regarding my investments, I applied the “4 percent rule” put forth by the Trinity Study to determine how much money I needed in my investment portfolio before I could move on from my corporate career.  The Trinity Study sought to determine a “safe withdrawal rate” for an investment portfolio that was “extremely unlikely to exhaust the portfolio” during an individual’s retirement. The Trinity Study, using historical return data on stocks and bonds and after factoring in inflation, found that investment portfolios using a 4 percent withdrawal rate lasted at least 30 years in over 95% of modelled scenarios. A lot of experts in the field have criticized the results of the Trinity Study and many financial experts are now recommending a 3 percent withdrawal rate due to lower expected future returns on investments.  Nevertheless, using the 4 percent rule, I felt reasonably confident that I could pay my expenses for at least the next 25-30 years.

Using the 4 percent rule to cover my family’s annual expenses, I determined I needed a $2 million investment portfolio before I could declare financial independence.  I achieved this goal in 2019. I know $2 million seems like a lot, and you may need more or less money to achieve your desired level of financial independence, but it was attainable for my family after establishing and implementing a plan with discipline and purpose.  We thought being able to save $2 million seemed like a pipe dream but we did it.  

I’m now focused on maintaining my financial independence and there are a few reasons I am uncomfortable with relying on the 4 percent rule:

The assumptions to develop the 4 percent rule are flawed or not applicable to me.

•  The 4 percent rule uses a 30 year retirement period with a portfolio consisting of stocks and bonds.  I’m in my early forties and my wife is in her mid-thirties so we both hope to live more than 30 years.  Other studies using the Trinity Study methodology show a person’s chances of exhausting their investment portfolio using the 4 percent withdrawal rate can go up significantly if your retirement periods exceed 40 years.
• The 4 percent rule was based on a portfolio consisting of 50% stocks and 50% bonds.  For reasons I will discuss in many of my posts, I hold a lot of my assets in investments outside of stock and bonds.  The 4 percent rule also did not factor in taxes and fees which can significantly erode your portfolio’s performance.
• The 4 percent rule doesn’t work so well in other countries.  The United States financial markets have experienced an incredible run for a long time.   There is no guarantee such a strong performance will continue into the future and there are a lot of reasons to believe future returns for U.S. stocks and bonds will not be so stellar. 

I will likely have different events in my life that will cause my annual expenses to vary by year.

Annual expenses cannot always be perfectly managed to a four percent withdrawal rate.  Major water damage to your house, a medical condition that is not adequately covered by health insurance, a significant car accident, are examples of life events that happen and that can increase your expenses and require your withdrawal rate to increase.  If you have an increase in your expenses early on or in a bad year it can impact your portfolio’s long-term performance.

I don’t want to exhaust my investments and reduce the size of my investment portfolio in order to pay for my expenses.

Under the Trinity Study, you withdraw a specific amount from your portfolio every year and it is considered a “safe withdrawal rate” as long as your portfolio does not run out.  Just beating $0 at the end of my retirement does not work for my wife and because we want to leave something to our children to help them achieve financial independence in the future.

Setting New Goals to Maintain Financial Independence

Instead of selling investments to pay for expenses I want the income from my investments, commonly known as passive income, to cover my annual expenses.  

Other personal finance bloggers, such as Mr. RB40, have dubbed the ratio where you compare passive income to expenses as the financial independence, or FI, ratio.  If you can achieve an FI ratio of 100% or more, you can pay your expenses with passive income and without selling the underlying asset that generates income. Your investments can then continue to generate income for you and your family for the long run.  My family needs close to $100,000 in annual passive income to cover annual expenses after factoring in things like taxes, etc.   

As an initial update, my wife and I are not at the point where our passive income from dividends or other distributions covers our annual expenses.  We have set new financial goals to achieve an FI ratio of 100% and we will provide you quarterly updates on our progress. We will also include in posts our perspective on what is working well and what is not when it comes to generating investment income.  My wife still works part time and I teach part time at a local university but our goal is to achieve an FI ratio in excess of 100% before the kids go to college. You can read the posts with our quarterly updates here.   We are using various different types of investments to generate passive income and some of these investments may be suitable for you to consider.  We don’t just invest in index funds.

Our Planned Future Boost to Financial Independence

We also have a plan to reduce our expenses and boost our investment income after the kids go to college.  This plan is possible because we live in California, a state that has a really high cost of living, and we are willing to move outside of California after the kids go to college.  We own our home debt-free, which was one of our financial goals, but it is a significant part of our net worth and it does not generate any investment income. After the kids go to college we plan to enjoy another part of the world and boost our investment portfolio by eventually selling our home and moving out of California. 

My wife and I hope our journey provides valuable information and inspiration to you.  Our posts in this section will include topics on:

• Our progress to achieving a FI ratio in excess of 100%.
• Investments to consider that can help generate investment income.
• How different market cycles may impact your investments and financial independence.
• How your expenses will change over time and how to try to manage them.
• Our progress on selecting a place to live that can help us maintain our financial independence.

Climb that mountain to financial independence and enjoy the view!

About Ryan

I recently achieved my financial independence and made the decision to stop advancing my corporate career at a time when my earning power was growing. I created Fire Mountain, a personal finance blog focusing on achieving financial independence, to help provide people with the encouragement and tools necessary to achieve their own financial independence.