FI Without RE

Back in November of 2017, a tired, burned out version of myself was pushed past his breaking point. After months of mandatory unpaid overtime, morning self pep-talks, stress-eating, and yelling at coworkers, the old Joel finally had enough. He walked up to his boss, and with a surprising, zen-like calm, gave his two weeks notice.

A huge weight was immediately lifted from his shoulders. Life felt, for the first time in a long time, wonderful. Hopeful, even. He wasn't fully FI yet, but that guy knew right then and there he would never work again. He was done. Forever.

…Until a few weeks ago, that is, when I accepted an offer for a new job.

Wait. Seriously?!

Why on earth would the guy who talked so much smack about work, and gave so much praise for being his own boss, slide back into the golden handcuffs? Is it for the money? Did sequence of return risk finally catch up to me? Were my FI estimates way off? Was it greed? Boredom? A desperate attempt to win a bet??

This is for real.

Nope. The simple truth is, I had enough time (sixteen months, to be precise) to really think about life, and learn more about myself. I had time to de-stress and recover from burnout. I had time to focus on things I actually enjoy, instead of simply avoiding the things I don't. And in that time, I learned something important.

It wasn't ‘work‘ I hated with a passion. It was lack of a work-life balance. It was mandatory unpaid overtime. It was the lack of control I had over my time and stress levels. I didn't hate work in general; I hated my specific job. It's easy to confuse the two when you're down in the trenches. I should have quit that old job months earlier. Or taken a sabbatical or leave of absence. There was no good reason for me to stay in that position as long as I did – it was unhealthy and unnecessary. I should have quit sooner. 

This is all interesting, sure, but it doesn't explain why I decided to go back to work. It seems to contradict what I said in the past about having enough. Didn't we already reach financial independence? Haven't we reached the proverbial ‘enough' point described in Your Money or Your Life?

FI Isn't Just About Me

The truth is, while I indeed have enough, I'm just a small piece of the whole picture. The Wife wants to reach more than enough – and that's one of the reasons she kept working even though she could afford to quit, financially speaking. She wants a surplus, so she can enjoy the benefits that come with having ‘more than enough'.

Like the ability to give generously to charity, and the community. The ability to treat friends and family when they come to town, without having to worry about the budget. And the ability to help when tragedy strikes, as we did recently when an (uninsured) friend suffered a stroke during surgery, waking up with no motor control of her extremities, and six figures of unexpected debt.

Our aging parents haven't reached their enough level yet, either. Most recently, my (uninsured) dad found out he needs five figures of dental work, and I want to be able to help him financially without being paranoid about its effect on my portfolio. In my hierarchy of life priorities, family is always higher up than money.

I'll make the hay. My cat will supervise.

And finally, though I may be FI, I still happen to be young and able-bodied. Unlike my friend I mentioned above, all four of my limbs still function. I'm lucky. And I realize now there's no better time to “make hay” then while the sun is shining, as the saying goes. The good luck streak my wife and I have enjoyed this past decade won't last forever. Our situation (and our parents' situations) can, and likely will change over the next couple of years, so I'm going to get while the getting's good.

Now, I should clarify, I didn't just have this eureka moment one afternoon and apply for a job the very next day. These are realizations that came gradually, over time, as my burnout faded. In fact, I had some sense of this even before I quit my job, when I said that my worst case scenario was everyone else's everyday scenario. But since I'm deciding to go back to work under my own free will, I get to learn from my past mistakes and do things differently this time around!

Instead of focusing solely on maximizing salary, as I would have done in the past, I found a job that respects work-life balance. A job where part-time and remote work is possible. Where “low stress” and “no overtime” are actual conditions of my employment. It's so important for me to have time for things besides work: like physical fitness, visiting family, and my numerous creative projects (like this blog, my podcast, and my music). This new job promises to give me this balance, as well as a few other perks…

Work Can Actually Be Fun!

Since so many of my past posts focus on the negative aspects of work, it's time I admit there are actually a few nice things about it as well (besides the paycheck, of course). For starters – I actually like this job! (I know, these words seem strange for me to say out loud.) But it's true – the technology, the people, the program goals, it all seems perfect for me.

In particular, I'm enjoying the social aspect of the office: running into friendly faces each day, conversations around the water cooler, and of course, afternoon coffee time. As an adult, making friends is harder for me than it was back in school, but work helps. I admit I always took this aspect of the office completely for granted. And I know there are plenty of ways to be more social without having a job, but since starting up this new gig, it's is a feature I'm truly enjoying.

Another thing I realized about myself during my sixteen months of early retirement? I'm not quite as self-motivated as I originally thought. Sure, I still accomplished a lot in my time off of work, but my day-to-day motivation was lacking. Why get up and get dressed early in the morning when you can lounge around in your pajamas until noon? I appreciate this on the weekend. But seven days a week? I don't know if that's for me.

What I do know is that it feels good to be dressed and out of the house early each morning. It feels good to plan my day over coffee and feel like I'm firing on all cylinders. And it feels good to learn new things during my day. Could I have done all this myself every morning without a formal job? In theory, yes, of course. Did I? No. No I did not. Go figure.

Yep. This looks about right.

Another benefit of working? I like to call it the “momentum of work”. Productivity in one area tends to rub off into other areas of your life. I've noticed that on my busiest days, when I have many things on my plate, I build up a momentum that makes it easier to tackle otherwise overwhelming tasks on my to-do list. For example, I updated this blog almost twice as frequently, on average, back when I was working full-time. So perhaps I'll have the momentum to finish off the dozens of posts that have been accumulating in the FI180 draft folder! 🙂

Here's the thing: everyone is different. Everyone has different motivations and behaves differently when left to their own devices. If you've never taken more than a few weeks off from work, and don't know how you'd act in similar circumstances, I strongly suggest you try it out! I learned more about myself during my year away from work than any other year of my life. Everyone should have a chance to try this.

Summary

Why'd I go back to work? Because a pretty awesome opportunity presented itself and I liked everything about it. The extra income to help me better support family and friends in need. The flexible schedule, remote work capability, and focus on work-life balance to help keep me productive in my many creative endeavors. And the position itself – this is one that genuinely interests me!

With perfect hindsight, I would have quit my old toxic jobs sooner. And more often! I needed a break from the grind every few years. Maybe you do too. Not only would my stress levels have stayed at bay, but there's financial incentive to switch companies every few years as well. Each time I've taken a new job, I've seen a salary increase in the 10% to 20% range. If you aren't close to FI yet, and feel like you need a break, I strongly suggest you save up your FU money and take a few months off while you look for that next opportunity.

How long will I stay with this new job? A few months? A few years? Who knows.  Whenever The Wife is ready to quit, or our parents have a nice safety margin, or I stop enjoying this job, I can easily transition back into early retirement. But this question sure seems a lot less important now that I know I'm in control! I chose this job specifically with work-life balance in mind. And I can (and will) leave if that balance ever fails again.

Now let's be clear. I'm not endorsing that you work any longer, or go back to work if you've already started early retirement. Nor do I think I need to go back to work with any financial urgency. Taking this job is simply something I wanted to do. It's an amazing opportunity, and it checked all the right boxes for work-life balance. It's what's right for me, and my family, right now.

This is the first job I've taken since reaching financial independence. The first job I picked willingly, without feeling obligated to work. I chose this job, as work is optional for me. This small fact makes working feel… surprisingly different than it's ever felt before. One friend described it as “putting the handcuffs back on while holding the key.” That's a fun analogy, but to be honest, it doesn't even feel like handcuffs anymore.

Because FI isn't about retirement. It never was. It's about freedom. The freedom to work, or not work. The freedom to spend your time doing whatever you damn well please. And the freedom to change your mind.

As many times as you like.

Oops. I QUIT!!!

Well, it finally happened! Today was my very last day of cubicle life! To be honest, I'm a little surprised myself, seeing as how determined I was to make it until January to help us hit our FI number.

That's right. I'm RE before FI. I don't know if this qualifies as retired early, since we haven't quite hit our FI number yet. All I can say with confidence is that I am now unemployed, and loving it! These past few weeks have been a blur… so what the hell happened?!

Breaking the Golden Handcuffs

I've griped about work a few times on this blog, so it's no secret that I dislike my career. I don't want to come off as a complainy-pants, but my job had been getting worse and worse these past few months, filling me with unnecessary anxiety and exhaustion.

A few months back, I found myself in the following thought spiral: “This job is making me miserable and I really want to quit! But if I stay five more weeks, my 401(K) vests! If I stay an extra month past that, I'll earn my year-end bonus! If I stay through January, I can front-load my IRA for the year. An extra six weeks after that, and…” You see where this is going, don't you? There's no end to all the mini-milestones I can achieve by working longer. “A few more months and I'll be FI! Another year after that- we hit FAT FI!” Ah, the sweet, seductive cushion of FAT FI. These rewards are so nice, I can't afford to stop working!

This mind game troubled me because I could feel myself losing control, becoming a slave to the golden handcuffs. The mental pressure to keep the fire-hose of cash flowing and keep passing more and more arbitrary milestones was literally making me sick. The demands at work kept increasing as the program schedule slipped further and further to the right. I no longer had the time or energy to spend on physical fitness, my blog, my music, my friends and family. Everything was second to work. I was chained to my cubicle. A cog in a machine. A mindless zombie. Eventually, I hit my breaking point. After a long walk with the wife, I realized I needed to set a firm exit date, and stick with it.

My Two Weeks

There's a phrase I've heard repeated these past few months: “leaning into” your fear. If something makes you uncomfortable, it's likely signaling a growth opportunity, and you should get out of your comfort zone and lean into it. Embrace it. Learn from it. For me, I noticed I became extremely uncomfortable with the thought of actually putting in my two weeks notice.

You'd think our quite substantial pile of FU Money would have lowered this anxiety, but this wasn't the case. The night before my meeting with management, I didn't sleep a wink.* I kept playing every scenario through in my mind. What was I going to say? What was my narrative? “Hey Boss – I saved up a bunch of money so I'm going home now and never coming back!” wasn't a graceful way to end my decade in the cubicle world. I didn't want to burn any bridges, either. I just needed a break.

A break! Bingo. I found my story. I was extremely burned out and needed a break. It was honest, simple, and to the point. They didn't need to know that the break would likely be perpetual. They didn't need an explanation of financial independence. They just needed to know that I was burned out.

The Meeting

The day of the actual meeting seemed never-ending. My 10 am discussion got pushed all the way back to 4 pm, so I spent the entire day wondering how things would play out. Why was I so nervous? It was like my brain was preparing for a really nasty breakup or something! When it was finally go-time, the entire conversation was over in the blink of an eye:

JOEL: “I'm really burned out and need a break. I think leaving the company is my best bet. This is my two weeks notice.”

BOSS: “Oh… well, what if we give you a few weeks off? If you can just hold out until we reach our next milestone we can…”

JOEL: “No, I've given it a lot of thought and I need longer than a few weeks off. Leaving is best for me.

BOSS:

A bunch of other things were said that I don't remember, then we shook hands and I walked out. The whole thing was a surreal blur, but I instantly felt a weight lifted off my shoulders. I went home early, wrote a thank you letter to my wonderful wife for being so supportive of my decision, and then enjoyed the best nights sleep I've had in months. The anxiety was gone. I was free.

Rear View Mirror

On my last day in cubicle land, I gave out some handwritten thank you cards, cleaned out my desk, and left. No fancy retirement party, no long and uncomfortable farewell email. Just a quick and uneventful exit. I took the long way home, driving by the ocean, reflecting on my stressful decade of full-time cubicle life.

I realize now, looking back, that I should have left sooner. Health and sanity are worth more than a few thousand dollars incentive. The irony is that many of the requests I made to management in the past (switching to another position, working from home, part-time employment, etc.) were all eventually offered after I put in my two weeks notice. Unfortunately, it was too little too late, but good to know for the future: walking away from work can give you incredible negotiating power. Just be sure you are actually willing to leave.

I like to think of quitting my job as taking my foot off the accelerator and coasting down the cash-flow highway. These past few years, the wife and I have been driving towards FIRE so fast that we can't even roll down the windows to enjoy what's outside. The exit signs fly by so quickly that we have to try to catch them in the rear view mirror. Quitting full-time employment isn't slamming the brakes on our FI timeline; rather, it's simply easing my foot off the gas.

Throwing the Dart

One of the reasons it took me so long to quit is that I was aiming for perfection. I wanted to perfectly hit my FI number, with a nice cushion baked in, all within a specific timeline. When things started sucking at work earlier this spring, I didn't want to quit and find another job. I only had to stick it out a few more months, or so I told myself. Besides, I didn't want to move to a new company, only to leave a few months later and possibly burn a bridge. If I just put my nose to the grindstone, I thought I could power through the toxic work environment. But I was wrong.

The truth is, perfection… doesn't really exist. Those who seek it waste the majority of their time and energy. This amazing video from Hank Green of the Vlog Brothers says it best:

“Everything creative I do, I do my best to get it 80% of the way to as good as I can make it, and go no further. I just don't try to get it to 100%… I'm not saying you can't increase your odds of getting into the bulls-eye… I'm saying you never really know where you're going to hit until you actually. Throw. The. Dart. And if you spend a ton of time thinking about how you're going to throw the dart and you never throw it, you might be doing a whole lot of work that isn't actually helping. So when I get to 80%, I throw the dart. Because I know that ‘perfect' doesn't exist.”

It took me a decade to learn what that video summarizes in under four minutes: ‘Perfection' is subjective, and always changing. It reminds me of the Pareto principle we covered in the post Investing Can Be Simple: trying to reach the moving target that is perfection will take 80% of the effort for a measly 20% improvement. To reach perfection in FI, I still need to figure out my detailed draw-down strategy. I need to read up on dozens of tax optimization techniques and start my Roth conversion ladder. I should probably build a large five-year cash buffer, just for safety.

Perfection be damned- my time has come to throw the dart! In Go Curry Cracker's recent post, Jeremy discusses the idea of working a few more years after FI to build a bigger cushion than you need, and how that's allowed his family to stay well under the 4% rule. While I appreciate this concept, I think it depends heavily on your current work-life balance.

If you're enjoying your journey and have time to do the things you really want to do, then, by all means, work that extra year or two. It really is a small amount of time in the grand scheme of things. But if you still have years left on your FI journey and are in a similar work situation to me, why not take a break instead of powering through? Use that FU money to take a gap year, like Noah and his wife at Money Metagame are doing. Don't push yourself to the point of burnout like I did!

As we discussed in the Milestones of FI, The benefits of financial independence are gained gradually over a smooth continuum, not all at one specific dollar amount. If you take a break from work for a year or two, or take a lower paying job for a few years, you don't go backward. You don’t lose the benefits you’ve gained along the way! This is essential to remember during your working years to keep a healthy work-life balance.

Spreading the News

Other than my wife and a few select people close to me, I haven't really shared the news of my early retirement with friends or family. I guess it's not technically retirement: I still plan to work on the things I love, but now it's on my schedule, as much or as little as I want, with no pressure to profit. Most of my friends and family won't understand this concept. And with the wife choosing to work for another year, there's an old-fashioned stigma associated with a guy who stays home and doesn't help provide for his family.

There's also a good bit of tension that comes with wealth when the majority of your friends and family don't understand money. The way I see it: “I have carefully constructed my perpetual money making machine, and can now start enjoying up to 4% annual withdrawals whenever I'm ready. I'll never take out more than that: you don't chop down the tree when you've picked off all the apples- you plant more trees!”

The way most people see it: “Wow you've saved so much money that you never have to work again?! That's like infinite money! Why don't you use it to help everyone do everything? What do you mean you won't fly out to visit on a moments notice and bring lavish gifts!?”

OK, I'm obviously exaggerating here, but you get the picture. If someone knows you have a pile of money, their expectations of you change! It's just the way it is. Even if you explain exactly how the machine works, and how you have to withdraw less than 4% per year to keep it from breaking down… most people simply won't understand.

That's why I've been working on a different narrative: I'm starting my own business. I'll get to test it out at the Thanksgiving table in a few weeks.

FRIENDS & FAM: “Oh, starting your own business? That sounds risky. What does the business do?”

JOEL: “It's a financial business! I'll be doing financial advising and account management.”

FRIENDS & FAM: “Aren't you worried about losing your steady income?”

JOEL: “Well, you know how it goes with new businesses. The first few years will be a lot of work, so I'll have to keep my spending low so it can grow.”

FRIENDS & FAM: “You're braver than I am! Good luck!”

The self-employed narrative helps frame things in a way most people can relate to. Now, their expectations are set realistically: I'm not the rich guy with money to spare, I'm the guy who's living lean to try and get his business off the ground. And this isn't a lie… I will be living lean, I am a sole proprietor, and I will, in fact, be working on account management: they just happen to be my own accounts!

What's Next???

I'm extremely excited to be in control of my own schedule. For the very first time, I'm my own boss! I get to work on what I want, when I want to, as often as I'd like. I'm pretty much jumping out of my skin with excitement at the creative possibilities opening up for me right now! Not to mention – this is the first break** I've had since my junior year of high school over 15 years ago.***

I like to think of my upcoming year of freedom as my FIRE beta test. The wife will continue working another year to smooth the ride, while I test out the early retirement waters. If things go great, she'll join me next year. If the market comes crashing down or our plans change significantly, I can always go back to work! Remember: my worst case scenario is everyone else's every day scenario! And when you're close to FI and your expenses are low, every job in the universe becomes a ‘high paying' job!

THERE'S TIME NOW!!! One of my favorite Twilight Zone episodes!
THERE'S TIME NOW!!! One of my favorite Twilight Zone episodes!

I'm so excited for this next phase of my life to begin. There's time now for so many things I want to do! Just a sampling of my plans:

  • Sleep in for like a week straight and relax
  • Get back into excellent physical shape
  • Write more often on this blog
  • Collaborate more with other awesome people in the FIRE community
  • Work on my ‘Ted Talk' style presentation for CampFI
  • Get back into my songwriting side hustle
  • Complete my backlog of 100+ todo list items I've been putting off for months
  • Convince The Wife to join me next year!
  • Learn a new language. Pick up a new instrument. Literally anything I want to do!

I'm so incredibly thankful to this amazing financial independence community for showing me that this path was even a possibility****. It's my turn to give something back, so stay tuned… for the next Financial 180!

 

*This was actually like a week, not a night. The wife was concerned.

**Longer than two weeks at least!

***I had to do the math on this and wow – time sneaks up on you when you stop paying attention to it!

****I should take a minute to acknowledge how privileged I am to be standing on the shoulders of giants. While the wife and I have worked extremely hard to get where we are now, we had a head start. Parents who paid for our education, high demand careers, the list goes on. I have an entire post in the works on this very subject for Thanksgiving, but it's important to mention it here too. 

Don’t Fear The “Penalty”!

Few concepts are as misunderstood in the FIRE community as the (ominous voice) “early withdrawal penalty.” More accurately described as section one of tax code §72(t)*, this is the additional 10% income tax that applies to withdrawals from tax deferred retirement accounts taken before age 59½. As I browse the various financial independence forums, I see statements like these way too often:

“I have 25 times my annual expenses in my 401(K), but I can't retire because I'm not 59½ yet.'”

“I don't want to pay large early withdrawal penalties, so I save most of my money in after-tax brokerage accounts.”

“I need to make sure my FU money is funded in penalty-free after-tax accounts, so I'll hold off funding my tax deferred accounts until later in my investing timeline.”

“I want the flexibility to withdraw my money at any time. That's why I invest in regular investment accounts instead of IRAs and 401(K)s that I can't touch until I'm 60.”

No, no, no, no. You absolutely CAN withdraw from these tax deferred accounts before 59½, as I discussed in detail in my post Investing Can Be Simple. Skipping these accounts to avoid a 10% tax can actually cost you hundreds of thousands of dollars over your investment timeline! Let's dig a little deeper to find out why.

The Mad FIentist Reveals All

Unlike the exciting topics of FU money and FI milestones, posts about tax code are… well… boring. How can I get you to dive deep into this important subject without falling asleep? The Mad Fientist does a better job of this than I can. Read his article, here. Get comfortable, grab a cup of coffee, and read it now. No, seriously, go read it. I'll wait…

Ready? Let's review it together:

  • You can withdraw your money before age 59½ if you pay an additional 10% income tax (the “penalty”)
  • This tax only applies on the amount you withdraw, NOT the entire account balance.
  • Penalty-free methods for early withdrawals do exist: these include Roth Conversion Ladders and Substantially Equal Periodic Payments (SEPP).
  • In MF's simulations, simply paying the penalty outperforms after-tax investing to the tune of six figures over the portfolio lifetime, and comes surprisingly close to the more complex penalty-free withdrawal methods!

To quote the Mad FIentist,

“Even if you don’t want to mess with things like Roth Conversion Ladders or SEPP distributions, it still makes sense to max out your pre-tax retirement accounts and then just pay the early-withdrawal penalty! The Penalty scenario (Scenario 2a) has over $200,000 more than the Taxable scenario (Scenario 1) by age 60 and will provide an additional decade of elevated income during standard retirement!”

SEPP, Ladder, and 'Paying the Penalty' on top; Roth and Taxable waaaay below!
SEPP, Ladder, and ‘Paying the Penalty' on top; Roth and Taxable waaaay below!

This is an amazing result! And this isn't even taking into account the very real tax savings those of us in higher tax brackets get each year due to the reduction in taxable income. As I've said before – pay yourself, or pay Uncle Sam – the choice is yours!

Keep in mind, the results above are most dramatic when you move down to a lower tax bracket in early retirement. While this may not always be true for traditional retirees, it is generally a safe bet for us FIRE types who have high savings rates and plan to live on 4% of our portfolios in retirement.

Takeaways

OK, so what's the takeaway from all this? That for the vast majority of those pursuing FIRE, you should max out your tax advantaged accounts before you put a single penny of your money into regular, taxable investment accounts. Even with the extra 10% on early withdrawals, the tax advantages of these buckets blow taxable investing out of the water. To the tune of hundreds of thousands of dollars over time!

Of course, it's still wise to diversify your investment dollars between different tax buckets (taxable, pre-tax 401(k), and post-tax Roth, for example) because you never know what future tax law changes will bring. But this happens automatically as your savings rate increases: there will come a point when you'll max out all available tax-deferred options and still have a surplus of cash available to invest. MMM echoes this concept as on his blog:

“While I still advise maxing out any tax-deferred savings accounts like the 401k, you’ll also need to invest elsewhere simultaneously. My own strategy was in Vanguard index funds, a paid-off house, and some rental properties, but you will surely find other places depending on your own interests.”

This is where you'll contribute to a standard after tax brokerage account, or perhaps, take advantage of the Mega Backdoor Roth and fund the after-tax portion of your 401(k). But in the beginning, when you are deciding which accounts to prioritize, choose tax advantaged accounts first.

The big picture is that you need to max out these tax advantaged accounts while you can. Once you miss a year, that opportunity is gone. F-O-R-E-V-E-R. The tax-free growth over time in these accounts is so incredibly powerful, I could have been FI years ago if I started contributing to them earlier. I'm still kicking myself for waiting so long to max out my 401(k), IRA, and HSA accounts.

OK, enough talk about what I should have done. The wife and I have a large portion of our money in 401(k)s now, so how should we access our money going forward? Let's compare options and see how they apply to our specific situation.

Roth Conversion Ladder

The Roth Conversion Ladder is the method that gets the most publicity in the FI community. While relatively straightforward to implement, this strategy requires a five-year pipeline before you can start withdrawing money penalty free. This means you need extra savings to cover your first five years of FI.

Had I known this the last time I switched employers, I would have rolled** my old 401(k) into a Vanguard IRA to have more control over when I get to start the five-year pipeline process. But I was so excited about my new employers' VIIIX fund, with its amazingly low 0.02 expense ratio, that I rolled all that money into my new 401(k) instead.

We've since saved up almost enough in other buckets to cover my first five years of retirement, so the conversion ladder is still an option for us. But I'm not sure it's the best option since there are rumors that it might be going away in the next few years. Bummer. Luckily there are other options to consider.

§72(t) SEPP

Substantially Equal Periodic Payments (SEPP) is the IRS approved method of withdrawing money from your tax advantaged retirement accounts penalty free before the age of 59½. Let's analyze the IRS guidance on this together:

“If distributions are made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary, the §72(t) tax does not apply.”

Sweet! We can avoid the penalty and access our money. What's the catch? Let's keep reading:

“If these distributions are from a qualified plan, not an IRA, you must separate from service with the employer maintaining the plan before the payments begin for this exception to apply.”

OK – no issue here. I just have to quit my job and roll over my 401(k) into an IRA before starting SEPP withdrawals. I was planning on doing that anyway, no worries here. Anything else?

“If the series of substantially equal periodic payments is subsequently modified (other than by reason of death or disability) within 5 years of the date of the first payment, or, if later, age 59½, the exception to the 10% tax does not apply. In that case, your tax for the modification year is increased by the amount that would have been imposed (but for the exception), plus interest for the deferral period.”

OUCH. This is the catch. Once you determine your periodic payment, you have to stick to withdrawing that specific amount, every year, for five years, or age 59½, whichever is later. This means if I have a tough year, and withdraw a little more from my IRA, I am back-taxed 10%, plus interest, on all distributions I've ever received (even from earlier years!).

If you want to play with SEPP numbers, there's a good calculator over on Bankrate, and a nice clear write-up on Vanguard, but I think I'm ready to see what other options are available.

Just Pay the 10%

The simplest option of all is to just treat our IRAs like any other financial accounts, withdraw the money we need, when we need it, and pay an additional 10% income tax (on those specific withdrawals) until age 59½. Mad FIentist already showed us how paying the penalty performs nearly as well as the other two options above, with none of the tricky hoops to jump through or dangerous pitfalls if we mess up. Even with this “penalty”, we still save much more than we would if we simply invested in a taxable brokerage instead. As Bryan from Smart Money, Better Life writes:

“If there are months or years where I don’t need the IRA income, it just keeps growing in my account, tax-free. So it’s like a faucet I can turn on or off as needed. On the other hand, after-tax income is ALWAYS taxed even if I don’t spend it. It’s ALWAYS taxed. Did you hear me? IRA income is ONLY taxed when I need it. This right here can be the difference (when you take into account compounding) of a HUGE SUM over 30 years.”

As we saw in the MF chart above, this sum was over SIX FIGURES! This concept of IRA + Penalty being superior to after tax investing for early retirees was also discussed at length on Radical Personal Finance in this episode. Think about it: every dollar you take home in your paycheck is ALWAYS taxed, regardless if you spend it or save it. Put this money into a 401(k), though, and we're ONLY taxed at withdrawal time, on the specific amount we withdrew. The rest of the money can keep on growing, tax-free. Add this to the fact that I should be in the lowest possible tax bracket in FIRE and you can see why this makes so much sense.

Summary

To be honest, I haven't really added much to this conversation: Mad FIentist said it all! But after seeing so much confusion in the community on this topic, I felt the need to reiterate the importance of funding these tax advantaged accounts first and foremost so they have time to grow. You should have NO FEAR about accessing these funds in early retirement!

It doesn't really matter all that much if you choose the conversion ladder, the SEPP, or pay the additional 10% tax on withdrawals. What matters is that you max out your tax advantaged accounts while saving for FI, so you can save WAY MORE MONEY and retire even earlier. THIS is the point I want to emphasize: If you're not maxing out all tax advantaged accounts available to you, but are still investing after tax dollars, you need to stop what you are doing, right this second, and fix this!

I've seen many people bend over backwards and make crazy decisions to avoid this 10% early withdrawal tax. To me, this is silly… It's significantly more important to max out your tax deferred buckets early, before funding a taxable brokerage account. It's also important not to hoard a ton of cash (more than an adequate emergency fund). The natural consequence of these two heuristics is that you might find yourself in a position, at least in the first few years of your FI journey, where part of your FU money requires a 10% tax to access. This is not the end of the world – believe me, when I'm ready to say FU to a job, it's going to take a lot more than a small tax to stop me!

So what withdrawal strategy will the wife and I choose for our own situation? Perhaps we'll tinker with the conversion ladder first, and see how that goes. If laws change and this option disappears, we might talk with a tax professional about SEPP. Perhaps, to mitigate the risk of having completely fixed withdrawal amounts every year, I'll try out SEPP on my IRA, and then just pay the penalty on early withdrawals from my wife's IRA. The SEPP IRA would provide a fixed income, and the wife's could provide variable, supplemental funds, as needed.

The wife and I really like the simplicity of just paying the extra tax on withdrawals as we need it, however, so we may wind up just paying the penalty. We've saved a few years of expenses in other buckets*** like our Roth IRAs (whose principal can be withdrawn penalty free at any age), so we don't have to rush into a decision today.

As I start implementing some of these withdrawal strategies, I'll blog about it here so we can all learn as we go. The important thing to remember right now is that the money you contribute to tax advantaged accounts is all yours. It's not trapped until you are 59½. It's completely accessible at any time. It lowers your taxable income today. It grows tax-free. It's only taxed when you withdraw it, on the amount you withdraw. And for most of us pursuing FIRE, it blows after tax investing out of the water.

It's simply too good to pass up!

 

*Bonus reading: Tax code §72(t) is about halfway down the page here.

**Be careful when rolling over 401(k) or similar accounts to ensure you don't accidentally withdraw the money by mistake. While this is usually an automated electronic process, sometimes a paper check is involved. If you wait more than 60 days to deposit that check into an account of like kind, it's considered a withdrawal. While I say not to fear the penalty in this article… I'm referring to the additional 10% tax on small monthly or annual cost of living withdrawals… you definitely don't want to pay it on your entire portfolio balance!!

***If you're like me and your portfolio spans many different account types, I recommend reading chapter 30 of The Simple Path To Wealth, titled “How Do I Pull My 4%?”. Here, Collins goes through some great examples of the mechanics behind withdrawing money from numerous accounts and makes sense of what would be an otherwise tricky problem.

The Milestones of FI

**Update 7/17: The Milestones of FI is now a featured episode of the ChooseFI podcast! We elaborate on the content of this article, and discuss a few additional milestones as well. Check it out here.**

When my wife and I first discovered the financial independence community, we were beyond excited. We binged through the Mr. Money Mustache blog together, implementing all the changes he recommended as quickly as possible. We read every FI book we could get our hands on. We began carefully tracking our expenses, and optimized everything we could think of. We were, to put it simply, obsessed. After a few short months, our course correction was complete, and for the first time in our lives, we were speeding in the right direction to achieve true financial freedom.

And then… there was a bit of a lull. The cruise control was set, and so the excitement faded. “What do we do now?” I remember thinking to myself. I continued reading and absorbing as much information on financial independence as I could, but the big stuff was already taken care of. By the end of the year, I could feel my inner ten-year-old impatiently asking “Are we there yet!? Are we there yet!?”

It took another year or two before I truly understood that financial independence is actually a journey, not a destination. This then begs the question, “Where exactly am I on this journey?” It can take a decade or two to reach FI, so it’s important to occasionally zoom out and know where you are, so you can keep motivated and stay on course. Seeing the big picture also allows you to confidently pause your journey when ‘life happens’ without feeling like you’re moving backwards or giving up. So, I began searching the FI community to see if others had written more about this idea.

Jonathan and Brad, who I met at Camp Mustache earlier this year, have an excellent podcast episode about the ‘Pilars of FI’, which gives a blueprint for how to systematically progress on your FI journey. JD Roth and Joshua Sheets, who I also met at Camp Mustache, wrote great articles on the various ‘Stages of FI’ over at Money Boss and Radical Personal Finance. This concept is powerful, because it reinforces that financial independence is more than a simple destination, which is usually a surprise to those new to the FI community. Matt over at the Distilled Dollar discusses the ‘Phases of FI’, which frames financial independence as an ever-changing lifestyle.

So we have the ‘stages’, ‘phases’, and ‘pillars’ of financial independence, which tell us both where we're headed and how to get there. But how do we know where we are right now? What are the most common milestones we all cross on this journey, and when do we reach them? To answer these questions, you’ll need to first figure out your FI number.

What’s Your Number?

Mr. Money Mustache has an excellent post explaining how to easily calculate your annual spending. If you’re serious about making it to FI, you really need to know your specific expenses. For example, my wife and I are aiming towards annual spending of about $25,000.00 (we’re not quite there yet, but each year we carefully track our expenses and make budget improvements that get us a bit closer to that number). If our expenses seems small, keep in mind it assumes a paid off house, and absolutely zero dollars per year spent on interest.

To calculate your number, simply multiply your annual expenses by 25. For us, that’s $25,000.00 * 25 = $625,000.00. This number represents the total portfolio value needed to passively cover all annual expenses, forever, assuming the 4% rule inferred from the Trinity study. Note that this number is NOT the same as net worth: it doesn’t include the value of a primary residence, or other non-income generating assets.

I like to think of it like this: I need to save $625,000.00 to purchase a magic money making machine that will print me $25,000.00 checks, once per year, every year, forever. The laws of thermodynamics may forbid perpetual motion machines, but luckily there’s no law of finance that prevents perpetual money machines!

There’s only one catch: This magic money printing machine, which costs $625,000.00 to build, cannot be purchased on credit. It’s cash-only, I’m afraid! This means that your journey to FI might take a little while. If you have a 50% savings rate, for example, it will take you ten to fifteen years to reach your number. To help keep you motivated on your journey, let’s discuss the milestones of FI you’ll pass along the way.

FU Money

The first significant milestone on your journey to FI is saving up your FU Money. As we discussed in our previous post, FU Money is the cash you need on hand to feel confident enough to walk away from your employer for a year or two, should the need arise. The specific dollar amount you need will depend on your expenses and risk tolerance. For the wife and I, it was around 10% of our FI number, or roughly $60,000.00. FU money is different than your typical emergency fund, which you might already have. An emergency fund is designed to cover your most essential bills for three to six months in case of emergency. It's usually liquid, either in a checking, savings, or money market account.

FU money, in contrast, is a much more luxurious concept. You'll want to save enough to cover one or two years of regular (not just essential) expenses. This money doesn’t have to be as liquid as an emergency fund- it can be a percentage of your investment portfolio of stocks, bonds, or real estate, for example. With this milestone completed, you can walk away from your employer whenever necessary, because you'll have at least a year or two saved up to find another job, at your leisure. The confidence this brings is what makes FU money so powerful.

We actually had FU money saved up at the very start of our FI journey in 2014. Even with our previously outrageous six figure annual expenses, the wife and I thankfully still contributed to our 401Ks, giving us this FI jump-start.

Click for full size
Click for full size

Take a look at the chart I created above (you can click it for a full size version). Here, I've plotted portfolio value (in multiples of annual expenses) on the vertical axis, and time (relatively speaking, of course) on the horizontal. This chart is idealized, and assumes continuously smooth market growth, which of course isn't realistic. Your journey will be much bumpier… but will average out the same in the end. The idea here is to see a rough map of the journey to FI, and where the milestones lie along the way.

Half FI

When you save up half your FI number, a celebration is in order: You're now ‘half FI’! For the wife and I, this milestone was $312,500.00, which we passed in April of 2016. Because savings growth isn't linear, the time it takes you to save up this first 50% is noticeably longer than the time it takes you to save the next 50%. You've actually completed significantly more than half of your journey!

Click for full size
Click for full size

Half FI is also a meaningful milestone for working couples like my wife and I: assuming an even split in your expenses, it’s the point in which your better (and luckier!) half is completely FI. This should give you significant peace of mind, and is the perfect motivation to try new things: perhaps take a new job, go back to school, take a sabbatical, or even reduce your workweek! Buckle your seat belt, though, because the next milestone will be here before you know it.

Lean FI

Lean FI is what my wife and I call the point where you can passively cover all your essential expenses, perpetually. Think food, shelter, and bills. This leaves off all the discretionary frills such as travel, eating out at restaurants, Netflix, etc. It wouldn’t be a super fun lifestyle, but you technically could quit work right now and survive forever. I like to think of Lean FI as an emergency fund that can cover infinitely many months of essential expenses.

Click for full size
Click for full size

The wife and I analyzed our expenses and found that over 30% were discretionary, meaning our Lean FI number is about 70% of our full FI number, or $437,500.00. We just crossed this milestone a few months ago, in February 2017!

Lean FI is a huge milestone*: all your essentials are covered, and you're literally working for the gravy. Don’t like your job? Quit! You have all the time in the world to find a new one that suits you, assuming you live a lean lifestyle during the downtime. Whether you go back to work or not, you and your family can rest easy knowing you'll have food on the table and a roof over your heads for the rest of your lives! This is a great time to start ramping up a side hustle and ramping down full time employment, so you can gradually transition into your awesome FI lifestyle.

You might notice something exciting happen if you track your money close enough around this milestone. For the first time, your dollars could be working harder than you! This crossover point is surreal: I was shocked the first month our portfolio gains were larger than the earned income from our wages. I kept double and triple checking the accounts because I couldn't believe it! This doesn’t happen every month, of course, because the market doesn't always go up. But when it does, it’s quite exciting.

Flex FI

The next milestone along the way is what I like to call flexible FI, or ‘Flex FI’. This milestone comes when you’ve saved 20 times your annual expenses. The idea is that at this milestone, you could potentially pull the early retirement trigger if you're flexible with your annual spending! For those of you with side hustles or a large percentage of discretionary spending in your annual budgets, this is the perfect time to be bold and quit the day to day grind. Starting an annual draw here is equivalent to following a 5% safe withdrawal rate, which, according to the Trinity study, has an 82% chance of success, even if you are completely inflexible with your withdrawals.

Click for full size
Click for full size

Indeed, the 4% rule is overly conservative most of the time. In fact, if you study the tables, you’ll see that over 50% of sample portfolios end up with over twice the desired principal in the end. Which means that half the time, you have more money than you need, and could have safely pulled more than 4%. According to J.L. Collins:

“The authors of the study suggest you can withdraw up to 7% as long as you remain alert and flexible. That is, if the market takes a huge dive, cut back on your withdrawals and spending until it recovers.”

The Flex FI milestone, therefore, highlights an important concept: you can retire early BEFORE reaching the traditional FI milestone. As Mr. Money Mustache has alluded to a few times on his blog, the RE component of FIRE is dependent more on your personal risk tolerance and financial flexibility than it is on any specific number in your accounts. This should bring you an added sense of confidence and control when planning your early retirement. As long as you watch your portfolio carefully over the years, there’s not much to fear. Your worst case scenario, after all, is everyone else’s every day scenario: you go back to work.

The wife and I may exercise this option if a 20% ‘market adjustment’ strikes right as we're getting ready to pull the early retirement trigger, which is looking more and more likely. We'll need to have $25,000.00 x 20 = $500,000.00 invested in our portfolio in order to reach this milestone, which we are on track to accomplish this summer!

Get ready: The next milestone is the big one, and it’s coming up fast!

Financial Independence

You made it! You’ve reached financial independence. You’ve saved up 25 times your annual expenses, and with a little flexibility**, you can safely draw 4% on your portfolio, forever!

On Monday morning, if you decide to go to work, it's completely optional. You don’t need the money. You've finally attained the elusive ‘enough’ mentioned at length in ‘Your Money or Your Life’. What do you do now? Anything you want! Keep working if you like your job. Or retire early, whenever the mood strikes. Maybe work part-time on a favorite side hustle, or start working unpaid volunteer work. Whatever is meaningful to you, that’s what you should spend your time doing!

Click for full size
Click for full size

Your journey isn’t over though – far from it! Financial independence is just another milestone along the way. If you decide to keep working, your dollars are going to keep working too, earning more money faster than you can spend it. But if you decide to quit, your dollars will still keep working so you don’t have to!

The wife and I need to save up $25,000.00 x 25 = $625,000.00 in our investment portfolio to reach this milestone. At our current pace, we're expecting to cross this major milestone somewhere in the first quarter of 2018! If the markets make a 20% ‘correction’, as I suspect they might, this could push us back a few months, but as we discussed earlier, the Flex FI milestone is still there for us to fall back on.

Our plan right now is a bit of a hybrid: I’m planning on diving into early retirement as soon as we reach our FI number, while the wife is interested in a more gradual transition, reducing her hours and wading slowly into the early retirement waters. With this approach, we’ll be well positioned to weather any upcoming recession, saving up a nice safety cushion along the way.

Remember that this milestone is inherently tied to the 4% rule. In our post ‘How Long Will You Work’, I discuss how this rule came to be, and why it’s a great starting place for your FI planning. But some people might want to save up more of a safety margin, particularly those who don’t have side hustles or are less flexible in their annual spending. For those of you, the next FI milestone is just around the corner.

FAT FI

When you save up 30 times your annual expenses, you’ve reached what I like to call ‘FAT FI'. For those with very low risk tolerances, Fat FI provides a comfortable 3.33% safe withdrawal rate, which is, according to J.L. Collins, “as near a sure bet as anything in this life can be.” This milestone is essentially 120% of the financial independence number you’d calculate based upon the 4% rule.

Click for full size
Click for full size

To achieve this milestone, the wife and I would have to save up $25,000.00 x 30 = $750,000.00 in our investment portfolio. If we both continued earning at our current pace, and the markets remained somewhat stable, we would need to add on an extra year of work past FI to cross this milestone.

While some people may value the reduced risk, I’m not very happy with my career, so I’ll be pulling the early retirement trigger far before FAT FI. With side hustles in place, I’m sure our savings will one day cross the 30x expenses line, but I'm not going to sit around in a cubicle and wait for it!

Summary

The milestones above are just some of the many you’ll encounter on your journey to financial independence. For the wife and I, these are the landmarks on the trail that keep us motivated and on course. They allow us to look back at where we’ve been, and look forward to our next achievement. Each time we cross a new milestone, we pick up a bottle of Aldi champagne and celebrate being that much closer to our goals!

These financial landmarks make it clear that FI itself isn’t a specific number in your bank account, but rather just another milestone on your financial journey. With this in mind, retiring early can be decoupled from financial independence, and executed at any of the milestones in the second half of the the journey.

For example, you could retire when you reach the lean FI milestone, if you're willing to cut out discretionary spending. This could be a great choice if you don’t like your day job and want to focus on starting a side hustle, for example. Or, if you like your work, you could push early retirement back a few milestones and enjoy more gravy on your financial potatoes. Perhaps you'll take a break from work at the flex FI milestone, then go back part-time doing something fun a few years later. The choice is yours, and the possibilities are endless.

Over in the sidebar, I’ve added a countdown to our financial independence date, currently only 7 months away! This isn’t necessarily the date we’ll stop working- it’s just a best guess of when we’ll hit 25x our annual expenses in our passive investment portfolio. Of course, this is a moving target, so I’ll correct it from time to time as needed, and post updates here on the blog when I do.

I hope sharing these financial milestones keeps you motivated on your journey. Before you know it, you’ll be crossing them off at breakneck speed- just remember to slow down and smell the roses every once and a while. The journey is more important than the destination.

Where are you on your journey?

 

*Note that, in our chart, that the lean and flex FI milestones are pretty close together. This may look a bit different for you, depending on what percentage of your annual spending is discretionary. While flex FI will always line up with 20x your annual spending, the lean FI milestone may vary a bit on your financial map.

**Actually, you don’t need that much flexibility when following the 4% rule. You know that 96% success rate everyone quotes? That assumes a 50/50 stock bond split. Increase your allocation of stocks to a more reasonable 75%, and the success rate hits 100%. Check out the tables in the Trinity study, or pg. 213 of The Simple Path to Wealth for details.

The Power of FU Money

I’m writing this post from beautiful St. Simons Island, relaxing in the sun and enjoying a much-needed vacation away from work. A vacation which, interestingly enough, wouldn’t have happened if I didn’t leverage the power of FU money.

What is FU money? Well, I’ll let Jim Collins, the author of “The Simple Path To Wealth” tell you using his own, rather colorful language (video link – NSFW):

The concept is that when you have enough money saved up, you can leverage that nest egg in a way that brings you more negotiating power, more confidence to do what’s right, and the courage to stand up to the frequent BS policies that many employers force on their employees.

Perhaps you’re tired of going to daily standup meetings that you know are a waste of everyone’s time? Stop going! Upset your company revoked flexible work hours mere months after introducing them? Continue working that flexible schedule. Bummed that your boss just told you to cancel your family's Memorial Day vacation plans to work through the weekend?

You can see where I’m going with this. I don’t take nicely to demands. And neither should you! Now, I’m not saying to be flippant and storm out of work in a blaze of glory (although I have had such daydreams). You can still be respectful to your boss and colleagues, while simultaneously respecting yourself more. What most people don’t realize is that everything is negotiable, particularly when you have the confidence to walk away from your employer should the need arise. I put all this to the test last week at work, and here I am, enjoying my vacation. And yes, I’m still employed. 🙂

Idle Threats

A little over a week ago, my boss interrupted my morning status meeting to inform the software team that we’d all be working Memorial Day weekend to catch up on our schedule. As the team lead, I decided to push back a bit, trying to stand up for my already over-worked team. “What about those of us with travel plans?” I asked. “Plans need to be canceled” my boss said forcefully. “Everyone needs to commit to bringing our program back on schedule.”

At this point, I had a choice. I could publicly obey, and perhaps take the issue offline with my boss, hoping for some special treatment. Or, I could simply say ‘no’. It’s a perfectly valid, underrated option. “Sorry, I won’t be able to work that weekend” I said, knowing perfectly well that I had to be ready to accept the consequences of my disobedience. “I’ve had travel plans since January, and I’m not canceling them. I can provide support over email, however.”

My boss was not happy with my response. “This is not a request” he said sharply. He stared directly into my eyes. Now, this is the very point where most people slither into compliance, afraid of what would happen if they lost their job. And trust me, employers know this well. But the “will I be able to pay my bills if I lose my job” worry never even crossed my mind. I was ready and willing to fight for my hard-earned holiday and weekend time.

“Everything is a request” I answered back promptly. “I’m sorry, but I won’t be coming to work that weekend.” Clearly irritated by his inability to shake me into submission, my boss played the only card he had left. “You are all exempt employees, and you’ll be working the hours we tell you to work!” he exclaimed, running out of patience. It was unfortunate that things escalated so quickly, and I wasn’t thrilled about saying what I said next in front of the team, but it needed to be said.

“Let me be clear.” I spoke calmly but firmly, being sure to maintain eye contact as I spoke. “I’m happy to put in some extra overtime, but I will not be coming into work next weekend, or the Monday holiday. If you’d like me to come back after my vacation, I’ll be ready to work. If not, that’s fine as well. The choice is yours.” His expression changed. He had no more leverage. There was nothing he could threaten me with- I already told him I was OK with finding another job, and I made it clear it wasn't a bluff. What more could he say? He left the meeting, shaken.

An Unexpected Turn

My encounter may have been a bit harsh, and probably should have happened in private, instead of in front of the entire engineering team. But it was my genuine reaction to a wildly inappropriate attempt at management. You don’t get what you want by making demands.

Imagine, instead, if he came in and said: “Is anyone willing to put in some over time this week to help us meet this deadline? We could really use all the help we can get. I don’t want anyone to have to work the holiday, and if we really buckle down this week I think we can pull it together.” But he didn’t ask. He demanded. This is the sign of a novice in management.

A few days later, one of the VPs from corporate paid a visit to our facility. “Are you Joel?” He said, entering my office. “That's me” I responded, surprised to finally meet the face behind the name that most of us already knew. “I hear you’re not working on Memorial Day” he said in a playful tone. “You’ve heard correctly” I replied. “I’m taking my family on vacation to St. Simons Island that weekend.”

What ensued was a constructive, hour-long discussion about the program I’m a part of, the schedule trouble it’s gotten into, and what could actually be done to fix it. He immediately understood that the problems we were having weren’t going to be solved by a weekend of unpaid overtime. There were deeper underlying issues. We were understaffed. We had unrealistic milestones. He could see my passion for the program, and my frustration when I told him that management had ignored our warnings for months.

We brainstormed for a while longer, and came up with an actual, achievable plan to move forward. As he was getting ready to leave, he reassured me that I did the right thing. “Nobody’s going to fire you for taking your holiday. When you get back, you’ll have an additional engineer to help with the workload. And if you notice things getting out of hand again, please, call me directly. Have fun in St. Simons.”

You Don't Need to Be FI to Say FU

What a roller coaster! I had a feeling things would work out alright, because we were short-staffed, and losing me would have only put the already small team into even further jeopardy. But I was fully prepared to walk away from this job if that’s what it took to make things right. That’s the magic behind FU money: you can take more risk and enjoy more potential reward, while simultaneously hedging yourself against the worst case scenario.

Enjoy the view, or sit in a cubicle all weekend? I made my decision.
Enjoy the view, or sit in a cubicle all weekend? I made my decision.

Even though everything turned out well for me, I still feel for my coworkers. Most of them are working this weekend, even though they needed the break as much as I did. Some of them will likely burn out, moving on to other companies or even other careers. Some will stay right where they are, putting up with whatever BS management dishes out for another three or four decades.

But hopefully, some will discover the FI movement, and start saving the majority of their dollars. And in a few years, when the boss wants them to do something unreasonable, they’ll push back too, knowing with full confidence that they can weather any financial storm that may ensue for doing so.

You don’t need to be fully financially independent to enjoy the power of FU money. In his first podcast interview with the Mad Fientist, Mr. Collins described saving his first five thousand dollars at a summer job, and putting in his two weeks notice when they denied him time off for a month-long vacation overseas. Stunned that he’d actually walk away, they decided to keep him on payroll and re-assured him that his job would be waiting for him when he returned. More often than not, those who are willing to take the risk enjoy the reward, and that was certainly true in this case.

The Piece of Mind of No Debt

All you need to start enjoying this super power for yourself is a few months worth of savings. The lower your debt, the lower your monthly bills, and the quicker you can save this money up. Once you start demolishing your interest payments, you create a snowball effect that is quite powerful. You don’t need to pay everything off to start enjoying the benefits of FU money, but let me tell you first hand- it sure feels good to be debt free!

This month, the wife and I completed the final piece of this puzzle for ourselves by paying off our last piece of debt. In our last post, we discussed the sale of our rental property from hell, but we didn’t say what we did with the proceeds. After some deliberation, we decided to use this money to pay off the mortgage on our current house, and I’m happy to say that we are now completely debt free.

Gone, but never forgotten. RIP mortgage.
Gone, but never forgotten. RIP mortgage.

I know there’s a heated debate in the FI community about the pros and cons of paying off mortgage debt. I’m well aware of the ‘power of leverage’ and the standard adage of making more by investing the money instead. But in our particular case, the math was in our favor. Paying off our mortgage was the right decision for us, not just financially, but also psychologically. You may find that like me, you’re much more likely take risk when you know you have a paid off place to sleep every night.

I’d like to show you the math behind the decision-making, but it’s significantly more complex than just comparing interest rates. There are many variables: the amount you have free to invest each month, the amount of your mortgage payment, the timeframe of your payoff, the list goes on. And since I’m on vacation, I’ll save these juicy details for a future post. One that shows why I’ve never believed in the phrase “good debt.”

Summary

Having enough money saved up to put yourself first is priceless. Being able to stand up for what's right and push back against corporate BS is just one of the many perks of having FU money. Forget financial independence for a moment- FU money is something I would recommend for everyone, regardless of your goals or retirement plans. It's the first (and most essential) step on the ladder to FI.

With a large pile of money already saved up, paying off our mortgage was just icing on the FU cake. The wife and I can now rest easy knowing that no person, or bank for that matter, has any financial leverage over us. I can raise the deductible on my homeowners insurance as high as I’d like, for example. Or get rid of that insurance entirely if I see fit! And I'm no longer paying interest on something I can afford not to pay interest on. Every single one of my dollars is free to work for me now.

And soon, the same will be true about my hours. When I pull the FI trigger, I'll no longer be giving any corporation the majority of my free time. I'll get back those precious 50 hours a week, and they can once again work for me, for the first time since summer vacation after high school. After some updated number crunching, it turns out that the wife and I are closer to FI than we originally thought! I’m excited to share our latest projections, and our countdown to FI… on the next Financial 180!