Flavors of FI
FI can be many things – in fact it can mean very different things depending on who you talk to. To help codify it a bit, the FI community has come up with a few terms that help explain some of the different strategies. Note these aren’t the only ones, just specific ones that the community has decided to name.
Working towards FI
You’ve built up enough of a portfolio that you can stop contributing to it and have enough when you want to retire thanks to organic growth. To some, it also implies that they can not try as hard at work for things like promotions or raises since it wouldn’t make the difference to their retirement date.
Similar to CoastFI, BaristaFI is where you built up enough of a portfolio that it can organically grow large enough by the time you want to retire without contributing to it anymore. The difference here is the focus on keeping a job mostly just to not have a large increase in extra expenses that one wouldn’t have with a job that gives you health benefits, which can be very costly if one retires early. The term barista doesn’t mean one has to become a barista, but it’s used to imply one could take the lowest paying full-time job that still gives health benefits (like being a barista at Starbucks).
Leveraging FI to retire
Just plain FIRE has no connotation other than simply being financially independent and retiring early. Nothing more, nothing less. The other terms are basically the two extreme positions in FIRE (living small or living large).
The easiest way to FIRE purely from a numbers game is LeanFIRE. You optimize your budget to be extremely small so that you don’t need a large portfolio to FIRE with. The downside is whether you want to live off of that budget or not – which is a decision that must be made realistically and with life goals and happiness in mind. If you can be happy on a small budget without becoming miserable, and don’t want to leave something like an inheritance, then it’s a great option.
If you can build up a portfolio so large that you can spend money on anything that you want without holding back (whatever you’re into – boats, vacations, cars, etc.) then you are FatFIRE.
There’s quite a large following that’s obsessed with passive income. I mean, the value-prop is pretty great: Do less. Make more.
Thanks to mortgages, real estate can be a great way to leverage a relatively small amount of money against large assets that both grow in value (as they get paid off) and can provide income along the way as long as you can handle tenants, repairs, etc. You might consider this passive-ish income depending on how hands you have to be.
Investing in the stock market can give you regular income if you focus on having a portfolio that provides dividends regularly. It’s basically a forcing function that guarantees (for the most part) that you’ll continuously get financial value rather than just at the end after a stock has gone up.
- Learn new skills and switch industries – for example, a rising software industry desperate for talent can be a great new career. Boot camps try to make it approachable and quick-to-work and can be a great leveraging tool assuming you put the work in.
- Take a second job – working nights and/or weekends is a viable way to get some more dough.
- Switch jobs – it’s often easier to get a pay raise by finding a new employer than convincing your current employer to give you more money. It’s a common sad reality that’s fueled by companies not increasing salary matching the market due to many people not leaving simply due to convenience.
- Take the initiative – Grow in your current job and take more responsibility, which can bring great rewards.
Rewards can be a great way to get income from spending that you’re already doing. It’s not so great if you spend money you weren’t going to spend already, because then the rewards are worthless since they don’t cover the new extra costs. Note that these can often be taxed similar to income so it’s not necessarily free money.
Bank Account Churning
Some banks wil give you incentives to become new customers. For example, you can get cash by opening checking or savings accounts. Usually there are caveats about how much money you add, how long it stays there, and how long the account has to be open. They’re not all worth it, but when the opportunity rises it can be pretty low-effort money. A great resource for this is Doctor of Credit.
Saving for anytime
High-Yield Savings Accounts
Large liquid funds are best kept in high-yield savings accounts that give you high interest rates (currently above 2%). This helps your cash not be devalued from inflation. If you keep a large amount of money in checking or low-interest savings account, you’re losing money.
As opposed to retirement accounts that you can only get access to (without large penalties), brokerage accounts give you the same great growth potential with the ability to access the funds whenever they will be needed. You can be speculative and choose stocks that you believe will go up by the time you would need to take money out, or you can be safer and go with index investing to give you the same growth as the entire stock market domestically, abroad, or even the entire world.
Saving for later
Saving for retirement often has two options that you can use: saving using pre-tax or post-tax money. Both have great benefits and many utilize both to leverage not knowing which statedgy would work best.
Pre-tax Retirement Saving
Saving for retirement into pre-tax accounts (traditional 401ks, IRAs, etc.) allow you to put money away now without paying tax and delaying paying tax until you start taking money out at retirement age. If you project that you’ll have less income at that time, this is a great way to essentially get free money now to invest for retirement.
Post-tax (Roth) Retirement Saving
In addition to pre-tax retirement saving which give you tax benefits now, post-tax retirement saving can allow you to put money into retirement accounts now and not have to pay taxes on the gains. This is a great option if you think that your income when that time comes is going to be larger than now, which would put you at a higher tax bracket.
Pre-tax to post-tax Conversion Ladders
What if you could get the benefits of both pre-tax and post-tax savings with the same contributions? That’s where Roth conversion ladders come to play. Basically you contribute pre-tax dollars and later on when your income is low enough to be in an extremely low income bracket, you take funds from the pre-tax accounts and put them in the post-tax accounts (making sure to only take out enough funds to not hit the higher income brackets). For example, if you take a sabbatical for a year and only make $20,000 in the calendar year, there’s a lot of potential room to add income that doesn’t increase your tax bracket.
Credit Card Utilization
Using cash these days should in general really only be done when credit cards aren’t accepted or if you can’t control spending using a card. Using cards for purchases that you would otherwise use cash for can be a free way to get rewards that include things like cash back, air miles, hotel discounts, etc. Credit card companies mostly make their money by charging vendors to be able to take the credit cards, which at a macro level likely increases the amount that has to be charged, while credit card rewards give you some of that back.
Credit Card Churning
Credit Cards often give large rewards for new customers. Since those bonuses can be much larger than the normal ones you get, many people optimize to get as many of those bonuses by signing up for new cards regularly.
One large positive that real estate can give is increased cash flow after there isn’t a mortage. Unlike renting which goes on indefinitely, once a mortage is gone the only housing payments are taxes, repairs, etc. which can be a huge boon to increasing cash flow. The main problem in the immediate term is getting there can take usually 15 to 30 years, so this is often a long play.
Here are some strategies to keep in mind when working towards FI with an eye towards retirement.
The 4% Rule
While many people argue about the exact percentage, the 4% rule accepts a very simple rule that one can use to plan for how large of a nest egg they need in order to be able to retire. The rule says that you can safely take out 4% of your portfolio every year during retirement (which takes into account growth and inflation) since on average the portfolio will still be positive in 30 years. Many assume a lower percentage is safe to take out to account for potential catastrophic events at the wrong times or longer retirement timelines if retiring early.
An important distinction between early and normal retirement that one has to take into account when planning for, is where to put funds. Traditional retirement is highly optimized for explicitly not allowing access to funds until traditional retirement age (around 70). Because of that, if you want to aspire towards early retirement, you have to build a portfolio that has a mix of funds including a large post-tax non-retirement-account position that you can use until you hit retirement age. You will likely want a mix of non-retirement and retirement accounts to allow yourself to reap those tax savings once you hit retirement age.
Traditional retirement basically involves all the mostly-known strategies (contribute as much as possible to retirement accounts to reap tax savings). 401ks, pensions, etc. are the name of the game here.