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You don’t need to be Financially Independent to Retire Early

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You don't need to be financial independent to retire earlyFirst, what is Financial Independence? It’s that euphoric state where you don’t have to worry about money (much) anymore. Your passive income is higher than your expenses and you don’t have to work if you don’t want to. I have been sharing my views on Retire By 40 for 3 years now and many of our readers are actively pursuing financial independence (FI henceforth.)

Most people think they need to achieve FI before quitting their job/career. This is one path to follow, but it’s not the only way. Personally, I think it is a huge misconception and I would like to change that.

Reach for FI

FI is pretty simple and there are only two ways to reach it. There are only two variables – income and expense.

  1. Increase your passive income. It takes money to make money and you need to work your ass off to build up your passive income streams. We have income from rental properties, dividend stocks, peer to peer lending, and interest bearing accounts. These are not quite enough to pay for our cost of living yet, but we made up for that in other ways.
  2. Cut your expenses. If you cut your living expense enough, you’ll reach financial independence pretty quickly. This is extremely difficult for us because we like the way we live now. We could buy an RV and instantly become financially independent, but we don’t want to live that lifestyle at this point (or ever says Mrs. RB40.) I’m sure most of you are in the same boat.

FI is not easy

While FI is a simple concept, it is not easy to get there. Most people work all their lives and don’t have much retirement savings by the time they turn 65. FI is even more difficult for people who want to retire early. If you want to retire by 40, your time line is compressed in half and it’s practically impossible to reach FI unless you work hard and are really lucky.

Fortunately, you don’t have to reach FI to retire from your career. You just need to get close and then use other means to bridge the gap. Let’s explore a few options.

Protip – Take your yearly expense and multiply it by 25. If the result is lower than your net worth, then you are close to Financial Independence.

Work part time

First of all, I am very glad I am not an engineer anymore. It’s stressful and it’s a lot of work. Our family is much happier overall now that I’m a stay at home dad/blogger. Our monthly expense is actually not that high and I only need to make about $500/month to help cover it. For most of us, it should not be difficult to make $500/month. If you play your card right, that’s just a few hours of consulting per month.

I wouldn’t have been able to stop working completely anyway. Think about it. If someone works hard enough to approach FI, they must have been very industrious. It’s not easy to just stop working completely and I’m sure none of us would want to at the young age of 40. It’s better to downshift and coast a bit by working less.

Take advantage of the workaholics

Our family is extremely fortunate that Mrs. RB40 is a workaholic. She likes working and she doesn’t know how to stop. Maybe when she is older, she’ll learn how to relax. This is good for our family though. She can work and enjoy the professional life for 12 more years. Her income enables me to leave my career without having to worry too much.

Generate future passive income

You can spend your time creating future passive income streams. You can invest some time into creating a product like a book, a course, or an app. If you are lucky, you will be able to sell these products and generate some passive income. There are endless ways to make money, you just need to go and do it.

Cut expense drastically

Of course, you can cut your expense drastically, too. This one is easier if you’re single. You can relocate to a cheaper country like Thailand and enjoy a comfortable standard of living on the cheap. Good luck convincing your spouse and kids though. One of my college roommates has been trying to convince his family to move to Belize for years without success.

Quit before reaching FI?

Here is the bottom line – it is entirely doable to retire from your corporate career before reaching financial independence. You just need to get close and figure out how to bridge the expense gap. Working part time is the easiest way, but it is not the only solution. If you don’t like your stressful job/career anymore, then it might not be worth it to stick around 3-4 more years to achieve FI.

Do you plan to be financially independent before you retire? How much more time do you need to get there? 

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{ 65 comments… add one }
  • Frihetsfonden October 11, 2013, 12:32 am

    My goal is without a doubt to leave my current job before I have passive income to cover all expenses. However, I hope to cover the gap with revenues from other projects.

    • retirebyforty October 11, 2013, 9:06 am

      Good luck!

  • FrugalSage October 11, 2013, 1:10 am

    To answer the question. Yes. I doubt I would retire unless I was financially independent. I would determine the date when I’m ABLE to, and then probably work an extra year or two as a buffer.

    I started late compared to most of my peers, and only started work 5 years ago. If it was just for myself, I think I’d be able to retire fairly comfortably in 15 years time.

    But with potential wife and kids on the horizon it makes the future more difficult to judge.

    I’ll just keep trudging along doing what I need to do to move in the right direction. I think I’ve already caught up and perhaps surpassed the majority of people my age.

    • retirebyforty October 11, 2013, 9:08 am

      Good luck! Keep at it and you’ll get there someday. A family will complicate things, but maybe you’ll be lucky and land an understanding workaholic. 😉

    • Jerome November 27, 2013, 7:08 am

      That is exactly what we did. We reached FI when I was 38 but I kept on working for another 2 years. Just as I wanted to quit, the company I worked for was taken over. I expected that this could give us a nice unexpected windfall which it did after another year. So I was FI with a buffer and free at 41. The buffer came in very handy when the credit crisis struck in 2008. We never worried much and have since added about 50% to our net worth.
      I am married and have 5 kids. We have found that 5 kids basically double the expenses. But like the OP, I married a workaholic wife who got bored doing nothing and started a company which gives us a nice second income. This we have mainly used for building a study fund for our children.

      • retirebyforty November 27, 2013, 11:21 pm

        Oh wow, 5 kids. Seems like it would more than double expenses. Congratulation! It sounds like you are enjoying the good life right now.

  • Mike October 11, 2013, 2:36 am

    My main goal is to simply get what I have going over $500 a month average. I have managed to hit it once or twice in the past year, but I still have a long ways to go before I can enjoy that! From there, I plan to increase it more so if I need to have a sudden career change, I can weather it (or a period of unemployment without needing to really work much).

    • retirebyforty October 11, 2013, 9:09 am

      $500 buffer was my goal when I left my job too. That seems like a nice safe number.

  • C. the Romanian October 11, 2013, 2:50 am

    Financial independence is something that I’d love to achieve, but I know that it’s different to achieve, especially when living in Romania. However, right now my aim is to be able to become a digital nomad. I have a location independent job for 5 years now (blogger) and I have managed to create enough revenue to cover for the expenses of my family and save a little too. My main goal is to keep working and increase that income, hopefully being able to create some passive income streams as well and then start visiting the world, three months per country, while also taking care of my online business. It’s not an ongoing vacation, it’s not financial independence, but it’s still something that sounds incredibly nice for me.

    • retirebyforty October 11, 2013, 9:10 am

      That’s an attractive lifestyle. I’m curious to see how it turns out. It’s so new. I’d love to travel around too. When Mrs. RB40 retire, we’ll do that.

  • Michelle October 11, 2013, 5:36 am

    Today is the last day at my day job, and I am switching to my online business. It’s not retiring early, but it sure does feel great 🙂

    • retirebyforty October 11, 2013, 9:11 am

      Congratulation! Enjoy your last day at the grind. 🙂

  • [email protected] October 11, 2013, 5:54 am

    Thanks for this post!

    We have two rental properties that will be paid off in approximately 12 years. We are hoping to buy at least one more in order to create at least $3,000 of rental income each year. At that point, we should be able to quit and do side hustles and keep ourselves afloat without quitting “work” altogether. That is the plan, anyway. We’ll see how it goes!

    • Insourcelife October 11, 2013, 6:54 am

      “to create at least $3,000 of rental income each year”. I think you mean each month… Otherwise I’d love to hear about your extreme frugal living.

  • sendaiben October 11, 2013, 6:09 am

    I am hoping to end up with a three-legged stool: my day job, my investments, and my passive and consulting income.

    Ideally each of these would produce enough to cover our monthly costs: together they give us a reliable margin of safety.

    I’m lucky in that I love my day job, but don’t want to be dependent on it.

  • Insourcelife October 11, 2013, 6:49 am

    I agree that you can quit your present career before you reach FI, but you won’t be “retired early” so the title is a bit misleading 🙂 And I am not trying to define retirement in the narrow sense of not working at all, but at least for me – in order to be any sort of “retired”, one needs to not be financially dependent on others. Hence there is no retirement without FI.

    Most of the time what keeps people working the same jobs is the difference between what they make now and what they can make if they quit. I can absolutely quit now and do something else, but I guarantee that this “something else” is not going to bring in as much as I currently make unless the amount of work is drastically increased or I get lucky. Personally, I would much rather work a few more years saving 60-70% every month and become FI first and THEN I can quit and try other business ventures. If I were singe, things might have been different but with a family I have to be a bit more realistic.

    • retirebyforty October 11, 2013, 9:12 am

      It is a bit misleading. It’s just one option for people who can’t stand their job anymore. 🙂

  • Pretired Nick October 11, 2013, 7:22 am

    This is why I call myself “semi-pretired.” I do consulting four hours a week (more this week) to cover my bills. I need to build up my Pretirement Fund a bit more to call myself fully pretired, but since we decided we’d rather have one of stay home with the baby, it makes sense right now.
    I think this is a really important post and will really help clarify things for folks.

    • retirebyforty October 11, 2013, 9:13 am

      Yeah, semi pretired is better. I’ll stick with retire for better SEO though. 😉

  • EL @ Moneywatch101 October 11, 2013, 7:28 am

    I have a goal to be FI between 45-50, hopefully I can do a mix of reducing expenses and increasing income to help me get there sooner rather than later. I just want the freedom to do what I please and not for the benefit of corporate CEO’s. (Bonuses of over a million dollars is ridiculous in my book)

    • retirebyforty October 11, 2013, 9:14 am

      Yeah, I can’t stand those CEOs. It’s ridiculous how much more money they make than the regular employees.

  • Corey October 11, 2013, 7:38 am

    I love this post – everyone else always talks about FI being the point where you can call it quits. Of course, as Sam has pointed out, it only works if you’re married – but that’s okay in my book.

    It definitely seems risky when I think about it, but I still have 15 years or so before I will consider it. I’m definitely on the right track considering that Mrs. 20s loves to work as well, and is on a nice career path (with potential to earn more than me). I personally would like to have my primary residence paid for so that our expenses are drastically lower – that way I wouldn’t have to worry about income as much.

    I like what you’ve been able to accomplish. If retireby40 continues to do well, maybe Mrs. RB40 will reconsider her stance on early retirement.

    • retirebyforty October 11, 2013, 9:15 am

      Mrs. RB40 is so restless. There is no way she can quit working anytime soon.
      It’s great that Mrs. 20s has a nice career ahead of her. Keep at it and you’ll get to FI sooner or later.

  • [email protected]&More October 11, 2013, 7:58 am

    I plan on being financially independent before we both retire retire, but I could see us changing things up a bit before we hit FI.

  • Savvy Financial Latina October 11, 2013, 8:28 am

    Both my husband and I have decided financial independence is our goal in life. Honestly, I would love to be a digital nomad. I like working, but I enjoy working on my own terms even more! Not having to deal with politics at work would be so great.

    • retirebyforty October 11, 2013, 9:16 am

      The digital nomad lifestyle certainly is attractive. Good luck!

  • davidmichael October 11, 2013, 8:53 am

    Financial Independence is a wonderful goal, particularly these days when job security is so tenous. I have been retired for 20 years now. Every five years, my wife and I go back to work for one to three months a year over a five year period, to bring in extra income to refill our cash bucket which we keep around $60,000. Right now we are working at Amazon.com at one of their Fulfillment Centers. It’s hard, physical labor in a factory/warehouse setting, nothing like my professional career in college teaching. And, I am grateful that Amazon hires workampers (mostly seniors) at three different locations in the USA who live the RV lifestyle.

    I mention this because there are all kinds of ways to supplement your income, as Joe says in this blog. The nice thing about seasonal work is we work hard for a few months and then it’s all over. Freedom! Yahoo!

    • retirebyforty October 11, 2013, 9:17 am

      I really need to get a guest post from you one of these days. I want to see how the readers react to your lifestyle. I like the idea of working once in a while.

  • Done by Forty October 11, 2013, 9:13 am

    It’s a simple idea but I hadn’t seen someone put it into words before, Joe. I generally think of early retirement & FI to be linked, and kind of binary concepts. They can be, but it’s probably rarer than I think it is. Probably a lot more common to find people retiring early without being fully FI, but bridging the gap like you say. I think we’ll be on a very similar path as you and your family are, since my wife wants to work for a while after getting her PhD.

  • wallet engineer #1 October 11, 2013, 10:00 am

    I recently started a side hustle to quicken FI as well as provide side income when I get there. I’d love to live in Belize( or Thailand)!

  • krantcents October 11, 2013, 12:39 pm

    I think it is all about your goal in life. I wanted a certain lifestyle and have the wherewithal to support it.

  • Lisa E. @ Lisa Vs. The Loans October 11, 2013, 1:21 pm

    When multiplying my expenses by 25, should it be lower than my net worth including or excluding house value/mortgage?

    • KM October 12, 2013, 2:49 pm

      This is slightly more complex than inclusion/exclusion. Owning the property you live in actively reduces your expenses (you don’t have rent to pay but the total cost vs rent may still be higher if you’re early in your mortgage) and therefore the 25 times expenses total is reduced but you still must increase your expenses to include any mortgage payment unless you see them stopping anytime soon. The money you hold in equity I would not include in your net worth as you cannot put it to work to earn income….it is already working to reduce expenses (double counting otherwise), unless you’re going to sell it and reduce your housing requirement. For simple maths exclude the equity from net worth and include all housing (interest, taxes, maintenance) associated expenses before multiplying by 25.

    • retirebyforty October 12, 2013, 9:28 pm

      To be safe, let’s exclude the primary residence.

  • Justin @ RootofGood October 11, 2013, 7:47 pm

    I retired at 33, but I had planned to keep working till 35. My last job ended suddenly and unexpectedly, and after a day or so of soul searching (and reviewing my financial model and retirement plan) I decided I was “close enough”. We had more than 25x expenses saved and invested, and like you, my wife is still working too. From a cashflow perspective, my wife’s take home salary pays our expenses, and we still manage to save a good bit of her income each month.

    If we end up a little short on income down the road, I don’t foresee any problems in finding some part time or temporary work that pays okay. Okay equals $15/hr to me. 10 hours per week at that rate would produce $600 per month of income, and cover about a quarter of our expenses. Or provide some serious funny money to go on more vacations or buy some toys.

    When I’m talking to people still working, I’ll often see what kind of part time opportunities they have at their employer or that they have heard of. That magic $15/hr number comes up often. For a college educated reasonably responsible person, that must be the value you can get for an hour of work even when it is part time and temporary.

    It is always smart to have a Plan B (as you have discussed here before!) and Plan B might be pick up some part time work to make a buck if your investments don’t quite produce what you need to live comfortably (and your wife isn’t willing to downsize! 😉 ).

    • retirebyforty October 12, 2013, 9:30 pm

      Just a day? That was quick. 🙂

  • Dividend Mantra October 11, 2013, 7:59 pm

    Joe,

    Great post!

    This is something I think about. Personally, I dislike my job to a fair degree. I often think about “coasting” once the finish line is within sight. I wouldn’t mind moving to part-time work once my dividends/passive income cover, say, 75% or so of my expenses. At that point, making $500 or so per month, as you point out, wouldn’t be terribly difficult. Of course, more time means more energy to spend on passions and projects that will probably bring in some type of income anyway. The more I think about it, the more I like that idea!

    Best wishes.

    • retirebyforty October 12, 2013, 9:32 pm

      That’s right. If you work on something you like and make $500/month, that’s a great situation. This is especially true if you are self employed or own a business. You might start out with $500/month, but it will grow as you keep at it.

  • [email protected] October 11, 2013, 10:52 pm

    Besides my 401K my key drivers are my real estate holdings. Once paid off that is the key to my future financial independence.

  • Felix Lee October 12, 2013, 6:44 am

    I started saving for retirement right after I got my first decent job. It may not be that much, but at least I am already starting. My plan right now is to finish any financial obligations I may have early before I retire.

  • Bryce @ Save and Conquer October 12, 2013, 10:56 am

    You have to be careful using your Protip at 40. Comparing your portfolio value to your annual expenses multiplied by 25 comes from using a 4% safe withdrawal rate (SWR) from your portfolio. A 4% SWR was something that came out of the Trinity study. The Trinity study only looked at making your money last for 30 years. A 4% SWR is probably too high for someone in their 40s who will need their portfolio to last for possibly 50-60 years.

    • retirebyforty October 12, 2013, 9:34 pm

      That’s why it’s just close to FI. 😉
      3-3.5% is probably better for early retirees.

  • Micro October 12, 2013, 2:32 pm

    I’m not sure if I’ll have the courage to quit work before I can safely hit the 4% mark. I know I’ll be doing some type of hobby work after I leave my full time job but I have no idea if I’ll be successful. If I have enough cash in the reserves, I don’t have to worry about if my hobby work fails miserably. 🙂

  • Dear Debt October 12, 2013, 7:24 pm

    Great article, Joe! I hope to get there at some point after I’m debt free. If I can re-allocate my 1k-$1.5k per month towards debt to savings and investments, I’ll be good!

    • retirebyforty October 12, 2013, 9:36 pm

      Keep at it. 3 years is a long time, but you’ll get there someday. It sucks that so many people have so much student loans.

  • moneystepper October 13, 2013, 6:31 am

    I currently plan to be FI before I quit work. At the moment, I think that this is about 10 years away, but at only 28 this doesn’t feel like a bad position to be in.

    • retirebyforty October 14, 2013, 9:53 am

      38 is not bad at all. Good luck!

  • [email protected] October 13, 2013, 7:23 am

    I definitely will be comfortable retired at age 55/56 as I have a pretty nice pension. It would be great to be financially independent before then, but I don’t know if I can give up the pension benefits. They don’t call it golden handcuffs for nothing. Plus living in NYC is very expensive and I’m not sure if we’d want to move to a lower cost of living area. We don’t know what the future holds so we’ll see. Definitely trying to work on my passive income and cutting expenses though.

    • retirebyforty October 14, 2013, 9:53 am

      Pensions are great! I wish I had one. 🙂
      Maybe we can visit you when we’re in NYC at some point.

  • Mom @ Three is Plenty October 14, 2013, 9:09 am

    We’re waiting until the debts are paid off to make a final “plan”, but the current plan puts us not needing one person’s income after debts are paid off (except mortgage), and not needing both incomes by the time we’re early to mid-40s (about 10 years from now). I’m a workaholic as well, but I can easily transition into part time work as I’m already a consultant, but Dad hates his job, so he’s likely to be the first to leave the work force.

    • retirebyforty October 14, 2013, 9:53 pm

      Good luck! Part time work is great. It’s flexible and you won’t be as stressed out.

  • Pichiri October 23, 2013, 4:53 pm

    Of all the ways mentioned I think cutting expenses alot is really helpful ,living off 50% or less is helping me save alot.

    In my opinion working part time before reaching FI puts you into a semi-retired category,since you are working for “the man” in a diminished amount still.

    My main problem is with passive income.
    I would LOVE to invest in index funds if the possibility were there but I live in Aruba,ya know the one from one of those songs in the middle of nowhere in the caribean.If there is investing of any such reasonable kind I haven’t seen it available.

    What is one to do when this option is not there to make your money grow?Real estate?

    • retirebyforty October 23, 2013, 11:25 pm

      You can always work for yourself too. 🙂
      Aruba sounds great. I have no idea about investment there though. Maybe real estate or a small business?

  • RioCanyon October 28, 2013, 8:34 pm

    I finally have my better half on board with “The Plan”. We have two rentals in addition to our basement that we also rent out. The plan is to move 2-3 more times using owner occupied to get a good rate and to not have to put so much down (will commit to a 5k nest egg for each rental). Although moves are stressful, this will allow us to get a good cash flow from 3-4 properties in the next three years so the partner can just work part-time. Along with our cash flow from the rentals, part time coaching from both our ends will cover expenses, plus give us savings each month for other investments as well as chipping away at the rentals.
    Our little man is only 2 and so by the time he is 5 we would like to be settled in our “dream” home to start establishing roots and be in the school district we want.

    • retirebyforty October 29, 2013, 8:28 am

      Sounds like a good plan. Rental properties are a lot of work, but many people have successfully used them to bridge the gap to retirement. Good luck.

  • AB October 30, 2013, 11:06 pm

    Good article. FI is achievable through combination of both expense reduction and asset building. The former is rarely talked about in financial media. Using your 25X guideline, for every $10K reduction in annual living cost, one needs $250K less assets to achieve FI. We are a family similar in age to you, RB, and have one young child. We relocated to Asia 4 years ago, where we are living a comfortable lifestyle spending just $25K/year (having a maid, good 4 bedroom house on rent, decent car etc.). Our actual spend for the last 12 months was $25,700, and we have about $900K in retirement assets invested (not counting about $250K worth real estate investment in the country we are living in, as an inflation hedge for future). So, from our experience, your goal is easily achievable if you move to Thailand or any other low cost country that you prefer. Social Security is 20+ years away for us, and at age 67, it may kick in another $1000/month. Do you believe we should count on SS? If you are living abroad on relatively low expenses, another $1000/month is a real boost. What is your view on SS?

    • retirebyforty October 31, 2013, 11:00 pm

      Thanks for sharing your real world experience. $25k/year isn’t bad at all. The lifestyle sounds great too.
      I think we should still get Social security benefit. It might be reduced or delayed, but we should get something.

  • TomB January 5, 2014, 10:32 am

    A little late to the party here but I had to comment as my fiancé and I were just discussing the idea of maybe not being fully FI, but going into semi-retirement on a cheaper island (we currently live in grand cayman) and doing enjoyable part time work in the tourism industry like stand-up paddle boarding / kayak tours.

    The reality is I think it would be pretty difficult for either of us to go from 40-70 hour work weeks to having all the time in the world on our hands. Having a little structure in our lives working 2-3 days a week in a less stressful and more enjoyable job could offer us a smoother transition to FI.

    • retirebyforty January 5, 2014, 11:51 pm

      I’d love to live in the Caribbean for a couple of years. I think semi-retirement is a great option for many people. It will be hard to stop working completely.
      Good luck!

  • E Dubya January 9, 2014, 11:46 am

    This is what I long to do, but the numbers aren’t quite strong enough yet. You all should be thankful for you workaholic spouses. 😉 Neither my husband nor I have that gene, but things sure would be a lot easier if one of us was still wanting to work full time.

  • TakingTheLeap January 9, 2014, 4:41 pm

    I do struggle a bit with the idea that you don’t include harvesting some capital gains as an additional source of income. Why is that? If my investments appreciate 7% in a particular year, I should be able to sell up to that 4% mark and be ok, right? And wouldn’t it be tough to be well diversified AND be getting 4% dividends from everything? What do you think I’m missing here?

    • retirebyforty January 10, 2014, 4:31 pm

      I just feel like I’m too young to start harvesting capital gains. I’d rather rebalance and reinvest any gain while I’m still young. Once we’re older, then I would be comfortable with drawing down. Probably at 55 or so. 4% dividend is pretty tough. I think 3% is more realistic.

  • MW June 8, 2014, 5:58 pm

    I can retire 08/2015 @ age 50-yrs and receive a $2,000/month pension for life. My house will be paid for and I have no debt. My pension will cover all my expenses. I should have about $400,000 in savings by then. I do not plan to touch my savings until later in life so that it will continue to grow. I do not enjoy my job and struggle to stay there every day. I’m afraid to retire because of all the “what ifs” that come to mind. I admire you for doing so and would like to know how you manage to overcome the “what if syndrome”?

    • retirebyforty June 9, 2014, 10:49 am

      What about semi-retirement? You can try working on something that you enjoy instead. You don’t need to make much money because your cost of living is already covered. It’s about the quality of life at this point.
      Good luck!

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