New definition of Financial Independence?

[NumberJohnny5]

I thought Financial Independence meant you had enough money to sustain your lifestyle for the rest of your life.  I.e. if you never wanted to work again, you don't have to.  Was reading The Simple Dollar today, well here's his "Five Tenets of Financial Independence":  http://www.thesimpledollar.com/2013/01/28/my-five-tenets-of-financial-independence/

1. You are free from debt and don’t expect to face in any in the future.

2. You spend significantly less than you earn.

3. You don’t rely on family members or friends for income, earning it only through your work.

4. If you were to lose your primary employment, your family would survive for an extended period of time without significant lifestyle change.

5. You have a skill set that you can immediately apply in a variety of fields.

Am I just old and set in my ways?  Do I just have old fashioned definitions of retirement and financial independence in my old age?  Or does society, in fact, consider both my wife and I retired and financially independent?  Even though one of us would need to work for quite a while before work became an option, and we don't have enough funds to live off of for the rest of our lives (well, I hope not anyways, plan on living forever or at least for a while longer).

[Matt K]

1. You are free from debt and don’t expect to face in any in the future.

2. You spend significantly less than you earn.

3. You don’t rely on family members or friends for income, earning it only through your work.

4. If you were to lose your primary employment, your family would survive for an extended period of time without significant lifestyle change.

5. You have a skill set that you can immediately apply in a variety of fields.

I've gotta say, parts of that set the bar pretty low for financial independence. Number 3 in particular, to me isn't about being financially independent, it is about being independent - as in: being an independent adult. To me, the definition of FI falls from the old school 'independently wealthy', that is, does not need to work for a living. Now, depending on how you define 'extended period' in number 4, maybe 'extended period' means 'the rest of my life' to the author, but then again, maybe not.

If you are old and set in your ways, then I'm right there with you, and pretty happy with it. These young whipper-snappers can have their FI that still requires employment.

[arebelspy]

That's still dependent on your job for income.

I agree with your definition.

Not surprising this came from Trent at TSD.

[Jamesqf]

You need to remember that things don't automatically become true just because someone posts them on the internet.

In this case, the writer is just plain wrong.  Financial independence, whether it's being independently wealthy, like some, or independently poor, like me (but approaching independently middle class :-)) means that you have enough money to live on the income from your investments.  Not savings, note: you use only the income, never touching the principal.

Now those five tenets are mostly good advice for people trying to attain financial independence, but they're not defining independence.  The financially independent may buy things on credit, paying the bills from income (just as working stiffs pay from their paychecks); they may have no marketable skills at all (e.g. trust fund babies); they might spend every cent of their trust fund income...

[tooqk4u22]

At best those five tenets fit the bucket for the FU money scenario but IMO they really only meet the requirements for being an adult. 

.....means that you have enough money to live on the income from your investments.  Not savings, note: you use only the income, never touching the principal.

This would be the most conservative definition but using principal is part of it - the 4% SWR is based on this.  Some years you have good gains and some you have losses but you still take the 4% of the starting balance and adjusted for inflation each year. 

[James]

At best those five tenets fit the bucket for the FU money scenario but IMO they really only meet the requirements for being an adult. 

I agree, he is talking about the FU stage.  Doesn't mean you have to say FU to your job, but you can because of that financial situation.

There are better blogs out there than Trent's, I'd stick to the better ones, no use wasting time there.  He means well, but...

[Jamesqf]

.....means that you have enough money to live on the income from your investments.  Not savings, note: you use only the income, never touching the principal.

This would be the most conservative definition but using principal is part of it - the 4% SWR is based on this.  Some years you have good gains and some you have losses but you still take the 4% of the starting balance and adjusted for inflation each year.

I'd argue that that's not true independence, just spending your savings at a rate which you hope will allow them to last until you kick the bucket.  Which is IMHO really pessimistic thinking.  Suppose you plan your savings to last to 100 at your SWR, but you go on living to 110?

[tooqk4u22]

.....means that you have enough money to live on the income from your investments.  Not savings, note: you use only the income, never touching the principal.

This would be the most conservative definition but using principal is part of it - the 4% SWR is based on this.  Some years you have good gains and some you have losses but you still take the 4% of the starting balance and adjusted for inflation each year.

I'd argue that that's not true independence, just spending your savings at a rate which you hope will allow them to last until you kick the bucket.  Which is IMHO really pessimistic thinking.  Suppose you plan your savings to last to 100 at your SWR, but you go on living to 110?

I agree more with your definition, but for most people here and elsewhere use the 4% SWR as the benchmark - As you can see in other comments I am not sold on this.

[arebelspy]

Keep in mind the 4% SWR doesn't necessarily mean you're spending principal.  In fact, 96% of the time using the 4% SWR you will have more than 100% of the original starting principal (historically, in the US)!

That meets FI under my definition.

[James]

And planning 4% SWR doesn't mean you must spend 4% every year.  Pick up some money on the side or lower spending during down years and you are golden.

[BPA]

I do not agree with Trent's definition either.  And one of the people who commented seems to think that you can have a mortgage and be financially independent.  Only in certain circumstances like where you could pay it right off and still have enough money to live on for the rest of your life or if it's an investment property and the rental payments will take care of the mortgage eventually.

[arebelspy]

I do not agree with Trent's definition either.  And one of the people who commented seems to think that you can have a mortgage and be financially independent.  Only in certain circumstances like where you could pay it right off and still have enough money to live on for the rest of your life or if it's an investment property and the rental payments will take care of the mortgage eventually.

Of course you can have a mortgage and be FI! 

Heck, you can be FI with loads of debt and $0 in the bank and investing accounts, and a negative net worth (depending on how you calculate net worth).

I'll leave that as an exercise to you to figure out how.  ;)

[needmyfi]

gee let me guess  could it be      Real Estate????

[arebelspy]

gee let me guess  could it be      Real Estate????

No. 

If you're in real estate with nothing in the bank (i.e. no reserves) and mortgages you're on a countdown to failure.  That's not FI.

And if you own them free and clear, then you have assets (i.e. you won't have a negative net worth).  And he specifically mentioned rental income as an exception, so I'm ignoring the potentials there. Because - theoretically - you could be underwater but with positive cash flow, so have a negative net worth, but be "FI" in a sense.  But again, you'd want reserves, and he excluded that scenario by saying "or if it's an investment property and the rental payments will take care of the mortgage eventually."

[BPA]

ha ha  I think the thing that most confused me was being called a "he."  :P

I know a few people I consider to be quite wealthy who could pay off their mortgages, but choose to invest instead because of low interest rates on the mortgage itself.  I am too chickenshit to ever do that though.  I'm also Canadian: can't write off mortgage interest.

Let me know what I'm missing though since I am intrigued (although I may feel like a bit of a doofus when it's all explained.; my ego will recover). 

[arebelspy]

Riddle answer: pension (or other fixed income) that covers expenses.

You could have a mortgage of 500k, credit card debts of 20k, and no assets, and as long as your income covers all those expenses, and your other living expenses such as food (and, hopefully is COLA'd to cover inflation), I'd consider you FI, even with a negative net worth and a mortgage and no assets.

Nords (author of The Military Guide to Financial Independence and Retirement) is a great example though of someone who has a military pension and doesn't have much need for more money.  Now sure, he has other assets (isn't net worth negative, like in the extreme example), but his pension allows him to donate all the proceeds from his book and blog to military charities and his wife to turn down high CEO-level compensations and work in the same job for free.  And it even allows him to invest fairly aggressively, from what I understand, and keep a mortgage.  In fact, although he could pay off the mortgage, he's an example of someone keeping it to invest the amount and try to earn a spread (and, I believe, took out the mortgage on a paid off property - or one that he could pay off - specifically for this purpose).

:)

[BPA]

Hmmmm.  Good point.  I will have a defined benefit pension once I turn 50 (in 5.5 years), but at $21K mine won't be enough to support my mortgage too, so that didn't factor into my own vision of FI, but I agree that it could work for someone else. 

I suppose if I were willing to move to a cheaper place like my rather selfish dream of moving from southern Ontario to Prince Edward Island, I could consider myself FI even while living in southern Ontario for a while.  In fact, with the commuted value of my pension and selling my place here to buy one there, I could be FI right now, but I want (and almost need) to stick around here until my son is finished high school. 

Thanks for the food for thought!

[Spartana]

 
[/quote]

Of course you can have a mortgage and be FI! 

Heck, you can be FI with loads of debt and $0 in the bank and investing accounts, and a negative net worth (depending on how you calculate net worth).

I'll leave that as an exercise to you to figure out how.  ;)
[/quote]

My guareenteed lifetime government pension covers all my expenses, debts and mortgages now and in the future? Yeah, that's being FI - as in I don't have to work again and get enough money to cover everything.

My version of FI is having enough income from ANY source (savings, pension, investments, real estate, etc...) to cover all my needs without having to work ever again. I personally have choosen to be debt-free and mortgage-free and live on a small sum of money from a combo of savings - including reducing some of the principle over my lifetime - and pension starting at age 42 so I could be FIRE now rather then waiting to a more traditional age when I may be able to live by the 4% rule.  No kids to leave anything to anyways.

[Spartana]

Hmmmm.  Good point.  I will have a defined benefit pension once I turn 50 (in 5.5 years), but at $21K mine won't be enough to support my mortgage too, so that didn't factor into my own vision of FI, but I agree that it could work for someone else. 

I suppose if I were willing to move to a cheaper place like my rather selfish dream of moving from southern Ontario to Prince Edward Island, I could consider myself FI even while living in southern Ontario for a while.  In fact, with the commuted value of my pension and selling my place here to buy one there, I could be FI right now, but I want (and almost need) to stick around here until my son is finished high school. 

Thanks for the food for thought!

Selling my house (which I paid off) and downsizing to another location (and a much nicer and less expensive one too!!) made me instantly FI.  New house cost about 1/3rd of what the old one did and freed up the extra cash (equity) to suppliment my military/VA disability pension until I would be old enough to get my civilian government pension at 50 . Highly recommend that as a way to go to achieve FIRE. I moved to a nice mountain/ski/lake resort town initially and not only had extra moolah to live on, but had a nicer lifestyle too then in the L.A. sprawl where I had lived and worked befor.

[BPA]

Interesting, Spartana (love the name).  For me, it is important for me to think of my son otherwise I'd be outta here and living down east.  :)  Also, my boyfriend of the last six years is considerably younger than me and isn't at the same place as far as FI/ER.  I don't really want to move away from him either. But it makes such a difference knowing I could quit and be okay. 

Honestly, I know that lots of people find Trent inspirational but even before I found ERE and MMM, I didn't find him particularly inspirational.  I'm glad things have worked out for him in a way he likes, but I didn't feel I learned much. 

Maybe that's because I'd already read a lot like YMOYL and The Tightwad Gazette and a book written by a fellow Hamiltonian of how she achieved FI at 36 on some pretty low paying jobs.

[cats]

I think there are a lot of folks out there who have a more flexible definition of FI than you might run across here.  For example, my roommate describes herself as financially independent, and really all this means is that she doesn't have to ask her parents/boyfriends/friends for money.  I don't think she's saving a whole lot but she's not running up a huge pile of unpaid bills either.  In my opinion, it's not the end of the world for people to describe themselves as financially independent, as long as they're cognizant of the limitations of their definition (i.e., my roommate is still dependent on her job to remain "financially independent").  Even the strict definition of FI here at MMM has its limitations.  If the economy has a total apocalypse style meltdown (i.e., worse than 2008) I'd say a lot of people who are currently genuinely able to live exclusively off their investment/rental/whatever income will still be experiencing some major disruptions in lifestyle.

[chucklesmcgee]

There are levels of financial independence. I think joshtann's definition is the most standard. I'd have to break it down this way:

FI 1.0- a large enough stache/passive income to provide for future expenses in the event one were unemployed for a significant duration
FI 2.0- a large enough stache/passive income to last for one's lifetime (but will probably be depleted around death)
FI 3.0- a large enough stache/passive income to safely exist on interest alone (full, inflation-adjusted stache will pass to spouse, children, etc on death)
FI 4.0- a large enough stache/passive income such that even safely existing on interest alone, the stache will continue to grow.

[arebelspy]

The problem with those is that FI 2-4 can be the same, depending on which way your investments go.

That is, say you start with 1MM and are doing a 4% SWR.  Historically this has a 95% success rate, meaning 5% of the time you aren't even FI 2.0, but some of the times throughout history you'd have been FI 3.0, and others you'd have been FI 4.0 (in fact, 90+% of the time you end with more than your starting amount, so you'd have been FI 4.0)

So you can't tell if you were FI 4.0 or 2.0 or whatever until you die, because you don't know which of the squiggly FIRECalc lines belongs to you.

But, since it's largely academic, I guess it doesn't matter.

[Nords]

But, since it's largely academic, I guess it doesn't matter.

This thread reminds me of the debates about determining one's net worth, or whether to pay off the mortgage...

[arebelspy]

But, since it's largely academic, I guess it doesn't matter.

This thread reminds me of the debates about determining one's net worth, or whether to pay off the mortgage...

You mean awesome and fun to read about and debate over and over?  Yeah!  :D

(Hey, you still clicked on the thread ;)  )

[Nords]

But, since it's largely academic, I guess it doesn't matter.

This thread reminds me of the debates about determining one's net worth, or whether to pay off the mortgage...

You mean awesome and fun to read about and debate over and over?  Yeah!  :D
(Hey, you still clicked on the thread ;)  )

And better yet, the moderators let the thread run instead of closing it!

[arebelspy]

And better yet, the moderators let the thread run instead of closing it!

Hey, yeah!  What kinda clowns they got runnin this join, anyways?

[Jack]

Riddle answer: pension (or other fixed income) that covers expenses.

Oh, what a load of BS! A person with a pension and no debts doesn't have a zero net worth; he has a net worth equal to the present value of his pension based on his age and life expectancy.

And to head your next argument off at the pass, the fact that he can't access the money immediately is irrelevant. It would be like saying that someone whose assets are all in CDs has a zero net worth, which is obviously wrong.

[arebelspy]

Riddle answer: pension (or other fixed income) that covers expenses.

Oh, what a load of BS! A person with a pension and no debts doesn't have a zero net worth; he has a net worth equal to the present value of his pension based on his age and life expectancy.

And to head your next argument off at the pass, the fact that he can't access the money immediately is irrelevant. It would be like saying that someone whose assets are all in CDs has a zero net worth, which is obviously wrong.

Hah.  You're a funny one.

It depends on how you define net worth.  What if they have a pension that covers all expenses, and they die tomorrow?

What about someone who has all expenses paid by someone else?

What about someone with no expenses?

It's all in how you slice and dice it, and you can fit or reject any answer based on your definitions or questions.

[tooqk4u22]

I agree that pensions are an asset to the individual but not extendable to another - no different than an annuity. Some pension plans also allow a lump sum payment - clearly those that do would be an asset.

Placing a value on the pension could be as simple as dividing the payment by 4% (SWR) or could be far more complicated.  Depending on the pension plan it might make sense to factor in a default discount as so many plans are underwater - not all pensions are created equal and some who have or expect to get pensions will not get what the have been or expect to.

In some regard a pension could be like investing in real estate  - there is cash flow from an asset that may be highly illiquid or possibly underwater.

[Spartana]

Interesting, Spartana (love the name).  For me, it is important for me to think of my son otherwise I'd be outta here and living down east.  :)  Also, my boyfriend of the last six years is considerably younger than me and isn't at the same place as far as FI/ER.  I don't really want to move away from him either. But it makes such a difference knowing I could quit and be okay. 

Honestly, I know that lots of people find Trent inspirational but even before I found ERE and MMM, I didn't find him particularly inspirational.  I'm glad things have worked out for him in a way he likes, but I didn't feel I learned much. 

Maybe that's because I'd already read a lot like YMOYL and The Tightwad Gazette and a book written by a fellow Hamiltonian of how she achieved FI at 36 on some pretty low paying jobs.

Having kids and/or family does make it harder to downsize and become FI and/or retired early. I only moved 100 miles away (and 7,000 ft up) from my old 'hood so I wasn't too far away from my family, although I was worlds away from the expensive and congested LA metro area and it's lifestyle.