FI Versus RE - How Do You Measure The Latter?

[mr_orange]

I haven't had as much time to post or read of late so my apologies if this question is answered elsewhere on the site.  If it is please point me to the right threads or articles. 

For those that are more enterprising and wish to do more than the bare minimum how do you define your retire early (RE) number?  I think I have a pretty good sense for what is required for financial independence (FI) and there are loads of threads debating SWRs, whether 4% is correct, etc.  I also know that many have the philosophy that they will stop working or transition to other activities post FI. 

My situation is one where I enjoy working, but I wish to transition to doing so solely for myself post FI.  Based on my most recent journal post I figure we're about 75% of the way to FI right now based on the lifestyle I want to lead.  Our FI point should come in the next few years and I hope to transition to working solely for myself at this point.  In this situation what would be a good RE number to target?  I realize that this is a bit subjective because it depends on my personal desire to stop working for myself and simply retire entirely later on, but I was hoping some of the wizards on the forums could help to frame the conversation better or give helpful advice on this. 

In general is there a way to shift focus and "retire" from a W2 where you have a situation with more autonomy and upside and later fully retire if you so-choose?  It would seem like the FI point would be a good target for leaving the comfort of one's job and the absolute retirement number could be set at some higher number.  Any thoughts on this?

[GrowingTheGreen]

If you've got 90% of what you need to RE, then you could transition to an income that would provide your living expenses only and just wait for compounding interest bring that 90% up to 100%.

Am I understanding your question correctly?

[ooeei]

I always saw it as "FI" is the point at which you can "RE".  They aren't two separate numbers. If you decide to keep working, you're not retired early, so you're not RE, and you may never technically be RE. 

It really depends how you define "retirement" and whether the RE label is important to you.  If you normally work 100 hour weeks, you might consider 40 hours a week "retirement" and claim you're RE.  Someone else might consider 40 hours a week a full time job, and only say they're RE if they do 0 hours of work.  You'll have to ask the internet retirement police which one of these is closer to right.

 

[Axecleaver]

Orange, what you're really asking is what number you need to feel secure that quitting your day job and shifting to self-employment is going to work for you. It's not necessary to achieve FI yet because your business is going to earn you well over your expense requirements.

When I did this, I saved up enough to cover six months of expenses (in a savings account - didn't count my retirement accounts in this). My business cash flowed from day one, but I knew that I needed to get the pipeline filled with enough work that I'd be insulated from disasters - late payments, canceled projects, whatever. I set my trigger at six weeks of expenses, figuring that it would take a little while to find a new job and start getting paid if things went South. Got to eight weeks at my low point, and that lit a fire under me for sure.

Having been a follower of your journal for a while, it seems to me that you've been keeping the W2 because it's low-effort and you can multitask the business and still bring in your W2 income. Recently you've had to ramp up the job commitments, which is probably taking time away from what you'd rather be doing.

Do two P&L estimate scenarios for the next 12 months, one estimate if you keep your W2 job, the other if you quit. Compare these and see if this helps clarify your next step. Then make sure you have enough cash to cover expenses for x months, and decide whether to pull the trigger. You could time this around events in your business, too.

You might also consider a halfway step where you reduce your work commitment, but don't quit altogether.

[mr_orange]

Having been a follower of your journal for a while, it seems to me that you've been keeping the W2 because it's low-effort and you can multitask the business and still bring in your W2 income. Recently you've had to ramp up the job commitments, which is probably taking time away from what you'd rather be doing.

Correct. 

Do two P&L estimate scenarios for the next 12 months, one estimate if you keep your W2 job, the other if you quit. Compare these and see if this helps clarify your next step. Then make sure you have enough cash to cover expenses for x months, and decide whether to pull the trigger. You could time this around events in your business, too.

You might also consider a halfway step where you reduce your work commitment, but don't quit altogether.

This is a good idea, but it would be purely fantasy land to do so.  Our business activities are very lucrative, but I am not kidding myself into believing that I can predict what our profits will be or that they're nearly as stable as our W2 setup right now.  Both sets of activities have risks, but it is hard to know what the optimal decision is given this uncertainty. 

We have enough cash to cover over a year of expenses for sure.  My wife also works which allows me to take more risk than I could without this "feature" of our situation. 

I have more than taken the halfway step.  For the last year I basically haven't cared much about the job, but have done enough to keep things moving along.  Given where we currently are I am having a hard time even devoting this much effort to things and feel like it may actually be costing me money to work the W2, but this is hard to know for sure.  First world problems....I know. 

Thanks for any thoughts or feedback. 

[Axecleaver]

Sounds like you have more than enough of a buffer to go full time on your side gig. The issue of revenue variability is common to most business owners, but don't let that stop you. So, model three scenarios:

* a worst-case scenario where you work on the side gig full time, but all your risks are realized. What does that look like in terms of earnings? It's probably more than zero but less than your old w2 gig. Meanwhile you'll be working to mitigate the risks, and learning a lot about what doesn't work.
* a best-case scenario. Now you have a band on worst/best case. You're almost certainly going to be somewhere in between these two extremes.
* A most-likely scenario. After thinking through the first two, you should have some more clarity around what is most likely to happen. Yes, there is an element of fantasy to these thought experiments, but as time goes on and you learn what works and what doesn't, you will be able to tune your approach and get much more accurate about your outcomes.

A lot of this could be derived from a well-written business plan. You probably have one - dust it off and see how close it is to what you're doing today. The plan I wrote in 2013 had some things that I never did, and given what I know now, were not high-percentage ideas, so I discarded them. But I also hit and exceeded a lot of the other targets in the plan, and it helped me to understand steps on how to grow the business. Marketing plan in particular was very close to what actually happened.