My Problem with Financial Independence

09 Dec / James Eastham

On Friday night I had a wonderful conversation on Twitter with Kali Roberge (@KaliRoberge) of the upcoming podcast series Beyond Finance. It’s pretty safe to say it sent me on a bit of an inner journey into why exactly I have started on this path to becoming financially independent and what I aim to get out of it in the long term. I find the best way to assess my own thoughts is to write them down, and I figured why the hell should I not put my internal monologue out there for the world to see! What could possibly go wrong with that, this is the internet after all!

What started this brief crisis of confidence

Before discussing this, it makes sense to put the chain of tweets out there that kicked off this post in the first place.

A lot to take in there, and although short it did really get me thinking.

The point that struck the biggest chord with me was Kali’s comment of

“If your version of reaching financial independence is to hit it within a decade or so and then have a limited amount of $ to live off for 30, 40, 50s years,”

I’ve mapped out my FI journey on the assumption that I will be financially independent when I have £40,000 x 25 years (the common maths of the 4% rule, little more on that here). That always seemed fine to me, but then I started thinking.

The broad point of FI is to take back your time and have the ability to use your time however you see fit, in my case that is to travel A LOT. Now, £40,000 a year seems absolutely fine if you look at things at a high level, but restricting myself to exactly £40,000 a year for the rest of time is actually quite limiting.

Some years I may spend travelling through South East Asia or South America where the cost of living is relatively cheap, but then for the next year spend time wandering around Scanevania where the same amount of money is not going to go anywhere near as far.

The biggest problem with the Financial Independence Retire Early movement

So what does that leave? Well, the argument I imagine coming from the rest of the FI community is that your income is actually variable and shouldn’t be fixed. The 4% rule should be applied to the value of your portfolio at that time, not at the time when you reached financial independence.

That’s great until there is a slowdown for a couple of years and your portfolio loses value, then what? Do your plans get put on hold until the markets start to rise again? I’m going to show one of Kali’s tweets again here:

When I first read this I was at a complete disagreement with her, after processing the information in full I feel she is actually 100% correct. Being financially independent and living completely off your portfolio moves you from relying on your 9 to 5 to relying on the stock markets and the world economy, which in itself is extremely volatile!

There are measures that can be taken to limit that volatility and diving into the details of that is something for somebody a lot of experienced than me to tackle. This post is mainly meant to address the wider question of is financial independence not still equally as restrictive as a 9 to 5?

So, what’s the answer?

This question has crowded my mind for the past 48 hours and is something I’ve thought about a lot. What is the answer to the overreliance on the stock markets and finding a way to stabilize your income in a way that allows you to lead the life you WANT to live without needing to scale your lifestyle back due to a couple of bad years in the markets?

As far as I see it, there is one key answer and one that is going to become one of the key goals of my journey to financial independence. What’s that you ask? Of course, it’s passive income! Generating a reasonably consistent stream of passive income to supplement the money taken from your portfolio returns.

There are plenty of forms that passive income can take; real estate, blogs, side hustles, owning a business etc. The list is a pretty long one! In my specific situation, I’m a computer nerd through and through! If you were to ask my partner what I did for a living, the answer would range from computer nerd, through to geek and probably ending up somewhere around “he writes things on his screen that makes no sense at all but all the lines end in a semi-colon”.

Generating a reasonably consistent stream of passive income to supplement the money taken from your portfolio returns.

I’ve always planned on my ‘retirement’ entailing me keeping working. The retire early part of the FIRE movement is probably my biggest bugbear with the movement as a whole. Now to really clarify this point, I’m going to run some simple maths because, well who can argue with maths!

Maths Time

Let’s use 40k as my yearly expenses, and multiply by that to give me a FI number of £1,000,000, a nice round number! Now using the 4% rule I can take my 40k per year for the rest of time with a pretty high statistical change of the money never running out.

Now let’s say there is a 2008 recession level event in which the FTSE 100 dropped by 31% (taken from BBC news). That would leave my portfolio sitting at £690,000. Using a variable 4% rule and not just blindly taking £40k per year that would leave me with £27,600. A full £12,400 lower than my targeted yearly expenses. Yes, that probably still be more than enough to cover my core expenses.

Yes, I know the markets would recover and yes, I know I could always go back into the workplace. But putting life on hold? No thanks!

Now, let’s take my theoretical freelance software development income. I expect to be able to bring in around £1000 a month in freelance dev work. A reasonably cautious assumption given that if somebody was earning £12,000 per year without a high net worth they would probably be living in relative poverty for the western world.

Handily, that £12,000 just above covers the drop in my portfolio value caused by the 31% drop in the stock markets. A 31% drop that is definitely an outlier in terms of probabilities and something that isn’t going to be happening every other year!

Closing notes

I appreciate there is a lot more to this argument than my simple maths above. If a recession hit like 2008 my freelance development work would probably dry up as well, leaving me in the same situation! However, these huge losses are the exception, not the norm. Take a market entering correction territory (a 10% or more drop) my freelance work would probably not take too much of a hit so the £12,000 gained would give me one of two options

  1. I spend more than £40,000 that year (hello Scandinavia you expensive son of a gun)
  2. I continue to invest the additional money from my side-hustle and my nest egg continues to grow

Building a small amount of time into your ‘retired’ life spent continuing to work on a side hustle really isn’t going to be a huge deal, especially if it’s something you want to do! No work is considered work if you want to be there. Building that into your life from day one also gives the benefit of not having to take the shock dive back into the freezing cold waters of full-time employment.

The key takeaway from this journey I’ve gone on the past couple of days. The wider takeaway for anybody reading this post has to be to find a passive income stream you enjoy! That’s the key. Build your dream life in a way that includes you doing something you enjoy and using that to earn additional money even after financial independence.

Enjoy yoga? Become a yoga teacher and start a small local practice. Baking is your jam? Find a local market and sell your product. Love writing? Become a freelance copyrighter. The possibilities are honestly endless if you put your mind to it, all you’ve got to do is find your passion!

Writing this post has given me a pure moment of clarity, FI is not about having loads of money. The money is a tool to allow you to follow your passions if that passion can earn you even a small amount of money as well then fantastic!

The biggest problem with the Financial Independence Retire Early movement

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