Financial independence and early retirement - a primer

October 6th, 2014

Lately I’ve been reading a lot about achieving financial independence and early retirement. There are of course many ways of reaching that goal, but a common thread running through the blogs I’ve been frequenting is their application of the 4% rule of early retirement.

According to this rule, which takes into account inflation and the overall fluctuation in the market (as well as it can be expected to - it’s not a fortune cookie, you know), you are basically ready for retirement if your investments amount to 25 times your annual spending. Since it’s all about how much you spend rather than how much you make, no matter how high your salary you’ll be able to try this out. If two persons start off with $0 in savings, one earning $30,000 a year and the other making $200,000, and both save up the same percentage amount of their respective incomes every year, they both will achieve financial independence at precisely the same time.

But don’t take my word for it; heed the advice of Mr. Money Mustache, who retired at age 30. MMM could easily have adopted a holier-than-thou attitude, deriding those who choose not to follow his path, but instead he infuses his writing with a humorous sort of do-as-I-say attitude, cleverly delivered in-character and with tongue planted firmly in cheek. The result is interesting stories as well as sound advice that may not be easy to follow for everyone, but will inspire many.

James Collins extols the virtues of long-term index investing. His blog contains oodles of great advice, but it was his Stock series of posts that turned me on to the whole index fund investment idea. Taking his cue from the inventor of index funds, John C. Bogle, Collins makes a very strong point for putting your money in funds indexing basically the entire stock market and then leaving it be, reinvesting dividends and adding saved-up money as you go along. In the long run, this has proven to be just as lucrative as investing in actively managed funds, and won’t give you sleepless nights like investing in individual stocks may. Then, when you’ve accumulated enough money, you can apply the 4% rule to slowly sell off your stock as they continue to grow in value.

Jason of dividendmantra.com offers a different approach to the 4% rule, seeking to live off the dividends provided by well-established companies with high dividend payouts. He locates potential investments though copious amounts of research, investing in another company or even adding to an existing position in his portfolio only after considering umpteen company- and industry-wide factors, and admirably presents his findings in great detail on his blog.

The people behind some of the sites I’ve been frequenting are champions of frugality at a level that may seem extreme to many, but, like any habit, ends up becoming second nature once you get into the groove. Becoming financially independent isn’t about not working, but rather having the freedom to decide when and on what you wish to work without money being the deciding factor. It's a highly intriguing subject, one I'll continue to delve further into as I let myself be motivated and inspired by the enthusiasm displayed by the subscribers to this lifestyle.

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