Financial Independence: When Your Income Matches Your Outgo, Without Working for Money

Financial independence is one my favorite topics. It’s something I one day hope to achieve through a variety of sacrifices, such as paying off our mortgage early, building savings inside and outside of retirement accounts, and sticking to a frugal lifestyle.

Saltwhistle Bay Dock and Beach on Flickr by Jason Pratt

The other day a reader asked for clarification on what financial independence meant. Well, I suppose it can mean different things to different people. To me, it means that my savings can be moved to ultra-conservative investments, and still spin off enough money each month to cover my basic living expenses. At that point, I technically do not have to work for money.

Roadmap to Financial Independence

So how does one reach financial independence (FI)? It certainly doesn’t happen overnight. The point where one reaches FI is a function of three things:

  • Diligent Savings. To build enough capital to live on interest and dividends takes years of faithfully saving and investing. We are still in the “capital building” stage ourselves, and invest in a variety of tax advantaged retirement accounts and taxable accounts. Currently, our plan is to max Roth IRAs, invest in my 401k through the match, and with anything left over, build our FI savings capital buying dividend stocks through our discount brokerage,, and tax-efficient mutual funds at in a mix of stock funds, bond funds and international index funds.
  • Debt Freedom. Reaching financial independence is hard enough, but adding a pile of debt to the mix makes it next to impossible. We have already eliminated all consumer debt (credit cards, student loan and car loans). We’d like to eliminate our mortgage in the next 5-7 years. However, building savings capital and paying off our mortgage early will mean there will be little money for anything else. Which takes us to the third component.
  • Reduction of Monthly Expenses. Saving money every month on regular expenses not only helps increase your disposable income for savings contributions, it’s good practice for living financially independent. It also means in most cases, you don’t necessarily have to become a millionaire to retire. In early retirement, you would need a nest egg of $600,000 to spin off enough money to cover $2,000 in expenses (assuming a 4% return, before taxes).  You would only need $450,000 to cover $1,500 a month in expenses given the same terms. That’s a significant difference in the amount of savings needed to reach financial independence.

Other Sources of Income in Early Retirement

Once monthly expenses have been reduced, and fairly well defined, we can begin to get a good idea of the amount of money we’ll need saved to retire early. But one thing many formal calculators and financial gurus forget to take into account is that most people will not “retire” early at 50 years old and never earn another dime from some type of work. Sure, they may not earn what they made while working full time, but most early retirees go on to work in another field they are passionate about, splitting time between their passion, their family and a hobby or two.

In the example above, if our expenses were $2,000 a month in early retirement, but we were able to earn $500-$700 from part time work, consulting, or something similar, our savings needs would be much lower than if we planned to earn nothing. This often means people can technically reach financial independence much earlier than they previously anticipated.

Do any of you have plans for early retirement? What steps are you taking today to get there?


  1. I (at 52) will not be able to retire at 50. However, I’ve set up each of my three kids with savings/investment accounts to which my wife and I make a small monthly contribution. The older ones have a chart that shows how that small monthly amount will grow with consistent additions each month until the age of 50. My wife and I will make the contributions until they are 25 and then they will have to keep the discipline of adding to the fund each month. If they follow this path, they will be able to retire at age fifty….

  2. Hello, I am 24 today and I am from Brazil. I have started studying personal finances has one year, and I have made my financial independence plan. I wish to be financial independent at 40 years old. I will get married in a couple of years and my future wife, is also a part of this plan. We are doing the discussion and saving all together. But since we have a frugal life, we can still enjoy the present and make some trips.

  3. My husband retired at 50, back to work at 56, retired at 58, returned to work at 59 and will retire for good this year at 60. We banked all of his salary when he went back to work both times. He returned to work because he thought he wanted to teach the second time around. Found someone to pay for his degree, but hated the classroom. This last year he has simply supervised his before 50 job. Piece of cake!
    Now the wood shop and the Harley call him.
    We have a good size nest egg(within the range on your blog) in case he dies and I am left without his pension. I have one more year to teach(53). I won’t have a pension because we moved so often. That is OK. No debt.
    We are really looking forward to next year.
    I do not think you need a million to retire- especially if one of you has a pension. What we are surprised at —once the “kids’ hit mid twenties- you can stop spending on them and put all that money away! That is ALOT of money!

    • I can relate – I used to think I wanted to teach as my second act (even looked into a provisional certfification program in my state for business folks), but now I’m not so sure. The classroom has changed quite a bit over the last 20 years, thanks in large part, in my opinion, to a lack of parental involvement and discipline. I admire today’s teachers, and I’m not sure I could do it – especially at 50.

  4. Our house should be paid off by the time we are 50, and college for the 3 kids will be done at 52. Whereas I would love to have enough for my husband to retire at that point, I think he will need to take advantage of those expense-less years to really put some money away.

    I know one thing we will have to take into consideration is the cost of health care. Plus, social security may or may not be around when we retire, and I we have 0 in pensions. We invest the max in our 401k each year, and need to put as much as possible away in mutual funds and such so we can access money before 59 1/2. We are off to a good start, but the kids are costly!

    Good post!

    • You and Jan both touched on an interesting idea – kids are expensive! I’m convinced people who believe otherwise don’t have kids. From everyday expenses to larger life expenses such as driving, proms, college, etc, there are always opportunities to spend a lot on our kids.

      We had our kids early, and hope to have most of these large expenses out of the way by the time we reach late 40s. We’ll take advantage of those few years to knock out the mortgage (if it is still around), and quickly build some taxable savings to access before 59 1/2. Hopefully, this plan will give us a few years of “early retirement.”

      • I wanted to add. Kids ARE expensive- but we are beginning to see with our extended family what happens if you do not have children. My sister’s husband passed at 50. She is alone. Because of illness, she has a very limited group of friends. She spent little time with family while following her career.
        It isn’t a great reason to have kids- but there is something about one generation sharing and giving to the other that makes the world go round….Our children were worth EVERY cent and hour we spent on them. They are our investment in the future world.
        I tell my students all the time, ” You had better learn how to take care of things, because you will be running them when I am old.”

  5. Always a fun topic. My plan is a three pronged approach: 1) debt free (house will be paid off in 2016) 2) large emergency fund (1 year of expenses) 3) about $50,000 yearly income from rental property once those are paid off (2026). That puts me at age 50 and my wife at 48, two kids out of the house, and one 16-year-old left to finish raising. My 401K and Roth IRA will still be growing then, but since it’s untouchable until another 9 1/2 years later I won’t be planning on it. My age 50 retirement will be from the corporate grind to focus full-time on my real estate ’empire’ and that will mean working when I want and how much I want. I manage it now with a 40-hours-a-week job, so it should be relatively easy once I’m done with that.

  6. Excellent post! One other thing to note. Once the mortgage is paid, usually the required monthly living expenses go down, so most people don’t need quite as much money to live on.

    I love the idea of doing some work after retiring. It brings in a little extra money without a lot of pressure.

    In case anyone is interested, I set up a monthly meme on my blog for wives to keep a ledger of their household spending. There is also a bit of history about this. Puritan minister Jonathan Edward’s wife did this. It was very common to write down every single expense and make it a permanent record.

    Here is the link:

    Mrs. White

    • This is a fantastic idea! Thanks for sharing! My wife and I keep up with expenses in a variety of modern ways, but the old-fashioned side of me likes the historical nature of simply recording all household expenses in a ledger. Something about putting pen to paper adds accountability for us. It would also be interesting to look back over the years and watch our spending, rather than tossing the budget and receipts at the end of the month and starting over.

  7. Now that I realized that if we pay off the house, there is a high possibility that we can reach financial independence much earlier than 55. Suprisingly without a mortgage and the need to save for retirement, and a small part time job, we really do not need as much money as we originally thought. But that is still years from now for us (only in our early 30s).

    • You’re right; paying off the mortgage early seems to be the domino that has to fall to pull off everything else. Once you free up that “house” money, and divert it to savings and investment, you can build wealth very quickly.

  8. I’m 28 right now and if I keep on track, I will retire at age 50 with a $1.6 million retirement fund and a $50,000 per year federal government pension. My goal is to work little jobs to cover the difference between my pension and living expenses, and stave off using the retirement fund until I hit 60.

  9. family planning has a huge impact on when you can retire, as my family and the posts above point out. Having kids later in life means you will be paying significant expenses later into your life. Retiring at 50 wont work if your 2 kids havent even gone to college yet. However, this is again specific to each family. If you were really good at banking your earnings before you had kids, maybe it wills till be possible.

  10. I don’t think many people understand just how important the “Reduction of Monthly Expenses.” section is. I work with a lot of people who think the important path to financial independence is to make more money – this is so not the case. There is no amount of money on earth that can save you from neighbor envy, financial gluttony and keeping up with the Joneses. Many times the more you make will only make you want to spend more and dont let yourself find out the guy up the street is making even more than you – you’ll end up doing anything to prove you’re above them on the list. Just ask any pro football player/ basketball player or even most musicians. The true key is to live within your means!
    “Because ridicule is the most effective form of education”

  11. Early retirement? In this economy?

    I know many people who save, have worked hard and long and are in their late 50s and early 60s. They have raised families, paid for educations (still paying in some cases), paid off their mortgages. They live fiscally prudent lives (at a high cost to them over the years), however, not one of them expects to be able to retire any time soon.

    To quote one friend, when I asked: We will work until we die.

    I don’t know what kind of jobs the people who talk about retiring early have, or what kind of income they have generated, but it is not taking into account the millions of people in this world who do not have a large salary and though they have some savings, they know they cannot live on either them or social security. All they care about is being able to get or keep a job until they die.

    Reading these blogs at times is like watching the HGTV shows where a young couple in their mid-twenties, for example, is buying a house for close to a million dollars. Hello? What kind of income do you have to do that?
    And how atypical are you (VERY)?

    You can only save so much when you’re income is not huge. We know families where there are four or five people, with say a $100,000 income, which sounds like a lot, but isn’t. They both work hard, save and know full well that they don’t have enough to live on if they retire in their late 50s.

    Who ARE you people who 1/Expect to retire in your 50s and 2/ who don’t get that the average human being in the U.S. right now couldn’t possibly afford to retire early, let alone retire at all.

    Wake up, most people will work until they keel over, win the lottery (their thought, but they are not hoping for it) or someone else supports them.

    And they know the last two are not realistic options.

    FYI: The only people we’ve seen who retired early were teachers with good pensions, government employees and silicone valley folks who lucked into their money (they were not the people who started the companies). Most people work long, hard and don’t have pensions or health care they can rely on if they leave work.

    • Yes, Sarah, you and I have different friends. I have more than a few friends who are now, or will be soon, retired. Most are in their late fifties/early sixties. The only thing holding them back is that “last dollar in the bank” nervousness.
      My dad started a company and quit at 50. Most small business owners, whom I know, that leave at 50 usually start another one because they are bored, not because they need the money. My other sister, owns a successful company, said, “Why should we close shop? All of our fun is run through as business contacts.”
      Healthcare can be independently financed and it isn’t half bad if you took care of yourself. This is true with small business anyway. You just have to make it to 65 and the government takes care of you anyway.
      Remember, money saved outside of an IRA is not taxable when you spend it. Your taxes go down- sometimes to zero. Think about how little you would actually have to be taking in IF you paid no taxes.

    • It’s all about priorities, Sarah. Age 25, hoping to retire by 45 or 50… we earn less than $50,000 a year but are well on our way to paying off our (small) home and do our best to max out an IRA each year. We enjoy our simple life. And when you have limited expenses, you don’t need as much money in the bank to retire!

      It also helps when you look at someone’s definition of early retirement. We don’t plan to “stop working” at age 45, but instead choose jobs that we enjoy and allow us to live a more flexible lifestyle – part time, perhaps seasonal work or freelancing in our current fields. And yes, we’ll have to buy health insurance. I have NEVER been eligible for employer-sponsored health insurance anyway, so how is this any different? It’s called a high-deductiable health plan and a well-funded HSA. 🙂

      Yes, most people will work until they die or cannot work. But it doesn’t have to be this way. Cut the cable, cell phone, brand new car, and suddenly life is much more affordable.

  12. sarahA, early retirement is possible by spending less than you earn and investing it, ESPECIALLY in this economy.

    My husband is a teacher and makes $43k a year. I’m an office worker that makes $35k a year. We are 27 years old and plan to retire in 25 years. This is how:

    1) If my husband stays in the school system, he’ll get a 70% pension after working for 30 years (age 52).
    2) I’ve contributed 6% to my 401k that is matched up to 6% since I was 22.
    3) We have maxed out a Roth IRA since we were 24.
    4) Our house mortgage and taxes come to less than 19% of our income since we shopped around before buying in 2007 and the mortgage will be paid off by 2017.
    5) We contribute at least $2500 a year to individual high dividend stocks so we will have money to bridge age 52 to 59 1/2.
    6) We have a single car loan that will be paid off by this December and all future cars will be paid for with cash.
    7) We live on one salary so we could survive a job loss if necessary, but we still have fun. Our annual vacation budget is $3000 and we each get $75 a month in fun money.

    We are on target to have $2 million spread between the 401k, Roth IRA, and Scottrade account. That plus my husband’s pension will allow us a perfect retirement (vacations, hobbies, volunteering, etc). We don’t plan on having full-time jobs ever again, but I make a little off of blogging and my husband makes a few thousand a year from sports officiating…even if it’s unneeded, those are two hobbies that we enjoy anyway.

    If people would live significantly below their income, they could retire early too. My husband and I were saving 25% even when we made less than $35k a year TOTAL. The trick is living in an efficiency apartment or having roommates when you don’t make enough to save otherwise and never taking on high interest debt. Our lifestyle has upgraded, but not as fast as our income and we are just fine on living on about $35k a year.

    Early retirement is not just possible…it’s highly probable if you live below your means!

    • Shannon, that really wasnt needed, they have a plan to retire and looks like they will make it. Why rip on them for not having kids? not eveyrone wants kids or can have kids and honestly thats their personal choice. And the 3000$ a year for vacation, how is that being frugal? i consider that a decent amount of money to be spending on a couple of weeks a year.

      • @Shannon,

        I leave a footprint with every person I meet every day. My husband, parents, sisters, grandparents, aunts, uncles, cousins, and friends think I mean something and I don’t value others based on their parenthood status either. I’m responsible to society as a whole and take that seriously.

        Don’t start spouting nonsense about someone not leaving a “footprint” just because you want to feel superior in some way. What about people who can’t have kids? Are they worth less to you too? I think everybody can make a difference.

        Being a parent is a gigantic responsibility that I wish more people were prepared for before jumping in. Good parents are priceless and I think it’s a decision that shouldn’t be taken lightly. I’m not going into my personal reasons for being childless, but you should think before attacking someone who was just trying to show that living below your means is a proven way to early retirement.

        Also, $3000 a year is $250 a month…that seems like a reasonable vacation account to me. If you don’t, then feel free to prioritize your money somewhere else. It’s personal finance, emphasis on the PERSONAL.

    • Shannon – I am quite surprised by this reply. Everyone makes personal life decisions, based on what their own goals are, and also the circumstances that life gives them.

      To me, it sounds like Budgeting has a good balance of living cheaply, planning for the future, and enjoying life now. That is a wonderful balance I wish everyone could achieve, including myself.

      I don’t think anyone was measuring their success by the size of their bank accounts. I think they were just sharing their own personal situations, which you read about all over the web. I really think you need to re-read Budgeting’s comment and then your own and see if it was truly necessary to be so negative.

  13. What steps?
    Recently picked up “Rich Dad Poor Dad” in audiobook format. It explains how and why the Rich stay Rich, the middle class stay middle class and the poor, well they just suck it up really. Sure it has it’s critics as every controversial book/topic does but it really made clear the mindset of the Rich, for they know you’ve already got a number in your head – how much you’re prepared to work for per hour.

    at 20 something, i’m at a cross-roads. zero debt, bit in the bank, currently between jobs, I see 2 choices. Grab money with both hands then invest it where it is likely to yield returns or drop out of the rat race and start a community living off other peoples excesses.

  14. I’m hoping to semi-retire at 50. It depends on if Mr. Market decided to work with me or against me for the next 10 years or so…

    If I do get to semi-retire at 50, I’ll probably be self-employed working at a business that I truly have passion about (or at least I hope this is the case).

  15. Awesome topic and great comments (with a few exceptions). One thing I don’t see here is dealing with inflation.

    So lets day you can live comfortably off $2000/month. What happens in 10 years when it will cost you $2500 or $3000/month for the same thing?

    So lets say you need $2000/month and at 4%, this is $600K in savings. Of course that needs to be tax free, but $24K/year is not a high tax bracket. I have always thought I need twice of what I need so I can continue to slowly grow the nest egg so it will generate more for inflation.

    I am sure there are better calculations out there regarding inflation vs returns and taxes and slowly reducing the nest egg as a factor. My primary goal is to allow for long term FI and pass a good chunk onto my children to jump start their retirement as it will be much harder for the next generation.

    For FI to retire, how do you view property taxes in the picture? Why I ask is when I used to own a house, property taxes kept going up. That is fine, but it seemed like if we have another housing bubble the taxes (and related insurance) could well outpace inflation and really eat up the monthly budget.

    I can’t agree more with the rat race concept that people are just fighting to make more, but fall more in debt as a consequence.

  16. We paid off house at 40, retired at 50. It can be done. One just has to plan early and stick to it. I took out a loan on house to buy out my second retirement. But nothing is a sure thing, the pensions that I get could go bankrupt in the near future. What we didn’t factor into our plans is that one parent will most likely outlive the other and will be left without income, so I will have to provide for that one. Agree that children are expensive so we chose to have only one. We did fund the first 25K of the child’s Roth IRA payments based on his earnings so he should have something in 40 years.

  17. Like anything else it starts with setting a plan and working that plan. All to often though we run into people who set a plan to late in life and had to adjust their expectations. I would never say its too late to have a plan but the earlier you start, the better off you are going to be.

    Trying to relay this to 20 somethings is not always easy…


  18. When my annual dividend income exceeds my annual expenses by a factor of 1.50 I would consider myself financially independent. I agree that most people should take into account different scenarios that would derail their retirement. By focusing on a diversified portfolio of dividend paying stocks which increase dividends annually, you are essentially generating an inflation adjusted stream of income. If you have any left overs you could always reinvest back into your portfolio, which further increases your dividend income.

    For example, over the past 80 years dividends have increased by 5.4% on average. Over the past 80 years inflation was 3%.

    Right now it is fairly easy to construct an income portfolio which yields 4% and consists of stocks that grow dividend payments over time.

  19. I hope to be able to fully retire in the next 10 years, then spend many months at a time traveling around different parts of the world. To make this dream a reality is going to take time and commitment on our part.

    We have completely paid off all our debt (except for mtg) and are taking on no new debt from here on out (if we can help it, of course). We fully fund every tax-advantaged vehicle we can find from 401k, IRA, HSA, 529’s and when we have exhausted those we move into dumping every other penny we can into a balanced mix of stocks/bonds/cash holdings (cd’s, etc). And of course we are living as frugal as we can possibly can.

    We make our living from buying homes and turning them into rental properties. Our goal is to start selling off these homes one by one and using the proceeds as living expenses. That will begin in 10 yrs also as we are still in the acquiring phase of homes (we currently have 16 rental properties and are looking to purchase more for the next few years). We buy sheriff sale homes and other fixer-uppers and do the work ourselves for minimal costs.

    Our ultimate goal is to downsize our ‘primary home’ and find something that is manageable in the upkeep department so that we may have the freedom of traveling. (this could even include just renting an apartment). And when it comes to the traveling we do not intend to travel as ‘tourists’. We will avoid touristy areas and immerse ourselves into the local communities of whatever country we are visiting. To us this is the true meaning of travel when we are eating, shopping, and hanging out with the locals. This helps keep costs down considerably. Another avenue we are pursuing for foreign travel is becoming caretakers for property owners when they are needing someone to ‘house-sit’ their properties for any length of time. The homeowners basically pay you to vacation in their homelands. That’s a win-win proposition in my book.

  20. I am not sure where the early retirement people are coming from but I assume you folks have pension plans. Please understand, most Americans (80% or more) do not have pensions. If you are a government worker then you have lucked out. The rest of us, those paying the taxes, are out of luck. The only money we have is what we save and the only retirement beyond that is Social Security and Medicare.

    I am just under 50, have paid off my mortgage and have nearly a million saved and receive a very modest income from a small farm. But once you figure in inflation, insurance (have you priced medical insurance?), property taxes, income taxes, etc. I can tell you that the income off $1 million won’t cover rice and beans in retirement.

    If you are a teacher lamenting your small salary, remember that your pension is far more valuable than what most of us making a low six figures can ever hope to save. Let alone what we can save after we get hit with a +40% marginal taxes to cover government retirement plans.

    My profession is finance and we live well below our means. I have run the numbers over and over again. For those of you living off the government dole please have some sympathy for us poor saps who live in terror of losing our jobs and watch in vain as (like those of us in California) the government comes in year after year taking an ever bigger bite of the funds we would have saved to cover the bloated retirements of our state employees.

    I am exhausted from 60 hour weeks and would love to retire and look on in envy as my friends with government jobs who work 40 hour weeks retire in their 50’s. Something is clearly wrong.