Today, the financial independence, retire early (FIRE) movement is gaining popularity very quickly. Although a lot of people are working towards the same goal of financial freedom or financial independence (FI), there are several different paths you can take to get there.
You don’t have to be a high-income earner in order to have a chance to reach FI.
In this article, we’ll look at 7 different paths that you can take on your journey to financial independence. This isn’t intended to be an all-inclusive list that covers every possible approach, but it does cover some of the most common and more realistic options.
Before we dive into the details, there are some important things that need to be mentioned.
First, terms like “financial independence” and “retirement” have different meanings to different people. For the purpose of this article, we’ll go with the definition of financial independence that is most commonly used in the FI community, which means that you have a net worth exceeding 25 times your annual living expenses. This definition is based on the Trinity Study, which found that you can safely withdraw 4% of your nest egg to cover your living expenses with a reasonable expectation (but not 100% certainty) that you won’t run out of money.
Second, this article includes some fictional examples along with calculations for demonstration purposes. The calculations were done with the Financial Independence Calculator from Financial Toolbelt. Although you can customize the calculator according to your needs, I left most of the default settings, including:
- Inflation rate of 1.9%
- Wage growth rate of 4%
- Drawdown rate (or withdrawal rate) of 4%
- Investment growth rate of 6%
Now, let’s move on and take a look at the different paths you can take to reach financial independence. (It’s also possible to combine these approaches, so you may fit into more than one category.)
1. Steady Saver
The steady saver is someone who consistently lives below his or her means and saves and invests on a regular basis. The goal here isn’t really early retirement. The steady saver is preparing for retirement at age 65, or somewhere around that age.
Being a steady saver doesn’t require you to be a high-income earner or to be a minimalist that cuts all expenses that aren’t absolutely necessary. It’s possible to have a moderate income and reach financial independence by choosing a lifestyle that allows you to save and invest every month.
Fictional Example of the Steady Saver
The typical financial advice is that you should aim to save around 15% of your income, so let’s take a look at an example that fits this advice.
Stanley Saver is 30 years old and currently has $50,000 saved for retirement. He makes $60,000 per year and he contributes 10% of his salary to a 401(k). He also saves 5% of his after-tax pay for other investments. Additionally, his employer will provide a 3% matching contribution to his 401(k).
At this rate, Stanley Saver is 34 years away from financial independence, which means he would reach FI at the age of 64.
While Stanley’s approach is nothing drastic, it does give him the possibility for a very comfortable retirement.
If Stanley wanted to reach financial independence earlier, he could increase his savings rate. Also, this example assumes a 4% wage growth rate. If Stanley is able to progress in his career and maintain the same savings rate, he’ll reach FI faster.
Overview of the Steady Saver Approach
- Doesn’t require a high income
- Doesn’t require extreme frugality
- Does require consistency and discipline
- Great approach for retiring at a traditional age
2. High-Paid Professional
While the steady saver path doesn’t require a high income, having extra income can certainly help to accelerate the progress. In the world of financial independence blogs, there are several that are run by doctors. A physician is one example, but others include attorneys, executives, and other high-paid professionals.
A higher income gives the potential to save more money, but of course, that’s not always the case. There are plenty of high-income individuals and families who are spending everything they’re making and even living above their means. A high income doesn’t eliminate the need to live within your means and save money.
Fictional Example of the High-Paid Professional
High-Paid Hannah is an attorney with a salary of $150,000 per year. She’s 30 years old and currently has $50,000 saved for retirement.
Hannah will be contributing 12% of her salary to a 401(k) and her employer provides a 3% match. She’ll also be saving 30% of her after-tax pay. This means she’ll be saving $52,596 per year with a take-home pay of $70,224 (24% tax bracket).
At this rate, she’ll be able to reach financial independence in 20 years, or at age 50.
Real-Life Example of the High-Paid Professional
A great real-life example of this approach is John from ESI Money. John retired at 52 years old (with a net worth of over $3 million) after working as an executive. John is still active and makes money from a few different websites that he owns and manages, but he chooses to work on passion projects more out of desire than need.
Overview of the High-Paid Professional Approach
- High income allows for the potential to save and accumulate wealth quickly
- Financial discipline is still required
- Early retirement is very realistic with an above-average savings rate
The high-paid professional approach sounds great because everyone would love a high income. Although it’s a legit option, it’s not for everyone.
Another option for earning an above average income is to start a business. Of course, not every business is successful, but if you’re able to have some success as an entrepreneur, you may be able to reach an income level that most people won’t reach in a more traditional career.
While the high-paid professional approach and the entrepreneurial approach both provide the possibility of high income, the details of the approaches are much different.
Of course, there are a wide variety of types of businesses, and entrepreneurs can come in many different forms. Regardless, a successful business that generates a high income for the entrepreneur provides the opportunity to save and invest. Sometimes that involves traditional investments, and other times the entrepreneur may invest in his or her own business, or by acquiring other businesses.
One of the keys to the entrepreneurial approach to financial independence is that a business is an asset that can be sold. Not only can an entrepreneur earn a high income while running a successful business, but that business can be sold when the entrepreneur is ready to move on. This type or payday is capable of getting an entrepreneur to financial independence very quickly.
Although we looked at fictional examples with the financial independence calculator for the first two paths, the entrepreneurial path doesn’t work very well with that type of calculation. The income for an entrepreneur or business owner isn’t steady, which means that savings rates also will not be steady or predictable. Throw in a lump sum from selling a business and you can see why it’s difficult to calculate using a generic a