Save Yourself to Financial Freedom

Financial Independence

Financial Independence (FI) is a state in which an individual or household has sufficient wealth to live on without having to depend on income from some form of employment. Financially independent people have assets that generate income (cash flow) that is at least equal to their expenses. Having achieved Financial Independence doesn’t mean you are retired. It means that you can choose to work or play on your terms. There is several levels of Financial Independence but that will be covered in a future post.

Savings Required for Financial Independence

Typically the FI community assumes a safe withdrawal rate of 4% from your investments (assuming you generate over 4% a year) so that you don’t have to impact (reduce) your principal investment. An issue I have with this is it doesn’t account for the inflation rate (rising prices). Realistically, one should factor in withdrawal rate plus inflation rate – typically between 1.5-3.0% in the developed world – when doing long-term planning for retirement. This means your passive income has to grow by 5.5-7% for you to be able to withdraw 4% safely. Historically, investing in real estate or in a major stock market index have been the main avenues to generate such rates, however this doesn’t mean one can rely on it. Whilst historic performance is a good indicator for future performance, surprises in the stock market and financial markets are not uncommon during these days of financial system instability. Personally I tend to be ultra-conservative when I do my retirement planning – crunching numbers, evaluating assets, always assuming the worst parameters and choosing the ‘safest’ assets to invest into just to be on the cautious side. This has served me very well in my planning and executing my plans to date.

So what does it mean to aim for a 4% withdrawal rate? Assuming a 4% withdrawal rate means you need to have amassed savings of at least 25x your annual expenses. These differ based on the lifestyle you lead. So if you have annual expenses of $30,000, you need savings of $750,000, and invest this at a rate of return of at least 5.5% (assuming 1.5% inflation) to consider yourself financially independent with a annual budget of $30,000.

Here is a table of what you need to save up based on your living expenses:

Annual Expenses

Required Savings for Financial Independence 























For me it was particularly difficult to ascertain if I would make it in my new FI life as my annual expenses were close to $130,000 before I put my corporate career on hold. I had saved up over $700,000 in cash (average of 35% net saving rate over 12 years of my previous career) and calculated I would be fine on roughly $40,000 a year for expenses – I didn’t want to compromise my life to live too lean either and still enjoy the freedom to travel a fair bit, keep studying, and further grow my retirement nest egg until I actually reach government retirement age. The budgeted annual expenses were roughly two thirds less than what I was used to, so I had to make drastic changes in my lifestyle if I wanted to go the FI path. I estimated I could conservatively generate a net income of about $24,000 per annum from my real estate investments in Poland and would figure out a way to earn another $16,000 a year once I have all the time in the world to built something new up and slowly. Well, because of my conservative estimates, I initially assumed half the average return on my real estate investments (at around 3.5%) and overestimated my new life’s living expenses by roughly double (read more about my actual expenses and income here) – maybe I was too conservative but I budgeted it that way, too be comfortable, as I prefer positive over negative surprises. I managed to reach a level of net income of over $40,000 from my real estate investments in less than 1.5 years. I became my own boss, and gave myself a safety buffer of $20,000 as well as training for a new career as a dive instructor, generating an additional net income of approximately $1,500 per month. Being able to choose when and where to work – I mix travelling and ‘passion working’ these days, has been one of the benefits of my new FI lifestyle. My current actual savings (predominantly from my properties) are currently hovering around $3,800 per month, allowing me to re-invest these savings for the future. As I cover all my living costs from pursuing my diving and teaching passion, I save all my current rental income plus a little from my diving salary. I plan to add a one-bedroom apartment every 2 years to continue to build up my income to an average of $73,000 per annum over the next thirty years, before I hit my actual retirement age. I honestly couldn’t bear the thought of doing nothing all day, like in the traditional retirement sense, so working in the field of my passion feels like the best thing to do. Financial Independence gives you the freedom to work when and where you want and on what you want. Whilst I could sit on my bum and live out the rest of my life, without working ever again, I plan to have children next and that requires yet another modification of lifestyle and associated cost structure. So a little more work is required to do this in comfort and stress free.

That thing called ‘Lifestyle Inflation’

So how do you get to half a million dollars in savings to enjoy a annual passive income of ca. $20,000? In my personal view the best way is to study hard from young, advance your career in a future-proof profession, continuously self-develop as a generalist, save and invest, and don’t succumb to “lifestyle inflation”.

Lifestyle inflation is the outcome of increasing your expenses with your growing salary. The first ten years of your career drive typically the largest pay increases (in %) and it is also the time you get used to how much you can spend. Most people don’t control their expenses well, especially during these formative years, and increase their lifestyle costs in direct proportion to their salary increases, effectively living pay cheque to pay cheque – a terrible mistake. Further folks take a loan to live in a house they couldn’t afford to buy otherwise – in my view this locks down most people into the current ‘system’ completely. Instead, if somebody wants to reach FI, one should increase the savings rate instead of the expenses while advancing their career and avoid loans like a deadly disease.

A young, well-educated professional starting out with a $50,000 salary today for instance can reach FI in about 10-15 years but it would mean sacrificing a part of their lifestyle (saving 20-30% of after tax income), steadily develop their career and associated income further, and invest financially wisely and disciplined.

Recipe for Financial Independence: 
  • Save at least 30% of your take home pay.
  • Invest savings into revenue generating assets which provide a return of +6% (index funds or real estate have shown +8% annual average gains over the last 100 years, but be aware of the cyclical nature of these assets).
  • You would need approximately 15-20 years of work to reach FI at this rate, excluding any pay rises.
  • Grow your salary through career advancement and self-development to generate additional savings. This will greatly bring forward your personal Independence Day – by years.
  • Look for opportunities to accelerate your FI date, such as setting yourself up for a company redundancy package, additional part-time work in the evenings or over the weekend, sales and e-commerce on-line, art sales, or similar.
  • Take an online finance course to understand how financing, budgeting, interest rates and compound interest work. These are the basics of personal money management.
  • Do not succumb to lifestyle inflation. It’s okay to live with your parents or share a flat in your twenties. Keep your costs as low as possible to maximise your savings rate. Save first then budget your monthly expenses. Live a little every month but don’t sacrifice your targeted savings as each unnecessary expense is basically pushing your FI date out.

Not surprisingly we see that most people never reach Financial Independence, or worse, they need to work in their 80s or until death, not being able to retire at all. More and more people simply do not save enough, live beyond their means, don’t invest, and do not understand the basics of financial management, i.e. how compound interest works or how ripped off one can get taking a payday loan. In fact personal saving rates i.e. in the USA have been significantly below average, compared to other industrialised countries, around the 2-5% mark. That doesn’t add up to a lot of savings over a 45 year average working life, meaning they solely rely on a pension system that is constantly being pumped up by today’s taxpayers and I don’t believe this will go on forever.

Do you have a retirement plan yet? How much do you save and when do you plan to (semi-) retire? Let me know your thoughts and questions in the comment section below.


For Freedom and to Live Your Dreams,
Your Financial Gladiator


About: This Financial Gladiator retired early at age 34 by investing most of his savings in a small real estate portfolio in Eastern Europe. Today he saves approximately 75% of his income while roaming the world and occasionally teaching as a Scuba Instructor on tropical islands. It helps him to keep fit while doing what he loves – teaching, traveling, and scuba diving. He called quits following a successful 13 year career in Information Technology throughout which he saved between 30-40% of his net income annually. Before he quit he positioned himself in a role he suspected was going to be made redundant eventually. The day arrived quickly and he ensured not to leave without a  retrenchment package reducing the need to work and save 3 more years. His real estate portfolio draws a return high enough to pay him twice his annual expenses, allowing him to continue to build up his retirement portfolio while enjoying 100% freedom today.

Disclaimer: All information provided on this site is for informational purposes only and does not constitute professional financial advice.

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