Financial Independence Progress Report

Financial Independence is a term you see a lot these days, but the definitions vary which is problematic. On the Reddit Financial Independence forum, it is defined as the combination of assets and other income streams that together generate a passive income that covers one’s basic living expenses. The level of assets is typically derived from the 4% rule. Then there are others that require the passive income to cover one’s current standard living expenses. It is this latter more stringent definition that I subscribe to. To make matters more confusing, there is the notion of “retire early (RE)” which together with FI makes the catchy FIRE. In principle, RE can happen at any time, but more commonly RE is concurrent with or follows FI.

I’ve always like this progression of financial milestones from Radical Personal Finance:

Stage 0
Financial Dependence
Stage 1
Financial Solvency
Stage 2
Financial Stability
Stage 3
Debt Freedom
Stage 4
Financial Security
Stage 5
Financial Independence
Stage 6
Financial Freedom
Stage 7
Financial Abundance

See the original post for definitions. So where am I on this journey? Below I’ve put my own “numbers” around the terminology. I couldn’t help patting myself on the back for what we’ve achieved in 15 years after my first “real job”. I’ll admit to having indulged in some Excel porn in coming up with the target dates of the future milestones; but hey, that’s the most fun anyone’s going to have with MS Office, right?

Disciplined savings and prudent financial decisions were largely responsible for our initial success but going forward the returns should matter a lot more. 2016 saw our highest income to-date but the contributions were still overwhelmed by the returns; and 2017 will be a below-average year in terms of bonuses. Equal if not a greater concern is to limit draw downs as the dollar amounts will be large and I’ll have less time to make them up. Hence the allocation to PMs, CEFs that are night and day from TBM, market timing moves, etc. While a large chunk of my passive portfolio is something even a Boglehead might approve of, the overall portfolio is probably as complex as an individual, non-professional investor can make it. I realize it’s not for everyone, God knows it took me two decades to get to this point. I’m still learning and evolving and my portfolio will too. That’s the fun part.