The 6% Rule for Financial Independence

26 Nov The 6% Rule for Financial Independence

Less than 2 days since publication of this post I see from comments that I have some explaining to do. I used the 4% SWR rule of thumb to set up a larger point about the RE of FIRE – early retirement. I am not suggesting anything about the rightness or wrongness of that rule for your investments. I am suggesting two other considerations as you plan for your FI. First, you may never NEED to earn money again but you may want to because you have a new cool interest that might make you money… like a business… or cost you money, like education and training. It doesn’t mean you are no longer FI – you are Flexibly Independent. Second, I’m suggesting that you focus on your values and purpose, not just your FIRE number. There’s no post FIRE requirements – you’re financially free after all – but a meaningful life has some element of service to others. So 4% SWR and the 2% more isn’t from your nest egg, it’s from your activities post FI. Read on and let me know what you think.

I know, I know – the 4% rule is sacrosanct. For those not in the know, it’s the rule of thumb for a safe withdrawal rate from a balanced investment portfolio to both have an income for life and not degrade your “nut” – your capital. It’s part of the Holy Writ of the FIRE community (financial independence retire early). The 4% Rule gets people to passionately unto obsessively pursue lowering expenses and increasing savings to build a nest egg that, invested, can liberate the remaining 30 or 40 or 50 or more years of your life, depending on your genes.

I believe there is much of what makes life worth living that falls outside the 4% rule, that secure income is a foundation for a well lived life, not the purpose. That is the topic of other posts, past and future. In this post I want to posit the 6% rule as a richer portfolio: 1% for creative earning and 1% for the planet. Presuming a million dollar portfolio, that would be $10,000/year active income, and $10,000 worth of service to planet/people/purpose.

Income after retirement

There’s a debate in the FIRE community, and those that write about them. Are you really “FIREed” if you make money after you quit your job? If you have income after you are FI are you really FI? In my long experience, such questions reflect more on the fear of the doubters than on the clarity of FIers.  Hard core practitioners, battling disbelief from the masses, bend over backwards to prove that you never have to work for money again. Nest egg + 4% Rule = the Time of your Life to do as you will. This purity sets the FIRE movement up for unnecessary critiques.

• The Suze critique is that a million is not enough. You need ten million at least in case life throws you a curve ball.
• The number cruncher critique is that inflation, market corrections and crashes, changing tax laws, etc. can erode the size or value of your nest egg such that income falls below expenses.
• The socially conservative critique is that you become an immature mooch and slouch is you aren’t working at a job in the economy. For society to work, we all have to work or at least look for work when we are unemployed and identify as a worker.

The purposes of work

In Your Money or Your Life we refer to E.F. Schumacher’s reflections on the purpose of work.

• To provide the necessities for you and your family
• To hone your character and build your skills
• To contribute to society

Said another way, work has three (at least purposes): income, self-development and service.

Income is the only life challenge that financial independence solves. If you are stuck in menial, repetitive, soul-crushing, health depleting jobs you can crawl out of this hole through entrepreneurship, frugality, and sometimes luck. No matter what rung of the income ladder you start on.

Self development is a vast topic, covering everything from maturation, sanity, soul, talents, interests, artistic expression, social skills. If you don’t develop over a lifetime, you become impoverished and suffer from arrested development.  You fail to find meaning, purpose and true fulfillment. Financial independence does not guarantee a this richness of life. Most people I’ve met who achieve early retirement are not spared the hard work of becoming a mensch (a profoundly good and real human).

Contribution to society comes from, as Einstein said, widening your circles of compassion:

“A human being is a part of the whole called by us universe, a part limited in time and space. He experiences himself, his thoughts and feeling as something separated from the rest, a kind of optical delusion of his consciousness. This delusion is a kind of prison for us, restricting us to our personal desires and to affection for a few persons nearest to us. Our task must be to free ourselves from this prison by widening our circle of compassion to embrace all living creatures and the whole of nature in its beauty.”

This is no trivial activity. It’s not like adding Facebook friends or doing a Vision Board or even studying important issues.  It requires a willingness to relate the suffering of another to one’s own experience without changing the subject to yourself!  It requires an exertion of the soul, loving a person or a possibility enough to commit – whatever suffering may come. In doing this you learn to ache, to be humble, to endure wanting without getting and thus know from the inside how all this feels for others.

Money for extras

Financial independence can be a floor without any notion of retiring from ever working for money again. You might do substitute or seasonal work to supplement your FI income.  With the standard FIRE formulation of stashing a million dollars in Index Funds and harvesting 4% income per year, the 1% for extras would mean working enough to earn $10,000 per year. People who’ve achieved FI are smart, clever and entrepreneurial enough to make that happen easily. Some examples:

1. Consulting with the company you retired from.
2. Taking short term assignments in your professional field, such as stepping in for a medical professional who takes maternity leave or being a traveling nurse
3. Monetizing a blog, be it the frequent formula of embedding ads and affiliate codes in your site or blogging about a unique skill, from pie baking to dog grooming to a keto diet to handyman skills and making money from classes or instruction manuals and such.
4. House and pet sitting for $40 a day (or more depending on geographic location and services required), eliminating housing costs and hopefully putting you in a beautiful home in a beautiful location.
5. Workshop presentations and lectures
6. Travel writing about your FI travels
7. Leading groups on travel adventures
8. Apprenticing in a skill or profession or location you’ve always wanted to know better
9. WWOOFing – Willing Workers on Organic Farms, a global network of opportunities to be a farm hand in exchange for room and board

And this is a very very partial list. The commitment to earn a little money part of the time or part of the year doing something that interests you, builds skills, exposes you to other ways of life or challenges your creativity or entrepreneurship – this can add spice and interest to your FI life.

Money for the Planet

For many, freedom from a soul crushing job is motivation enough to achieve financial independence. When you exit the job, you enter something new. I think most enter into an FI ante-room of travel and visiting and binge watching and hobbies and family time. Maybe we live here for the rest of our lives, but my observation is that those who flourish post FI eventually seek meaning as well as pleasure. I believe meaning arises as we fit the story of our lives into a larger story, be it political or historical or social.

• How did I get to where I am? Who or what helped me along the way?
• How can I assure that others have the advantages I have?
• How do I give back because I have been given so much?
• What’s needed and wanted by those around me?
• Given my skills and talents, what might I create to be of service to humanity?

The 1% figurative withdrawal rate from your nest egg can be volunteer time or investment in starting a non-profit organization or service travel or doing social media for a cause you care about or shifting from buying the cheapest to buying the most ethical products from food to clothes to cars. You want to tithe time and treasure to what feeds your soul and seems necessary for a brighter future for the world.

You might take on greater responsibility at your church. You might work for a candidate or cause you believe in. You might work in a shelter or offer support to new mothers. You might join a relief group for the growing number of environmental challenges: floods, storms, fires.

Having time to serve is a great luxury. It fills empty hours with meaningful activity. It grows your soul and bank of experiences. The 1% for the Planet might add or detract from your actual nest egg. You might spend less on entertainment or travel for free with delegations. You may also spend more money on bigger issues, but find you are drawing from spending categories you already have – that you are spending differently rather than spending more.

This 1% for the Planet keeps your eyes on a bigger prize from being financially independent – that wonderful feeling that you have make life better for someone somewhere, if only in one small way.

The key to financial independence: fulfillment and alignment

In Your Money or Your Life we suggest you ask of each spending category:

Is this expenditure of life energy in alignment with my purpose?

Does this bring me fulfillment in proportion to the life energy I expended to get it?

We don’t say, “Hey, until you know your purpose you should not even start this program.” We say, “Asking the purpose and fulfillment questions will initiate a process of discovery of who you are, what you love and what really makes you happy?”

By the time you achieve financial independence, which could take 5 years or 10 or 20, you will know what to do with the time you’ve liberated.

The 6% Rule for happiness

Here’s the upshot:

• 4% for expenses
• 1% for challenge, creativity and a bit of income
• 1% (of time or money, income or expenses) tithed to a purpose you recognize as a mighty one.

These are the keys to a steady income of money + meaning + mastery in your financial independence years, however many of those you have.