The 6% Rule for Financial Independence

6% Rule

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.

  • Brian
    Posted at 20:16h, 26 November

    So what you are saying is that 2% return on investment is what you need assuming you don’t work after retirement. Instead of adding to the 4%, you really should be subtracting.

  • Vicki Robin
    Posted at 21:30h, 26 November

    Hi Brian I am saying withdraw your 4% per FIRE common wisdom and plan to earn additional income using 1% of your nest egg as a guideline and then plan to tithe time equal to another 1% of your nest egg. It’s a way to say that we will likely work for money post FI to keep creative and will surely work for love as well. We don’t just walk out of a job and onto a beach and call that a life. IMHO

  • Barbara Mikula
    Posted at 21:32h, 26 November

    Not able to access webpage of other FIers to connect with. Have been on YMOYL program since 1987. A long time ago!

  • BusyMom
    Posted at 11:37h, 27 November

    I get paid too much right now. Once I leave my job, my hourly wage would be a tiny fraction of what I make now. And the only reason I want to leave it is to have more time. I don’t know if I want to spend precious time making more money.

    That said, I am sure I will end up making some money. But I will probably end up just withdrawing lesser from my nest egg. As to bring of some use to the world, and not just a burden, we will probably leave everything to charity when we die. If the math is right, we have a pretty good chance of being super rich if we actually live on that 4%. And that should be good enough.

  • Marian
    Posted at 12:36h, 27 November

    Thank you, I love this! We are planning on leading canoe trips for extra money, which we enjoy doing together, and then also volunteer for river cleanups and protecting the environment that we love.

  • Joseph Beckenbach
    Posted at 16:21h, 27 November

    Interesting take here, Vicki!

    It goes a step beyond JD Roth’s “wants and needs” phrasing, in making sure some form of service-purpose is front-and-center. It echoes a number of income-focused FI/RE folks, such as TropicalMBA, who suggest that business income fulfills you more when made and used after FI than when creating FI in the first place.

    I will pull this into my own planning and see where it leads me. Thanks!

  • Brent
    Posted at 19:57h, 27 November

    Hi Vicki. Brian’s right. The 4% Rule is the safe yearly withdraw rate of your nest egg. If you start calling it The 6% Rule, you are essentially saying to withdraw more money than is advised. I know that is not you intention, but I’m just saying it’s confusing. Instead, you should say to pad your expenses by 50%.

  • Vicki Robin
    Posted at 23:49h, 27 November

    How wonderful to see you show up here Joseph! I’m trying a variety of ways to shine a light on what seems missing for me in the FIRE formulation which focuses on hyper savings and hyper earning for a finite period of time (as with YMOYL) but is largely mum about the fulfillment and alignment questions and any encouragement to imagine what one will do with 3-5 decades of free time. And the strain of rigidity about FI being a bright line between paid employment and never getting money for anything you do in the future. I think the metaphor i used has added more confusion than clarity and i’m going to try to remedy that.

  • Vicki Robin
    Posted at 23:51h, 27 November

    Thanks for this suggestion. I think I was making a good set of points in the wrong way because the 4% (or 3% or 3.5%) SWR is so foundational to the FIRE community. I’m going to try to remedy it with some edits and a wee introduction to the post.

  • Vicki Robin
    Posted at 23:53h, 27 November

    That sounds great! And an inspiring example of what I was getting at in the post.

  • Vicki Robin
    Posted at 00:00h, 28 November

    Well that is intriguing. Paid too much? Few would say that. I’m not suggesting you ever ever go back to doing something you hate for money once you’ve achieved FI, but many people do make money in their post FI years, sometimes accidentally doing what they love, sometimes to cover a shortfall or adapt to an unforeseen circumstance (like getting married and having three kids!) or pursue a new interest that costs more than you bargained for. But to me you are still FI at least in having a clear relationship with money and hopefully a financial foundation you can count on no matter what. Maybe this will be you. Maybe not. Sounds like you are working your plan diligently

  • Vicki Robin
    Posted at 00:01h, 28 November

    Join the facebook your money or your life community

  • Adam@Evolving Escapades
    Posted at 16:00h, 28 November

    Great Post Vicki! I think everyone is getting way too hung up on the 6%, you didn’t just kill a sacred cow. You’re just adding an additional thought provoking layer to the 4% rule, I believe everyone is missing the point and not getting past the title.

    Contributing to society and building your skills is huge piece of life. FI is not the finish line, it’s the beginning of a new and awesome chapter of life. Since semi-retiring and traveling full time in an RV, I’ve started doing seasonal work as a truck driver/tractor driver for the wheat harvest in Eastern WA. It covers a decent portion of our yearly budget working less than 3 weeks and was fun to do while learning a new skill. That is just one of many projects or things that we are doing while also traveling the country.

    It was great to meet you last Memorial weekend Vicki, I hope our paths cross again in the future. Keep creating excellent content! We are looking forward to it.

  • Vicki Robin
    Posted at 17:05h, 28 November

    Thank you for “getting it”! It is a challenge to lift the eyes of people in the middle of their earning sprint to the opportunities of post FI, but it seems my best role in this movement. There are a thousand, at least, bloggers helping on the earning sprint. Few with the privilege of entertaining the “what makes life worth living?” question. And yes, I do remember our conversations at Camp Mustache.

  • Alison Macmillan
    Posted at 18:25h, 28 November

    Great idea! I am close to FI, and will likely stay with my employer five more years to access the immediate reduced pension and benefits (government employee). Work provided a very hostile environment for so long that I focused exclusively on saving to escape. Lately I have been focusing on the what next. I take care of elderly parents and a two year old (my miracle baby) and I am clear I need something outside of the caregiver role, likely fundraising for our local food bank, which I have been involved with for years.

    I have just been including in your FB community, thank you! I have suggested to the local MMM meetup to work on the exercises in YMOYL with tepid results. I would love to join the others that want to meet up via Facetime, hope to talk soon!

    This time of year is difficult, family relationships are difficult despite many conversations, many self development courses etc. to see how I could shift things. I am creating positive experiences and community around myself, thanks for being part of it.

  • T Dierks
    Posted at 06:49h, 08 December

    Thank you for publishing your book. I sure am hoping it resonates with my son-in-law.

  • Sebastien Aguilar
    Posted at 23:38h, 23 December

    Hello Vicki!

    I love this post! It resonates so much with me. Ever since I discover the FI movement (why are we still keeping the “RE” at the end?), I felt that the big “what comes after” question is missing everywhere. Aside from Tanja from OurNextLife and JD Roth, very few people ever talk about meaning and purpose beyond work. And I think your take on it is the closest to how I feel about it.

    “There’s no post FIRE requirements – you’re financially free after all – but a meaningful life has some element of service to others.”

    I love how you suggest FI people look at contributing to society. This exactly how I look at my life post-FI. I want to do good in the world. I want to help people. I want to have a positive impact. That’s how I feel fulfilled. That’s how I find meaning.

    I wonder why not more people speak about this. Could it be that not everyone has this need for meaning through service, growth and contribution? Maybe I am missing something…

    I think FI people have such an incredible advantage over everyone else. It is more than just an advantage, it is literally a superpower.
    For the first time in history, random common people have the option to decide what to do with their time irrespective of the pay. For the first time the “need to make a living” and “profitability” are not the main criteria dictating what we do in a given day. And these random people have proven to have some solid discipline, skills and competences that often let them earn more than average, and time to actually do what they want. All these people (we) basically have the potential, resources and time to pick any problem and go solve it. It literally is a superpower.

    As I have done for my finances, I am now looking at ways to make the best out of this superpower. And so I have been looking for answers to the question “what is the most good I can do?”. And it is leading me to very interesting path I could take to help make this world a better place.

    Not many people talk about this in the FI community, but luckily, this is a rather common question in the Effective Altruism community. Have you heard about it?

    Is this a questions people talk about in the YMOYL FB community? I didn’t know it existed! I am joining now.

    Thanks for all the work you do! I look forward to the discussion.