By Dr. Jim Dahle, WCI Founder

In the financial blogosphere, becoming financially independent and sometimes retiring early seems to have become the end-all-be-all of our financial (and sometimes even non-financial) existence. I think we're giving it too much credit. Becoming financially independent in the traditional sense isn't actually going to make you dramatically happier than being almost financially independent. If it does, it likely means you are currently leading a terrible life. Let me explain.

 

What Is Financial Independence?

First, let's define financial independence. We'll do it very simply—it's when you can live the rest of your life without changing your lifestyle or receiving earned income. Traditionally, using the 4% rule, that means having a portfolio that is something like 25 times what you are actually spending. If you have passive sources of income (Social Security, pension, rental property, etc.), then it's a portfolio 25 times the difference between your spending and your reliable passive income.

Now, let's assume you have a portfolio that is 24X your income and so you work and save a little more and compound interest does its thing and WHAM, you hit your number, 25X, and you are now FINANCIALLY INDEPENDENT! You're FREEEEEEE! The next morning, you go into work, flip off the boss, moon your co-workers, and take your Bobblehead dolls out of the cubicle. You're off to a life of leisure, fulfillment, and happiness!

Really? That's how this is supposed to work? I just don't buy it. Hitting your number isn't going to increase your happiness much, if at all. Hitting that number allows you to do only one thing that you couldn't do before hitting it—stop working. If stopping work is going to dramatically increase your happiness, I would submit that you have allowed yourself to live a terrible, regrettable life. Life is short. You cannot plan to live a significant portion of it doing something you detest and expect to have a happy life. As author Seth Godin says,

“Instead of wondering when your next vacation is, maybe you should set up a life you don't need to escape from.”

More information here:

The 2 Keys to Happiness

The Happiness Index: Mine Required My Own Version of Retirement

 

My Perspective on Financial Independence

Let's take a look at financial independence from my perspective since that's the person I know best. I am financially independent. As famed boxer George Foreman says, “The question isn't at what age I want to retire; it's at what income.” If I had to retire in 2016, when I originally wrote this post, just on the investable assets we had accumulated, we could have done it for the rest of our lives. We would have had an income higher than that of the average American household. But that would have been a significant drop from our then standard of living.

In 2016, I was certainly independent of any need to practice medicine since The White Coat Investor makes more than my practice, but in some ways, I'm just exchanging one job for another. The retirement police would deny that's really retired. I don't know what this site's residual income would be if I quit writing, interacting with others, going on speaking gigs, marketing, writing books, creating courses, and writing for other sites and publications. I guess I would still get at least half the income for quite some time, which we could also quite comfortably live (and save) on. But given our desired lifestyle/spending, if we had to support it just from investable assets in 2016, we would not have been quite financially independent for a few more years.

Guess what? I no longer care.

Over the last few years, I've been trying to mold my life into exactly what I want my life to be. I've cut back from 15-16 shifts a month to 12 and then eight and then six. I no longer work the overnight shift. I've offloaded many of the unpleasant tasks associated with WCI onto others. I've scheduled more trips. As I originally wrote this, we were en route to Zion National Park to do some canyoneering, my fourth of nine trips/vacations in a three-month period. About half were with my family, and the rest were “adventure trips” with friends. I have nearly aligned my actual life with my ideal life. When I first wrote this piece, I believed that if I were financially independent, it wouldn't change my life or my happiness level one iota. My prediction turned out to be absolutely true. Crossing the threshold to financial independence did not make me any happier. It may have made me less happy. Mo' money, mo' problems. The more money and stuff you have, the more time and effort you have to spend taking care of it. It is certainly harder to motivate myself to work as I have to rely SOLELY on my passion to do so, rather than my passion plus the improvement of my financial situation as it was prior to FI.]

How Much Money Is Enough?

What's the point of this rant? The point is that you need to figure out what is going to make you happy and then work toward that goal. Maybe for you, that does not include any paid work. Maybe it involves cutting back at work, changing jobs, or dropping some unpleasant duties.

Who knows? But the sooner you figure out what is going to make you happier, the easier it will be to implement that. If you can figure that out, you can figure out how much “enough” is. How much income is enough? How much net worth is enough? Once you have those numbers, it will be easy to see that, for most readers of this site, you will hit those numbers long before you actually want to stop working.

 

Financial Independence Enables Financial Security

 

Financial security comes before financial independence, and that financial security is what adds to your happiness. Once you have maxed that out, your life is not going to get any happier from financial sources—no matter how much you make, have, or spend. If you want additional happiness, you will have to seek it outside the financial realm. As Jack Bogle related in his book, Enough,

“There's a sign in Einstein's office that . . . says there are some things that count that can't be counted and some things that can be counted that don't count. And that really summarizes it up . . . the idea that you think you know something when you see a number is just greatly overdone. We think we can count everything that's important, and we can't do that. You can't measure character, you can't measure integrity, you can't measure moral conduct, you can't measure love, the things that are really important in our lives, in our society.

More information here:

Life After Financial Independence: Two Perspectives

8 Things to Do with Financial Independence Besides Retire Early

 

The Good News About Financial Independence 

There is some good news out of all this.

  1. You don't have to wait until financial independence to be happy.
  2. You can increase your happiness by aligning your actual life with your ideal life as much as possible.
  3. Developing and following a financial plan that is highly likely to lead to financial independence will also make you happier, even before you hit your number.
  4. Remember the concepts of marginal utility and the law of diminishing returns. The rapid rate of increase in happiness you get when you first start getting your financial life in shape will gradually slow and then stop. Like the Starling Curve, going over the top may even make things worse.

What do you think? Do you think financial independence is oversold? Are you financially independent? Did hitting that point make you dramatically happier? Why or why not?

[This updated post was originally published in 2016.]