My Three Levels of FI - Bro

Financial independence is not an all or nothing thing. If you are willing to live under a bridge it is quite possible to be financially independent for only a few thousand dollars. The problem is that is not the type of retirement most people want to live. I sure don't want to live like that. On the other hand it is also possible to spend your whole life saving and saving to try to hit a FI level where you can live in Monte Carlo. You may hit that level of FI but by then you might be 99 years old.

For me there are three reasonable levels of FI to aim for. The first level is Basic FI. This level would produce enough money that we could pay our bills. There would really not be much money left over for anything else but we would be able to live. The second level is Full FI. This level would supply enough money that we could pay our bills and live a little beyond that. That might translate to some higher quality groceries, a road trip, or even a very rare flight to somewhere fun. The last level is Baller FI. This level is the point where FI supplies enough to pay the bills and live it up (within reason). For us this would be a nice trip every year, a new car every 10 years, and paying for the kids college.

The beauty of these three levels is you can bounce between them. If the market is red hot (like it is now) and your portfolio is looking flush it is ok to switch to Baller mode. If the stock market takes a little dip then you may need to roll it back to Full FI and if the market crashes then Basic FI here we come.

In Basic FI it is very important to be conservative. There is really no room below this level.* Due to the need to be conservative a safe withdrawal rate is 3%. The origin of this is based on the oh so famous Trinity study. In other words if my family needs $30K per year to “keep the lights on” then my family needs about $1M invested. The truth is that 3% is absurdly low for a withdrawal rate. The goal of this level is really to ensure you will have enough to live on. It is extremely likely if you were to retire at this level your money would naturally grow and push you into Full FI. That being said better safe than sorry in my book.

Full FI is about living a satisfied life. You might never have the room in the budget to visit an ice hotel but you will always have good food, good friends, and nice things. The way to think about how much you need to get to Full FI is what amount of extra money do you need in your budget to take your life from just “barely making it” (A.K.A. Basic FI) to “I am quite comfortable”.  For my family an extra $16K per year is that amount. The extra money would allow for us to get nicer groceries, go on an occasional road trip, or even splurge and take a plane somewhere (once every few years). Due to the fact there is some “fat” to cut in the budget a 4% withdrawal rate is reasonable. If for some reason the the market dips and you get spooked you can simply fall back to Basic FI until things settle down a bit. In my example the extra $16K per year would require an extra $400K saved. Added to our Basic FI stache we would require a total of $1.4M to settle in at Full FI.

Baller FI is where you have the room to attack the bucket list. RV trip around the US? No problem! Just rent one or buy one gently used. Cruise some Norwegian fjords and see the northern lights? Sign me up! Make large recurring donations to your local library so they will build a statue of you (or at least a commemorative plaque)? Go ahead and rock that donor advised fund!** Life is still restricted (no limited edition Tesla roadster for you) but if something is intriguing to you then there is room in the budget to get it done. For my family $40K per year above and beyond Full FI would put us at this level. We would be able to travel where we want for the most part and set up some sustainable giving. Baller FI is not something I feel the need to sustain every year so I am happy to use a withdrawal rate that is fairly aggressive, 4.5% seems to do the trick. So for my family to be in Baller mode we would need about $900K extra.*** If you add that to the previous levels that brings us to $2.3M to live it up.

Your level of FI does not need to remain the same year to year. We would be ok spending most of our time at Full FI and hitting Baller FI in order to living it up a bit once every few years. I would like to avoid Basic FI but it is also nice to know if for some reason the market where to drop for an extended period of time we would be okay.****

* This assumes you are totally allergic to work. 99.9% of people would ride out whatever downturn that hit their portfolio and then get a J.O.B. and rebuild.
** Being able to be generous is actually one of the strongest motivations for me to hit Baller FI.
*** Yes for you math nerds out there $40,000 / .045 = $888,888.89. I like to round because life should be clean!
**** Safe withdrawal rates already take this into account! That being said I really really don't want to have to go back to work unless I want to.

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