Are We There Yet?
Posted On May 11, 2019
Not yet. And, since we’re here, I might as well define “there,” so we know where we’re going.
Near-Term Goal: Financial Independence
A near-term “there” is reaching financial independence. In other words, accumulating sufficient wealth to live on for the rest of one’s life (or, more to the point, not having to work for money again).
What Financial Independence Is and Isn’t
Financial independence would mean no longer being reliant on someone else (such as an employer) to have the means to support your life. It would mean no longer spending most of your time and energy to pursue the goals of someone else, subject to their rules and control, because you need to earn a living.
Achieving financial independence doesn’t mean that I would quit immediately or wouldn’t work for money again. But, it would mean that I’d be able to choose to do other activities that I want (within my means), on my own time, for the rest of my life, even if I never earn another cent beyond what my existing assets generate.
This isn’t intended to discount the many positive aspects of my current job nor dismiss the possibility that I can find other opportunities that may be an even better fit. But, so long as I continue to work out of necessity — not purely because I “want to” but partly because I “have to” — I won’t be spending my time entirely as I wish.
Assessing Financial Independence; Degree of Confidence
At first glance, determing whether or not one has achieved financial independence might seem like a simple binary yes or no question: Will my existing assets cover my expected expenses, for the rest of my life?
But, answering that question depends on various assumptions about the world and the future, such as the expected rate of return of your assets, your expected expenses, the rate of inflation, the timing and amounts of your cash flow and your remaining lifespan. So, what might seem to be true today might not be true in the future if some assumptions turn out differently than expected.
Instead, when I consider whether or not I’ve achieved financial independence, I tend to think about it as: How confident am I that my existing assets will cover my expected expenses, for the rest of my life?
Only when I have a high enough degree of confidence that my existing assets will be enough will I consider myself financially independent. Everyone has a different degree of risk tolerance, needs and priorities, so what might be right for me might not be right for others.
Capital Preservation and Safe Withdrawal Rates
My current goal is to have sufficient passive income (e.g., dividends, interest, capital gains) generated by my assets to cover my inflation-adjusted expenses, including taxes, and not touch the underlying principal assets. And, who knows, perhaps that will be supplemented by earned (active) income as well (although I’d want to be working for reasons other than the money).
If I can do that, then — assuming a reasonable rate of return and Western civilization and capitalism more or less continuing as we know it — I won’t need to worry as much about things like severe economic downturns and living longer than expected, which may ultimately result in my unexpectedly needing to return to the world of negotium. And, I’ll be able to leave something for people and organizations I’ve cared about during my lifetime.
Of course, living off of passive income isn’t the only way to pursue financial independence. There are a lot of great resources discussing “safe withdrawal rates” (i.e., how much someone can safely withdraw from the principal portion of their assets without running out of money, given certain assumptions about their starting capital, withdrawal rates and rates of growth). For now though, it’s much more important to me to feel confident (with a large margin of error) that once I’m out of the rat race, it’s for good.
A Dream Deferred
Although I wish I had more freedom in my life, to use my time as I wish, I’m not going to quit just yet. I haven’t achieved financial independence, so if I take a break from working now, I know I’ll need to make money again (or would need to significantly change my spending habits, which is a possibility I may consider in a future post).
On balance, as long as I need to work for a living, my current job is not a bad way to do it. The longer I work, the more confident I become that I won’t need to again, and that’s okay for now.
Lifelong Goal: Otium
Ultimately, financial independence is a means, and not the end itself. It’s only a milestone (albeit an important one) along the path to achieving the desired state of otium, which is the ultimate goal. And otium itself is not a terminal event, but a continuous process of living well, growing as a person and helping others, on one’s own time.
I have initial ideas about what otium would look like in real life and plan to use this blog to explore that further, but in the meantime, I continue my journey toward that vision.