Do you need Financial Independence to Retire Early?

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Ahh… early retirement. We all dream about it, but only a few can pull it off. Early retirement is a difficult challenge, financially and mentally. How does someone even retire early? Most workers barely save any money for retirement. They’ll be lucky to retire at 65. Well, the answer is Financial Independence. That’s when your investment income can pay for all of your expenses. At that point, you don’t have to work if you don’t want to. The early retirement dream can become a reality. This is the ideal case. However, I don’t think you need to be financially independent to retire early. Let’s look at financial independence (FI) first and then we’ll talk more about retiring early (RE).

*This post was originally written in 2013. I updated and expanded it to be more useful. I hope you enjoy this one.

Reaching for Financial Independence

FI is a simple concept, but it’s very difficult to execute. I’ve been trying to increase our passive income for years. Finally, we’re there, but not securely yet. Here is how I measure our progress toward financial independence.

  • FI ratio = passive income / expense

There are only two variables here: passive income and expense. It’s 4th-grade math. We need to increase the numerator (passive income) and decrease the denominator (expense) to become financially independent. Unfortunately, both of these things are not easy to do.

Increase Passive Income

Passive income is tough. It takes money to make money. You won’t be able to generate significant passive income until you save and invest diligently for years. It took us over 20 years to build our passive income to over $50,000/year. Now, we have passive income from real estate crowdfunding, dividend stocks, rentals, and other sources.

It isn’t easy to increase your passive income because investments usually generate a tiny fraction of money invested. For example, most S&P 500 index fund pays out less than 2% of the dividend. Investors need to take on more risks to receive higher income. Real estate is a great way to generate passive income. I invest withCrowdStreet and it’s been quite good. Check them out if you want to diversify your investment with commercial properties across the United States.

Decrease Expense

Decreasing your expense is even trickier. Most of us are accustomed to our current lifestyle and nobody wants to cut back. I’m no exception. We usually spend about $50,000 to $55,000 per year and it would be very difficult to cut back. We could buy an RV and instantly achieve financial independence, but we don’t want to live that lifestyle at this point (or says Mrs. RB40). I’m sure most of you are in the same boat.

We just have to find the right level of spending and minimize lifestyle inflation as much as possible. Some people are happy with $25,000 per year and some can’t live without spending $100,000+ every year. You’ll have to make some tough choices if you want to reach FI earlier.

In 2019, we moved into our duplex to decrease our cost of living. This decreased our income, but also decreased our housing expenses. The bottom line is our FI ratio improved. Do whatever works for your family.

FI is not easy

FI is a simple concept, but the execution is a long grueling slog. Many people work all their lives and have very little retirement savings by the time they turn 65. Lots of Americans will have to depend on Social Security when they’re old. That’s not something to look forward to.

FI is even more difficult for people who want to retire early. Retiring by 40 means I have half the time to save and twice as long in retirement. It’s practically impossible to reach FI unless you have a very high saving rate and are extremely lucky.

Our FI ratio was over 100% over the last 2 years. I’m quite happy about that. If we can keep it up this year, we’re set. This is fortunate because it shows that I wasn’t crazy to retire from my engineering career 10 years ago? Well, maybe I was a little crazy at the time. However, we’re making it work. Life has been great since I retired. I still believe you don’t have to be FI to retire from your career. You just need to get close and then use other means to bridge the gap. Let’s explore a few options.

Joe’s FIRE tip – Take your annual expense and multiply it by 25. If the result is lower than your net worth, then you are close to Financial Independence.

Work part-time

First of all, I am very happy I am not an engineer anymore. Life was way too stressful as a senior engineer and I had little time to spend with my family. Everyone is much happier now that I’m a stay-at-home dad/blogger. These days I work for myself 10-20 hours per week from home. This is the ideal work situation for me. I love it.

These days, our passive income is enough to pay our living expenses. But I’m still working a bit to generate some side income. It’s good to work part-time and have something to do after retirement. I’d be bored out of my mind if I don’t have anything to do all day long.

Most early retirees shouldn’t stop working completely anyway. Think about it. If someone works hard enough to retire early, they must be a highly motivated individual. It’ll be tough to change gear completely like that. Most early retirees I know are still working in some capacity. It’s better to downshift and coast by working less rather than stop working completely.

This is also known as Barista FIRE. You just need to find a fun casual part-time job that will supplement your passive income.

Starting a blog is a great way to build your brand and generate some extra income. You can see my tutorial – How to Start A Blog and Why You Should. Check it out if you’re thinking about blogging. 

Take advantage of the workaholics

Our family is extremely fortunate that Mrs. RB40 is a workaholic. She likes working and she doesn’t know how to stop. Maybe when she is older, she’ll learn how to relax. This is great for our finances though. She can work and enjoy her professional life for 7 more years. Her income and benefits enable me to leave my career without worrying too much.

Create Intellectual Properties

Here is another way to create future passive income streams. You can invest time into creating intellectual properties like a book, a course, a podcast, or a blog! If you are lucky, you will be able to leverage these IP into passive income. Retire by 40 generated almost $500,000 in revenue since I started blogging in 2010. That’s insane, but many other bloggers are doing even better. There are endless ways to make money, you just have to find a niche and create some valuable content.

Ernie Zelinski, my personal hero, retired from his corporate career at 31 with a negative $30,000 net worth. He wrote How to Retire Happy, Wild, and Free and other great books. Today, he’s raking in over six figures every year from his books and speaking engagements. That’s incredible.


Now, let’s work on the denominator (the expense.) Geoarbitrage has gained popularity in recent years. Once you’re retired, you don’t have to live in a high cost of living area anymore. There are many nice areas in the US where it’s cheaper to live. From what I read, North Carolina and Tennessee are very nice affordable states. Why not check them out if you live in crazy expensive areas like NY and SF?

Many young people even move out of the US to take advantage of geoarbitrage. I spent 3 months in Chiang Mai and the cost of living is very cheap. I can live luxuriously here and still spend a lot less than in the U.S.

We’re planning to take advantage of geoarbitrage at some point too. Once RB40Jr goes off to college, we’ll be free to try living in SE Asia and South America. I’m really looking forward to it, but that’s a long way off. Our son is only in 5th grade.

Cut expense drastically

Of course, there are other ways to cut your expense drastically. You can buy a multi-plex and move into a unit as we did. Or you can turn your back on the American consumerism culture completely and stop buying stuff. There are many ways to cut expenses down to the bare bones. This is easier if you’re single, though. Cutting back drastically usually doesn’t work when there are 2 or more people involved. You’ll have to make some compromises to prioritize happy family life.

Quit before reaching FI?

Here is the bottom line – it is entirely doable to retire from your corporate career before reaching financial independence. You just need to get close and figure out how to bridge the expense gap. Working part-time is the easiest way, but it is not the only solution. If your stressful job/career is too much to handle, then it might not be worth it to stick around 4-5 more years to achieve FI. Sometimes, you just have to call it good and figure it out later.

What about you? Do you need to be financial independent before you retire? What are some other ways to bridge the gap and retire earlier?

*Sign up for a free account at Personal Capital to help manage your investments. I log in almost every day to check on my accounts and cash flow. It’s a great site for DIY investors.

Disclosure: We may receive a referral fee if you sign up with a service through the links on this page.

Photo by James Connolly

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.

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