What is Financial Independence to me?

There are many definitions of Financial Independence out there is the web world. For example, “FUMoney”, Eary Retirement, etc etc. Each person who defined it was solving a problem in his/her life i.e. was trying to get free in some way. So, what does financial independence mean to me?

  1. Emergency Fund for 12 months of expenses
  2. Multiple Passive Income Streams that produce $50000 per year for years 50-70
  3. College Fund for my kid
  4. A retirement fund that covers 30 years of expenses for years 70-100
  5. A paid off roof for my family
  6. A $100K medical fund to help fix emergency health issues…not sure about insurance with preexisting health issues.
  7. Life Insurance to cover my family.

I am not sure if this is a realistic number yet….but this is a start. I hope to refine it over the next year or so when I have some more clarity on issues like housing.

Emergency Fund ($72K)

We live in the age of uncertainty in many areas and one of them is the source of income. I do not have super intelligence or super will power, but I sacrifice many things and work really hard. Inspite of that, I cannot say that I will never face a loss of income streams. So, this fund is there to take care of my worries for a while. $6000 pm for 12 months = $72K.

Details here.

College Fund for my kid ($80K)

College cost is soaring like crazy…looks like there is no end in sight. I wish I could fund the entire cost, but I am not sure I can. So, I have set a target of $20000 per year for 4 years of college. Anything more than this, the kid has to manage. I feel since we brought the kid into this world, it is our responsibility to build a proper foundation for our kid. A college fund is one part of the foundation. Maybe I will write another post about all the parts of the foundation I have planned to provide for my kid…..but that comes later.

Details here.

Multiple Passive Income Streams that produce $50000 per year ($1million Taxable account investments….for years 50-70)

Where I live, $4000 pm is an absolute necessity. A major portion of this expense is housing costs. A 2bed/2bath apartment costs around 2.5K to rent in a good school district. A mortgage for the same house will cost $4500 at least. If housing is taken care of, then $4000 pm will afford some luxuries like travel, etc. Else, this money would be necessary for basic living….sad, but true. Moving out of this area is not an option for me….my entire social circle is here and it is almost impossible to find such a set of good people anywhere else.

Details here.

A retirement fund that covers 30 years of expenses at $30000 per year ($900K Tax-advantaged account investments….for years 70-100)

I have been contributing to 401K over the past 14 years of working…but not much to show for this yet. I was not maxing out my 401K in the initial few years and the 2008 downturn wiped out a decent chunk. My current company does not match 401K. 401K has recovered a bit now but still way off target. PS: With my health issues, I realize that won’t live until 100…but running short for my family is not something I want.

One question to ask is: what is the difference between the passive income streams (yrs 50-70) and this retirement fund?

  • The first difference is the source of the money…taxable account vs tax advantaged accounts.
  • The second difference is that I want to give the tax advantaged accounts as much time as possible to accumulate and grow. If at all possible, I would like to not touch it until I hit year 70. After that the plan is to just take $30K out of it every year…which roughly works out to 3% withdraw rate. PS: Need to study issue of Required Minimum Distribution (RMD) from the 401k/IRA funds later.
  • The third difference is the type of investments. The money in the tax-advantaged accounts will be in target date funds..which get super conservative as the target date approaches. So, effectively, there will not be much growth for the money beyond the target date. But, the taxable account investments will continue to be invested in slightly more riskier and hence growth oriented vehicles so that there is some percentage of the portfolio that is geared towards growing the money.

The expectation is that a combination of the passive income streams and the retirement fund should provide a reasonably comfortable money pool for each month spent in retirement.

A paid off roof for my family ($850K $1millon)

This is one I am having most trouble with. In the past, I was unsure of taking on such a big commitment, especially due to many uncertainties in personal and professional life. Now, it seems like it is next to impossible, even with a more than reasonable down payment. I just don’t feel like paying a million dollars for a house that needs a million dollars worth of repairs. But, without this, I will surely not be financially independent. I do not have anyone else to rely on for housing…no parents or relatives. So, this is a must. I am hoping that when I reach a state where passive income streams are generating money to take care of basic necessities (say $1000 pm), I can take the plunge into housing…..which hopefully would have cooled a bit down by then.

A $100K medical fund to fix broken health issues.

I have accumulated some nasty health issues which need to be managed over the rest of my life. With uncertainties about health insurance for folks with preexisting conditions, I do not want to saddle my family with a huge medical bill. So, this fund should cover for any emergency health expenses. My current plan is that if the Emergency Fund is unused until retirement (touch wood), it will morph into a Health Fund for me. So, I am not going to work on this actively in the immediate future.

Life Insurance

There are few questions to answer when it comes to life insurance:

  • term life or whole life
  • how many years
  • policy value

I wanted to protect my family from any emergencies for my earning years i.e. until 65-70 years of age. I decided to go with Term Life Insurance and not Whole life. Apart from Whole life being a whole lot more expensive, the main reason for term life insurance is that by policy expiry time (65 or 70), I hope to have a reasonable financial plan for my family, even if I am not there. So, I have applied for term life insurance…the approval process took a long time but the policy has been approved! It costs me a packet every month…a bottomless pit…but, at least my family is covered until 70yrs of age.

Status at the start of the marathon called Financial Independence

07/25/2014        Emergency Fund                        100% complete

07/25/2014         College Fund                             29% complete

07/25/2014         Passive Income Streams            3.75% complete ($150 pm vs $4000 pm)

07/25/2014         Retirement Fund                        46% complete

07/25/2014         Roof for our family                     not yet

07/25/2014         Medical fund                              not yet

09/01/2014          Life Insurance                           100% complete


14 thoughts on “What is Financial Independence to me?

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  5. I too am struggling with the “roof over my head” dilemma with a similar $750k-$1 million price point. The hurdle I still can’t get past is that even if I paid for my million dollar property in cash (wishful thinking), I’d still have a monthly outlay of $1700/mo or so (property tax @ 1.15%, homeowner’s insurance @ 0.42%, and maintenance @ 0.39%). Depending on the specific property, I may also be subject to HOA in the $250-500/mo range. If I can rent a similar property for $2500-$3000/mo ($2700 is what I pay now for a 1br/1ba – ridiculousness, I know), I don’t know if it makes sense to be saddled with a similar monthly payment AFTER already having put down $400k ($600k mortgage taken out).

    I don’t see my home as a savings vehicle and as long as I remain disciplined in investing funds that would have otherwise been diverted to home ownership, I should be good in terms of FI. Would love to hear your thoughts.


  6. Yep…been there unfortunately. I did something even worse..hopefully, you are not doing it.

    I kept the home down payment fund, in cash, for many years trying to buy a home. Each year I would try and each year I would get disappointed at my lack of affordability for the homes that appealed to me. I finally decided this year that I will put the money to work and wait for the next housing down cycle. I did not want to waste anymore money by keeping the cash idle.

    The other option to consider is investing in a rental in a satellite city and generate an alternate income stream. You can take advantage of some tax benefits by rental depreciation, etc. Build up the home downpayment again and get ready for the next housing down cycle.

    The secret I have realized is to have money when the economy is down i.e. when people are hesitant to jump into home ownership. Best of luck in your quest!


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  8. Humble Fi,

    What do you plan to to with the passive income sources after 70? Reading your post, this stream seems to be financial assets.
    Do you plan to turn them into your pension fund? Or Do these assets have another goal?

    Assume that your passive income fund reaches 1mio in financial assets, and next to that you have a pension fund that has 900k into it. At the age of 7à, this would then mean you have 1,9 mio.

    Or did I overlook something



    • Apologies for the delay…was out on work related stuff and caught a nasty viral fever on the way back that laid me super low for a couple days.

      Yes. Your keen eyes have not made a mistake. My goal of $900K in my 401K was to fund the retirement years from 70-100 at a (withdraw) rate of $30K a year. My passive income streams would also sustain at about $4000 pm. So, if everything went well, I should have $7000 pm of income to begin age 70. $7000 pm is the generally accepted cost for nursing home care for one person. Yep…have to plan for it right? If I do not use it, my family will get this. They will not have to worry about money for some years atleast.

      Also, the $900K is designed to get into super conservative funds by age 70. So, this means I can assume that there will be virtually no inflation beating component in the $900K. The passive income streams will continue to be invested in income producing stocks and bond funds….at least there is some inflation protection. So, if I can have both by age 70, I would deem myself financially successful 🙂
      Wish me luck.


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