Navigating the Road to Financial Independence

Your Ideal Route to Financial Independence May Be Off the Beaten Path

Charts, Goals, Theory

Financial independence – the concept of establishing a sustainable system where your investments can cover your expenses, making work optional – is an issue of particular interest to me, and from the popularity of the Withdrawal Rates calculator I gather that it is for many others as well.  Of all the things money can buy, I have a difficult time imagining something more valuable than the freedom to live on your own terms free of financial worry.  While I’ve previously discussed the effect of asset allocation on the retirement half of the FI equation, the natural next question is:


What’s the fastest path to early retirement?


The quick answer is “it’s complicated”.

When picking the best driving route between two cities, there are several variables involved like traffic, construction, and speed limits, but a good GPS device can easily calculate the fastest route at any given time and help you get there as quickly as possible.  Like a GPS device, there are a variety of nice tools in the early retirement community for estimating required portfolio values and the time to retirement.  Some make well-reasoned recommendations for the ideal percentage of stocks at every age in life, and project your arrival time down to the month.  While such tools are unquestionably fun and educational, the effects of asset allocation and market uncertainty on financial independence are quite a bit more complicated than such precision implies, and one-size-fits-all conclusions may not be particularly helpful.

Imagine for a moment what would happen in your trip planning if the roads themselves move over time.  Perhaps they constantly change paths, regularly reverse course for many miles, and even spontaneously dead-end altogether.  And what if the final destination is also a moving target and its ultimate location is affected by your driving habits?  No two journeys would ever be identical, and your own individual path would be impossible to predict with any precision.  Perhaps that sounds like the plot to a science fiction novel, but when it comes to investments all of those strange situations are real-life issues!  While financial independence is often described as a journey, the underlying math is far more interconnected than many understand and your travel strategy requires careful consideration beyond finding the theoretically fastest route assuming the financial world is static.

For example:

Despite the conventional wisdom, not every asset allocation has a 4% safe withdrawal rate. This affects not only retirement but also accumulation, as different portfolios will also have different savings goals required to provide for the same retirement expenses.  A portfolio with a 4% withdrawal rate requires 25 years of expenses, while one with a 5% WR only requires 20.

A typical safe withdrawal rate assumes only that the portfolio did not run out of money in 30 years.  However, this number may be a poor choice for an early retiree expecting to live much longer than that. Something like a more conservative perpetual withdrawal rate that protects the initial inflation-adjusted principal would be more appropriate for many people.

Investments do not return a fixed average percentage every year. Because of the effect of volatility on compound returns, using the average return while ignoring the underlying volatility can misrepresent the speed of investment growth in accumulation.  In addition, it provides a false sense of precision.  True historical times to reach a certain goal form a range, not a single number, and the higher the volatility the larger the range.


Put those things together, and a portfolio with a lesser average return but with lower volatility can nonetheless reach financial independence before a higher return portfolio, and on a more predictable timeframe.  But how, you might wonder, can you know the difference?

Good question.  As I considered many of the variables I realized I already had the tools to address them.  The Withdrawal Rates calculator is able to find the Safe and Perpetual withdrawal rates for any asset allocation, including ones never considered by popular retirement studies.  And the Portfolio Growth calculator is able to show the full range of historical portfolio growth data no matter what year you started.  What would happen if you combined the two?

You get the Financial Independence calculator.




The Financial Independence calculator shows the full range of working years historically required to fund financial independence no matter what year you started.  The only required inputs are your asset allocation and your savings rate.  Fundamentally, that’s all that really matters!  The math is the exactly the same whether you live on $20k a year or $200k a year.

There are a few other optional variables as well.  For those well into their savings journey, you can enter how many years of expenses you already have saved up.  For those who expect their expenses to change at retirement (perhaps you plan to pay off the mortgage, move to a less expensive city, or even increase your budget for travel), you can enter how much you expect them to change.  And while the default setting is the more conservative 30-year Perpetual withdrawal rate that preserved initial principal, interested retirees can choose to use the 30-year Safe WR instead.  All numbers account for inflation, so don’t worry about the cost of living difference across decades.

Note that the lines are color coded by start year, with darker colors starting in earlier periods and lighter colors starting in more recent periods.  Keep that in mind as you evaluate whether a certain portfolio is appropriate for your needs today.

Most importantly of all, it’s critical that everyone be aware of the single most important input on the Financial Independence calculator.  This time, it’s not the Asset Allocation.  It’s the Savings Rate.  When it comes to financial independence, no other choice will come close to the savings rate for determining your career duration, and no amount of investment risk will beat simply learning to save more.  It’s like the difference between walking and driving a Ferrari.  My absolute best advice is to find a “good enough” asset allocation you’ll actually be able to stick with for the long haul and spend the rest of your time and energy growing a Money Mustache.  You owe it to yourself to take the time to proactively explore how to maximize the savings rate while keeping it at a happy level you can sustain for the long run. Your future self will thank you later!


For a working example, let’s compare the range of historical retirement journeys for two different portfolios: A 100% Total Stock Market Portfolio and a very common STT version of the Permanent Portfolio.

Since 1972, the real CAGR of the Permanent Portfolio is 5% while for the Total Stock Market it’s 6%.  It only seems natural that the higher returning portfolio must have reached financial independence more quickly the vast majority of the time, leading very intelligent investors to recommend loading up on risk in accumulation to achieve the higher returns.  Well, let’s look at the Financial Independence charts for both.





Starting from nothing and investing in a total stock market fund, an adept saver who invests every other paycheck historically attained financial independence between 11 and 22 years later.  Splitting the difference, that’s an average of 16.5 years.  The same investor using the Permanent Portfolio the entire time reached it in 16-18 years.  That’s a 17 year average — only 6 months difference!  This unintuitive outcome is a result of the Permanent Portfolio’s higher withdrawal rate, requiring only 25 years of expenses to service the same retirement spending as the 30 required for the stock market.  So although the Permanent Portfolio did travel more slowly, the final destination was not as far away.

Just as important as the average time to financial independence is the uncertainty.  Market returns are not constant, and you do not receive the average return every year.  The roads move daily!  The Permanent Portfolio had a pretty impressive historical accumulation spread of only three years compared to eleven years for the stock market.  A quick word of wisdom for a phenomenon I’ve seen over and over – higher uncertainty is especially painful once you feel like you’re already close to the goal and don’t want to work any longer than you have to.  Sometimes the best plan is the more dependable option.

So which portfolio is the best option?  That’s totally up to you, and there are good arguments for either choice.  My goal is not to talk you in or out of anything, but simply to provide new information to help you see investment options in a new light.  Based on the typical assumptions that higher returns are always better, that your “number” is independent of your portfolio, and that projections based on constant average returns are reliable for planning purposes, I wager the charts have already surprised a few people.  Take some time to explore how asset allocation, volatility, and savings rate affect the road to financial independence, and you may quickly find that your previous trusty GPS really didn’t tell the whole story.


As always, please don’t interpret this post as a recommendation for a certain portfolio.  The Total Stock Market and the Permanent Portfolio are nice examples for illustration purposes, but there are lots of good portfolios for all types of investors.  Be sure to explore the new Financial Independence charts in the portfolios section and to try the tool for yourself.

Also, please take the time to read about the methodology to understand the assumptions and limitations of the Financial Independence calculations.  As you do, be sure to openly and honestly consider your own previous assumptions and the limitations of any other tools you may use for financial planning.  One new tool shouldn’t necessarily change your portfolio decision, but perhaps it will change the way you think about asset allocation and retirement planning as a whole.

It’s said that a journey of a thousand miles begins with a single step.  When it comes to financial independence, the first step is not necessarily to race to the finish line as quickly as possible, as returns are not the only factor to consider.  But even as you carefully research the ideal long-term plan for your own personal situation, nothing is stopping you from taking immediate action to start moving in the right direction.  The best day to take that first step is today.  Give it a try!