The Many Paths That Lead to FI – A Case Study – Part 2

This is part 2 of the case study with Michael from Ireland, who is exploring alternative pathways to get to FI. If you have not read part 1, I recommend you do so before you read part 2.

Michael’s FI Lifestyle Goals

Before we get into the numbers, I’ll share some more background from my conversations with Michael.

Michael has set an €800,000 FI number for his family. He feels this would be enough to support his family of five following the 4% rule. However, this wouldn’t be a Fat FI lifestyle with a lot of extras.

A lot of families (the Money Flamingo family included) are in a similar situation – if you want to fully FIRE with kids, your FI number will be a lot higher than if you FIREd once the kids are out of the house. Accumulating a “Family FI” nest egg means that you’ll likely end up with excess funds in the long run when the kids have left home.

An elegant solution to this is to simply set a FI goal that is just enough to support a family but a decent amount for a couple without dependent children. Instead of fully retiring while you have kids to support, you just live a semi-retired life, supplementing the income from your portfolio by working part-time.

This is exactly what Michael is planning to do: “[…] I guess my full version of “retired” is really semi-retired.  I enjoy many aspects of work, but would just like to work less and with more meaning. […] Thus, my approach to handling early retirement with family is really to simply semi-retire – working 10 hours a week causally, spending time with my family and playing lots of golf.”

Michael is currently working full-time and manages to save €10,000 per month. He is due to finish a project soon and plans to cut back and slowly transition into a semi-retired lifestyle. He is very much looking forward to this lifestyle change. However, even after cutting back, he believes he will manage to save around €5,000 per month for the foreseeable future. He might reduce this amount if he feels it is too difficult to achieve and requires too many sacrifices.

Exploring Pathways to Financial Independence

Below we’ll explore different paths Michael could take from where he currently stands towards his FI goal:

• “Full-throttle” FI – pushing on at his current speed until he hits his full FI number
• Coast FI – what would happen if Michael just stopped saving and investing now?
• The part-time path – moving to part-time work as planned and reducing his monthly savings amount (we’ll look at three different options for this path)

The numbers and assumptions

Current monthly savings: €10,000
Planned monthly savings from June 2023: €5,000
Current FI net worth: €359,408.00
Assumed annual investment return (inflation-adjusted): 5%

Option 1: “Full-Throttle” FI

Michael is currently 38 (almost 39) years old. Theoretically, he could simply push on, working full-time and saving €10,000 per month to reach FI in just under three years by age 41 (and around six months, to be exact).

In a recent podcast, Michael mentioned that he feels burnt out and that the financial progress his family has made over the last couple of years has come at a significant personal cost. So I don’t think this is a viable option for Michael at this stage of life. However, I have to say that the numbers and what is theoretically possible are pretty astounding with such a high monthly savings rate.

Option 2: Coast FI

What if Michael decided to do the complete opposite of the full-throttle option above and stopped saving and investing altogether?

Based on his annual return assumptions of 5%, he would reach full FI by age 55 through compound interest alone. Not bad, considering he wouldn’t have to save another cent to get there.

Michael loves working, so it is highly unlikely he would choose this option, but I think it is nice to see that age 55 is his baseline. Unless markets underperform for a really long time, he can look forward to reaching Full FI by his mid-50s. That’s pretty good when you think about how many people struggle to accumulate enough to retire even in their 60s and 70s.

Options 3-5: The Part-Time Path

Now that we’ve explored the two “extreme options” (full-throttle FI and not saving another cent and coasting) let’s look at some more realistic options.

The first one is his current plan – complete the project he is working on and then downshift in June 2023. This will see him cut his monthly savings by half – from €10,000 to €5,000 (€60,000 per year).

How soon will he reach FI with this plan? Let’s have a look. Note: I’ve used the “Die With Zero” spreadsheet for the calculations below.

Based on his return assumptions, he would reach full FI at age 43 (and again around six months, to be exact) – only two years later than with the “full-throttle” FI option above!

I find this incredible – he can literally halve his monthly savings amount, and it only costs him two years. If that’s not a good deal, I don’t know what is!

Note: The table shows €80,000 in contributions in the first year because Michael will be adding €10,000 per month for the first four months (using his January numbers as a baseline).

Michael mentioned that if a monthly savings amount of €5,000 becomes too difficult, he might reduce this amount further. Let’s assume he wants to cut his hours again one year into his new plan and only manages to save €2,500 per month (€30,000 per year) after that.

Let’s have a look at what this scenario would look like from an accumulation perspective:

Based on his assumptions, Michael would reach full FI at age 45 – four years later than with the “full-throttle” option. That’s still a fantastic result, in my opinion.

Now let’s look at one last option. What if, after the first year, Michael decided only to make small regular contributions of €1,000 per month (€12,000 per year)?

I think the result will surprise you:

In this scenario, Michael would get to full FI by age 47. Six years later than with the “full-throttle” option but eight years earlier than with the Coast FI option (Option 2 above)! This really shows the power of small contributions over time.

The Many Paths That Lead to FI

As you can see, there is more than one way to get to the finish line. We explored five possible scenarios, but in reality, the options are endless. I often write about the fact that Financial Independence is a spectrum. I think this case study illustrated this point quite well.

Also, all the options we explored assume Michael actually wants to reach full FI. I didn’t even get around to exploring what a “Die With Zero” scenario would look like for Michael. As you can see, there are so many options, and the whole FI concept is definitely not as binary as we tend to think.

Here is what the five options from above look like on a line graph:

We have one extreme – the “full-throttle” path – on the left (in red) and the other extreme (coasting without saving another cent) on the right (in dark blue). In reality, Michael will probably end up somewhere in between these two (like most of us).

The key here is that he has built a decent-sized portfolio already and will get to his end goal over time, regardless of what option he chooses. That’s the nature and power of compound interest.

As mentioned above, Michael’s FI baseline is age 55 – that’s when he should get to FI (based on his ROI assumptions) even if he doesn’t save another cent. Any additional contributions before then will bring his FI date closer, but at the end of the day, that is entirely optional. He will be fine either way. Michael could semi-retire tomorrow and simply decide to cover his expenses (which would probably mean only 1-2 days of work per week in his case).

One thing – the most important thing – that cannot be easily illustrated using a chart is the quality of life Michael enjoys along the path. We can only assume that any of the part-time options would mean a much higher quality of life and time freedom for him and his family.

Michael is very aware of the fact that working as hard as he does is not sustainable and that he is making huge sacrifices. This, combined with the acknowledgement that his real medium-term goal is semi-retirement rather than full early retirement, is very powerful. It allows him to choose from the full spectrum of options rather than feeling stuck on the “full-throttle” path like most people in the FI community.

I really look forward to following Michael’s journey and hearing about the decisions he makes along the way. If you want to follow along, too, I highly recommend you subscribe to his fantastic podcast.

Which path would you choose if you were in Michael’s situation?