Fast FI: Silveros Case Study
In my previous post, I introduced the concept of Fast FI and how it can help high-earning professionals achieve financial freedom and early retirement. Today, I'll dive deeper into Fast FI by exploring a case study of a family of four. (Numbers are simplified to understand the strategy and math. They do not include all factors or variables like their future tax bracket.)
Meet Zane and Raquel Silveros*. Along with their two children, they are an American family living in a suburban neighborhood in a medium-cost-of-living area. Zane 36 works as a dentist, earning $140,000 per year, while Raquel 37 is a lawyer with an annual income of $210,000. Together, they have a combined salary of $350,000 per year.
Like many families, the Silveros dream of financial freedom and early retirement. They envision a life where they can spend more time with their children, travel the world, and pursue their passions without the constraints of working a traditional job. They receive about $17,000 a month after taxes and 401(k) contributions. Their living expenses are $12,500, including mortgage payments, bills, groceries, and other necessities.
Using the Fast FI approach, let's see how the Silveros can achieve their financial goals:
Setting Clear Goals: The first step for the Silveros is to define their financial freedom numbers. They need to calculate two numbers and pursue both targets simultaneously.
One is the balance they need in their retirement accounts at age 65. They decide that $125,000 per year ($10,400 per month) will cover their living expenses and maintain a comfortable lifestyle in retirement no matter where they live. That means by the time they are 65+ the total balance in their retirement accounts needs to be 25 times** their living expenses (125,000 x 25) which is $3,125,000.
The other target number (freedom now number) is the amount they need to generate monthly to replace their working income with passive income. They calculate that $150,000 per year ($12,500 per month) will cover their living expenses and mortgage payments. It is important to note that the Silveros are being taxed at a high tax bracket and about 38% of their income goes to federal and state taxes. When their future income is generated through passive income investments and interest income, they will have a lower tax rate. This means they will keep more of every dollar their investments generate and don’t have to earn as much as when they were employees. (Side note: They are also open to living overseas or moving to a place with a lower cost of living and closer to nature. In that case, they would only need $100,000 per year to cover their living expenses. This is something they will reassess as they get closer to their target number)
Maximizing Investing: While still working, Zane and Raquel maximize their contributions to their retirement accounts to their 401(k)s. In addition, they commit to saving 28% of their paycheck, $5,000 per month, to buy income-generating assets. They will save this amount by making some adjustments to their spending. One big expense they decided to forgo was private school tuition and put their kids in public school and pay for a private tutor instead.
Creating a Plan: The Silveros create a roadmap with target dates and milestones for each year of their plan. They set a goal to achieve early retirement in 10 years, According to the retirement calculators they only need to maximize their investments in their 401(k)s for 6 more years (based on CoastFI calculators.) At that point, they will have enough saved in their retirement accounts to grow to their full retirement goal by age 65. After 6 years, they can redirect money that was going to the 401(k) to buying more income-generating assets.
Building Passive Income Streams: While they are waiting those 10 years for their retirement accounts to grow, Zane and Raquel invest in real estate crowdfunding, private lending, and other passive income opportunities. Zane also starts a side business selling digital products online, creating additional streams of income. They target investments that will give them at least 12-15% rates of return as part of their criteria for choosing their investment.
Monitoring Progress: The Silveros regularly review their progress toward their goals and adjust their strategy as needed. The economy and market conditions will change along their journey. They plan to pivot with them and invest in different assets at different times taking advantage of whatever opportunities they find. They have strict criteria for their investments and that helps them focus only on opportunities that will get them to their annual targets. They also prioritize keeping their investments diversified so they don’t have all their eggs in one basket. They track their investments, savings, and passive income streams to ensure they are on track to achieve their financial freedom number within their 10-year timeline.
The beauty of this dual-tracked approach is that there is a lot of margin for error. The investments inside the retirement accounts are low-risk index funds, and the passive-income investments are higher risk. This works out in your favor in two ways. With high-risk investments, you do not need the same time horizon as low risk as returns are much higher. Also if you do not hit your early retirement target by your timeline you can 1) adjust your timeline by working a little longer, 2) adjust your lifestyle to live off the amount you generate at that time, or 3) quit your career on time and take on work you are passionate about that generates income to cover the gap. None of this impacts or jeopardizes their future retirement at the traditional age of 65+. This case study provides a simplified example of how a family can apply the Fast FI approach to achieve early retirement in 10 years without resorting to extreme frugality. Through consistent investing, strategic planning, and building passive income streams, the Silveros can achieve Fast FI and retire in their mid-40s without having to change their lifestyle drastically. By following the Fast FI approach, they can enjoy a life of financial freedom and pursue their dreams without the constraints of a traditional job.
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*Name changed for privacy
** Rule of 25 also known as the 4% rule. The Trinity Study, conducted by three professors at Trinity University in 1998, is famous for introducing the 4% rule. The 4% rule suggests that retirees can withdraw 4% of their retirement savings in the first year of retirement, adjusting the amount for inflation each year thereafter, and have a high probability of not running out of money for at least 30 years. The study was based on historical market data and portfolio simulations.