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  • Writer's pictureBen LeFort

How to Drop out of the Rat Race in 2 Simple Steps

Updated: Jan 24, 2020

A row of people sitting at a shared work space.

The idea behind retirement and the Financial Independence, Retire Early (FIRE) movement is to have enough money saved and invested that you no longer need to depend on your paycheck to fund your lifestyle. I believe that financial independence should be the goal of those in the FIRE movement and not early retirement.

If you enjoy your work, you may want to continue it long after you have achieved financial independence. If you hate your job but feel trapped by your paycheck you may want to achieve some form of financial independence as soon as possible so that you can pursue work you enjoy, even if it means taking a pay cut.

In this article, I'm going to tell you how to drop out of the rat race in 2 simple steps.

The math behind FIRE

The 25 times rule

The first thing you need to do is figure out how much money you need to be considered financially independent.

To answer that question, many people in the FIRE community rely on the 25 times rule, which states that you have reached Financial Independence once you have saved 25 times your annual spending. If you need $40,000 per year to fund the lifestyle you want to live post FIRE, you would need to save $1,000,000.


Action item: If you want to know how much you need to save each month to achieve your FIRE goal, play around with a compound interest calculator.

For example, if I need $1,000,000 to reach financial independence I can figure out how much I need to save each month to achieve that goal. If I am starting out with $65,000 saved and I assume a 7% rate of return on my investments, I would need to invest $3,200 per month for 13 years to achieve financial independence.


The 4% rule

Once you have figured out how much you need to achieve FIRE, you will need to determine how much of your savings you can withdraw to cover living expenses each year.

To answer this question, many people rely on the 4% rule. According to the 4% rule, in your first year of retirement, you can withdraw 4% of your retirement savings to cover your living expenses. If you have saved $1,000,000 you could safely withdraw $40,000 in your first year of retirement.

Notice that the 25 times rule and the 4% rule are different sides of the same coin. The math nerds out there have probably picked up on the fact the 4% is equal to 1/25.

The 25 times rule tells us how much money we need to save while the 4% rule tells you how to live off that money post FIRE.

But there is one problem with this math.

Sequence of return risk

One of the unknown variables that can throw all this math on its head is how the market performs in your first few years post FIRE. If there is a market downturn and your investments drop by 30% in your first-year post FIRE your chances of running out of money increase significantly. This is referred to as the “sequence of returns risk”.

If you had $1,000,000 and plan on living off $40,000 per year, what happens if the market tanks and your investments are now only worth $700,000? Using the 4% rule you would only be able to withdraw $28,000 per year or run the risk of running out of money in retirement.

FIRE Increases your downside and your upside

The 4% rule was originally intended for “traditional” retirement which lasted an average of 30 years. With the advancement in medical technology, life expectancy has been increasing. If someone “retires” in their 30’s or 40’s they may need to live off their investments for 50 years or more.

Michael Kitces ran the numbers looking at how the 4% rule holds up for those perusing FIRE. The first takeaway is that those perusing FIRE are more vulnerable to the sequence of returns risk. If you need your money to last 50 years, a market downturn in year 1 is a big problem. Given the increased risk, Kitces recommends a withdrawal rate of 3.5% rather than 4% if you plan on living off your investments for 50 years or more.

He also found that using a 3.5% withdrawal rate an early retiree with $1 million has a 90% chance of having more than $3,000,000 in your 50th year of retirement assuming a portfolio with a 60/40 stock to bond allocation. The longer your time horizon, the more likely you are to benefit from multiple bull markets and using a conservative 3.5% withdrawal rate increases your chances of accumulating more wealth in your post FIRE life.

The exciting news

The math behind the 4% rule assumes you fund your entire lifestyle through your investments. If you have any income post FIRE, the math dramatically tilts in your favor.

Returning to our example where you need $40,000 per year to fund your post FIRE lifestyle.

Using the 4% rule and the 25 times rule would tell us that you would need to save $1,000,000 to achieve FIRE.

However, if you continue to bring in $20,000 per year in income after you have quit your 9–5 you would only need to have saved $500,000 to fund your post FIRE lifestyle. Just like that, you cut your savings requirement in half.

How to drop out of the rat race in 2 simple steps

Very few people who are pursuing FIRE want to stop working completely in their 30’s or 40’s. What they want is to drop out of the rat race as quickly as possible and do work that gives them energy on a timeline that works around their life.

Dropping out of the rat race in 2 steps.

  • Step 1: Figure out how much money you need to fund your lifestyle.

  • Step 2: Fund that lifestyle through a combination of savings and income from work you love.

How much you need to save to quit your 9–5 depends on how much money you need each year to fund your post FIRE lifestyle and whether you plan on doing some kind work once you reach Financial Independence.

If you need $40,000 to cover your cost of living, here is how much you need to save to quit your job and use the 4% rule.

$1 million if you want a pure retirement with no plans for any type of work after you reach FIRE

  • $750,000 if you work on a passion project that brings in $10,000 per year

  • $500,000 if you work on a passion project that brings in $20,000 per year

  • $250,000 if you work on a passion project that brings in $30,000 per year

  • $0 if you work on a passion project that brings in $40,000 per year (what are you waiting for?)

Final thoughts

Financial Independence may be a lot more attenable than you thought. If you can find a way to earn money doing work you enjoy, you don’t need millions in the bank to quit your 9–5 job.

If you have something you are passionate about you don’t need to wait until you quit your job to try to make money doing it. Why not try it out as a side hustle as you save for FIRE. That’s what I am doing with my writing. It’s a side hustle that will one day become my primary work once I achieve Financial Independence.

By not waiting until I reach Financial Independence before monetizing my passion I will reach FIRE years faster as I have more money to save today and I am already building my post FIRE income meaning I won’t need to save as much money as I would have if my 9–5 job was my only source of income.


How much money do you think you would need to cover your living expenses?

Do you have any passion projects or part-time work you would enjoy doing that could bring in income after you reach FIRE?

Let me know in the comments.

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