When I first started Financial Samurai, I was proud of finally creating something. For too long, I had just followed orders. Yet, I couldn’t tell anybody about my hobby because I was still employed. I was afraid if my employer found out, they’d tell me to shut it down or at the very least, dock my bonus for being unfocused. After all, the site was started in the middle of the financial crisis and they were always looking for reasons to cut costs.

When I finally engineered my layoff three years later in 2012, I still felt it was unwise to tell anybody about my site even though I was internally beaming with pride about the site’s growth. I felt like a new parent who wanted to annoy the crap out of all his friends by cooing about every milestone their child hit.

But because I had five years of deferred compensation on the line, even if there was just a 1% chance my old employer would withhold payment, I didn’t want to risk losing years of living expenses. And so, I kept my mouth largely shut until I had a decision to make on 4/21/2017, when my last severance-related after-tax payment hit my bank account.

In a way, the five-year time period when I was collecting my deferred compensation was like a mental jail. Like Andy Dufresne in The Shawshank Redemption reaching for the stars as rain spatters his face, full emancipation only came years after leaving Corporate America.

With nothing holding me back in 2017, it would seem like finally, I could brag to everyone that I had created a website large enough to support a family in San Francisco. With some publicity would come growth. But alas, I felt it was much better to keep a low profile.

For those of you who are thirsty for attention, let me share some thoughts about being a nobody for so long and why it may be in your best interest to do the same. 

Financial loss creates stress. And given stress kills, your goal as a retiree should be to remove as much stress from your life to live as long and happy as possible.

Recently, I’ve been thinking about being OK with no longer making a lot of money from investments. With such huge returns in the S&P 500 and the SF real estate market since 2012, I kind of feel like Anthony Bourdain when he said,

“I should’ve died in my 20s. I became successful in my 40s. I became a dad in my 50s. I feel like I’ve stolen a car — a really nice car — and I keep looking in the rearview mirror for flashing lights. But there’s been nothing yet.”

I got in trouble the summer before starting college and could have easily given up on my future. But in college, I met my wife and landed a hard-to-get job for someone with my lack of pedigree.

Two months before likely being terminated at my first job as the internet bubble burst in 2000, I was able to find a new job in San Francisco for a raise and a promotion.

Instead of selling a home close to the bottom of the market in 2012, I was blessed that nobody took advantage of my uncertainty.

Instead of flaming out with Financial Samurai and having to go back to work a couple years later, this site has become a viable source of income to support my family.

Sure, there have been plenty of setbacks as well, but I’ve chosen to focus on the positives because life is better this way.

With low returns and a stable income, life becomes magnificent in retirement. All the worry about running out of money or having to go back to work full-time starts to fade away. 

Congratulations everyone! According to this chart below, everybody is rich in America! Our assets are at the highest level compared to our income in all of history thanks to tremendous asset price appreciation.

Anybody who bought stocks and real estate between late 2009 and 2015 is sitting mighty pretty. When you’re sitting mighty pretty, you tend to spend more frivolously and take on debt to buy things you don’t really need. But at some point, a percentage of the population gets carried away, commits financial suicide, and brings the rest of us down with them.

I’m really hoping the good times will last for several more years. After all, it’s more fun making money hand over fist than losing money. Alas, I’m worried that with cash-out refinances reaching pre-crisis levels, we’re bound to repeat our mistakes from the previous financial crises.

Ever wonder how net worth compositions change the wealthier you get? Look no further as I stumbled across this great chart from VisualCapitalist.com that highlights how much each asset is as a percentage of net worth from the Federal Reserve of Consumer Finances. If you want to get rich, it’s good to study how the rich allocate their money.

Notice how red (primary residence) quickly shrinks the wealthier you get while blue (business interests) quickly grows. The key to creating great wealth is to therefore build a business or acquire a significant share of equity in a business.

When I was 30, my goal was to retire in 2017 at the age of 40. I figured, after spending my 20s learning, I should spend my entire 30s earning.

Now that I’m almost 41, I’m glad I didn’t wait until 40 to leave the workplace for good. Life doesn’t end once you retire. It simply morphs.

Although I no longer consider myself retired with all the work that goes into running this site and being a stay at home dad, here are some things that have happened since 2012:

1) Written a book called, How To Engineer Your Layoff: Make A Small Fortune By Saying Goodbye.

2) Traveled to 30+ new countries in Europe and Asia with my wife. Angkor Wat, Cambodia was truly amazing.

3) Gotten my USTA tennis ranking up from 4.5 to 5.0. This would have not been possible without all the newly found time to practice.

4) Consulted for several financial technology startups ranging from seed stage to series C.

5) Built this site into over a million organic pageviews a month with no forum.

6) Grew passive income by 2.5X.

7) Bought and remodeled a fixer.

8) Became a foster child mentor.

9) Became a high school tennis coach.

10) Became a father.

I’m excited what the future will bring!

Whenever I publish posts with six figure household incomes and detailed expenses my comments section and social media light up with displeasure.

Instead of accepting the fact that higher income leads to higher taxes and that living in large metropolitan areas result in higher expenses than in less densely populated parts of the country, there is denial. There’s also a segment of people who display hatred for high income earners, as if living in a three bedroom house and wanting to eat healthier in order to be around to see their children grow up is an affront to their way of life.

Based on my observations, here are the types of people most triggered by others paying a lot of taxes while also trying to raise kids and save for retirement in an expensive city:

• People who don’t live in an expensive coastal city.
• People who don’t have kids.
• Students who haven’t even gotten a job yet.
• People who see a $1.5M house price tag and scoff, but don’t understand that if the median house price is $1.5M, then the house is quite average.
• People who work 40 hours a week or less and think they should be far ahead of the game compared to their peers who work 60 hours a week or more.
• People who are too afraid to make a change in their career or are too afraid to move for an opportunity.
• People who don’t tell the full story of how they make ends meet e.g. a reader claims to save $200K on a 300K income without explaining his taxes and housing situation.
• People who have a tendency to discriminate against others, otherwise, they would be more accepting of other people’s situations.
• People who feel their reality is the only reality that counts.

What the heck is going on folks?!  It’s OK to be skeptical and disagree, but to hate is unbecoming. If you are easily triggered in a personal finance context, I’ve got a solution for you. Focus on achieving equality instead of being mesmerized by the numbers.  

One of my biggest concerns about early retirement was running out of money. What if there was another massive correction in the stock market? What if my rental properties went vacant for an extended period of time? What if Financial Samurai died? What if I accrued unexpected medical expenses? What if I underestimated how much I needed to be happy? Such worrisome thoughts can paralyze even the best of us.

Whether you decide to retire in your 60s or in your 30s, I’m here to say the fear of running out of money in retirement is overblown. The media, money managers, and government officials, most of whom are still working, have fear mongered the general population long enough!

As someone who left the working world in 2012 at the age of 34, let me explain why your retirement life will probably be just fine.

Ever since landing my first job post college in 1999, I’ve been determined to build enough passive income in order to not have a job. A future that included getting into work by 5:30am and leaving after 7:30pm each day for decades seemed too brutal to endure.

In 2009, I decided that if I could earn about $80,000 in passive income, I would leave my job permanently and work on Financial Samurai while traveling instead. So I left work in 2012 at the age of 34. Once my wife decided to join me in 2015, also at the age of 34, I decided to shoot for $200,000 in passive income.

With $200,000 a year in passive income, I would have enough income to provide for a family of up to four in San Francisco given we bought a modest home in 2014. Now that we have a son, I’m happy to say that $200,000 indeed does seem like enough, especially if we can win the public school lottery to avoid paying $20,000 – $50,000 a year in private school tuition.

The Keys To Building Enough Passive Income

1) Save until it hurts each month. Most people think they are saving enough through their 401(k) or IRA, but they are not. Developing passive income requires an aggressive after-tax, after-401k/IRA savings amount each month because you can’t draw from your pre-tax retirement accounts before the age of 59.5 without a 10% penalty.

You must sacrifice the pleasures of today for the freedom you will earn tomorrow. In my 20s, I shared a studio with my best friend from high school and drove beater cars worth less than 10% of my annual gross income. I’d stay until after 7:30pm at work in order to eat the free cafeteria food. International vacations were replaced with staycations since work already sent me overseas 2-4X a year. Clothes were bought at thrift shops of course.

2) Focus on income producing assets. Internet growth stocks may be sexy, but they provide no income. To build a large enough passive income stream to survive, you must invest in dividend generating stocks, certificates of deposit, municipal bonds, government treasury bonds, corporate bonds, and real estate. You’re free to invest in non-income producing assets for capital appreciation too. You just want to earn reliable income when the day comes to leave your job.

My favorite type of semi-passive income was rental property because it was a tangible asset that provided reliable income. As I grew older, my interest in rental property waned because I no longer had the patience and time to deal with maintenance issues and tenants. Online real estate became more attractive, along with tax-free municipal bond income once rates started to rise.

3) Start as soon as possible. Building a livable passive income stream takes a tremendously long time largely due to declining interest rates since the late 1980s. Gone are the days of making a 5%+ return on a short-term CD or savings account. Today, the best 12-month CD is at 2.5%, and the best money market rate is around 1.85%, which is not bad considering such rates were below 0.5% just a couple years ago. Know that every $100 you save can generate at least $2.5 in passive income.

I knew I didn’t want to work 70 hours a week in finance forever. My body was breaking down and I was constantly stressed. As a result, I started saving every other paycheck and 100% of my bonus since my first year out of college in 1999. By the time 2012 rolled around, I was earning enough passive income (~$78,000) to negotiate a severance and be free.

4) Calculate how much passive income you need. It’s important to have a passive income goal, otherwise, it’s very easy to lose motivation. A good goal is to try and generate enough passive income to cover basic living expenses such as food, shelter, transportation, and clothing. If your annual expense number is $30,000, divide that figure by your expected rate of return to see how much capital you need to save. Unfortunately, you’ve got to then multiply the capital amount by 1.25 – 1.5 to account for taxes. For example, $30,000 / 3% = $1,000,000 in capital needed to generate $30,000 gross. But since you must pay tax on the $30,000 income, you really need closer to $1,250,000 to generate $30,000 in after-tax income at a 3% rate of return.

With the birth of our son in 2017, we aiming to generate roughly $250,000 a year in passive income by the time he starts kindergarten in 2022.

5) Make sure you are properly diversified. Capital preservation is underrated. We saw a lost decade for tech stocks between 2000 – 2010 after the first dotcom burst. It actually took 13 years for NASDAQ investors to get back to even. Investors in the Borsa Istanbul Turkey stock market index just gave up 10 years worth of gains after they saw a plunge in their currency, partially due to increased tariffs by the US and no-confidence in the government. Your passive income needs to be properly diversified in order to take the hits.

I currently have 10 main sources of passive income as you’ll see in the chart below, with bonds as my largest source at 30.4% of total. I’ve worked through the 2000 and 2008 meltdowns, and don’t plan to ever lose so much money again. 

In the 1960s, Columbia University psychologist Walter Mischel conducted an experiment on children that is now often referred to as The Marshmallow Test.

Walter invited various aged children into a room individually and asked them to sit down in front of a table with one marshmallow. He told the preschooler that he could eat the marshmallow right now if he wanted, but if he waited for five minutes, Walter would return with another marshmallow and the preschooler could eat two.

Here’s a short video that highlights the delightful reactions these kids display as they do their best not to eat the marshmallow. Watch them close their eyes, tilt their heads, and come close to eating the dessert before pulling away.

Walter observed that of the kindergarteners (age 5), 72% caved in and ate the marshmallow. If they’re in the fourth grade however, only 49% yielded to temptation. By the 6th grade, the percentage dropped to 38%. Such improvement is rational given five minutes is a short time to wait for double the spoils.

More interestingly, Walter discovered in subsequent studies that children who delayed gratification by 15 minutes scored 210 points higher on their SAT’s than children who lasted one minute. And even more importantly, children who are able to demonstrate self-control have a higher Executive Function, which is responsible for controlling planning, foresight, problem solving, and goal setting. 

Thanks to the unrelenting rise in the stock market since 2009, there’s now a trend on social media to share your 401(k) balance, especially if it’s over a million bucks. Despite the distastefulness of bragging, just the fact that more people are talking about saving for retirement via their 401(k) is a good thing.

Make no doubt about it, being a 401(k) millionaire is very impressive given the maximum contribution limit has never been higher than 2018’s contribution limit of $18,500. When I was first able to contribute to a 401(k) in 1999, the maximum contribution limit was only $10,000. Check out the chart below for details.

Congratulations for being retired or having enough money to never work again! Don’t listen to the naysayers who tell you retirement life is boring. Be assured that only boring people get bored. One question you should consider thinking about, however, is exactly how much investment risk should you be taking.

In 2012, I retired from the salt mines because I thought I had enough to provide a humble life for a family of up to four in San Francisco. But once I stopped receiving a bi-weekly paycheck, reality hit home that maybe my passive income and side hustle income wouldn’t be enough. The fact that I tried to sell my primary residence in 2012 to live in an apartment 65% smaller and cheaper shows that I had reservations about whether it was wise to leave a healthy paycheck at 34. But I was determined to provide a free life for my wife and I both before the age of 35.

In early retirement, I concluded that I needed to take the least amount of risk necessary to maximize my chances of never having to go back to work full-time again. At the same time, I was still pretty young and it looked like the economy was recovering so I ended up constructing a 60%-70% stock and 30% – 40% bond portfolio with the hopes of achieving a 4% – 6% rate of return each year. Doubling my investments by the age of 50 seemed like a good enough goal to have.

But thanks to a bull market in stocks and bonds, my public investment portfolio returned more. And thanks to a strong recovery in San Francisco real estate, everything has turned out fine so far. I wasn’t smart, I just stuck to an investment framework that fit my risk profile.

Reaching financial independence is the holy grail of personal finance. But what does financial independence really mean? In this post I’d like to determine the various levels of financial independence. That’s right. Even in financial independence there is no one size fits all since everybody has a different desired standard of living.

Contrary to what you may think, financial independence is not all about having enough money to cover all your expenses and then some. Financial independence also means being able to overcome your psychological fears to truly live free.

For example, I have peers who have millions in net worth, yet still make their respective spouses work because they do not feel 100% financially secure. Common reasons include the need for health care coverage or their spouse’s “love” for their job even though they’d rather be doing something else.

Here are the three levels of financial independence I’ve come up with. All three levels of financial independence should meet the following basic criteria:

1) No need to work for a living because investment income or non-work income covers all living expenses into perpetuity.

or

2) Net worth is equal to or greater than the number of years left in your life X living expenses e.g. $3 million with 30 years left to live is FI if your living expenses are no more than $100,000 a year.

Personal Capital, a digital wealth advisor with over 1.5 million users of its free financial tools, released its 2017 Affluent Investor report with some interesting data. I used to consult with them between 2013 – 2015 and have been using their tools to track my net worth since 2012.

The biggest surprise from one of its surveys is that folks with more than $500,000 in investable assets are most worried about a financially secure retirement. Think about that for a minute. With the median retirement savings for 56 – 61 year olds in America at only ~$20,000, Americans with 25X that amount cite financial security as their top worry!

With $500,000+ in investable assets alone, one can presume that most survey respondents have net worths in excess of $1,000,000. After all, about ~85% of the typical American’s net worth is tied up in their primary residence. Check out the survey results.

I’m not sure if homebuyers truly realize how much concentrated risk they are taking when they buy property. I’m particularly concerned about first time buyers putting less than 20% down because they can’t afford a larger downpayment. Given they can’t put at least 20% down, it’s likely they also don’t have any meaningful investments in stocks, bonds, or private ventures. In other words, they are all-in and then some with real estate.

Just in case it’s not obvious, mortgage debt is also considered investment risk exposure. You’re basically leveraging up to make a concentrated bet on a single asset that hopefully goes up. If it goes down and you need to sell, you’re screwed. During the last downturn in 2008-2009, the average American’s net worth got destroyed because over 80% of the average American’s net worth was in real estate.

Some people have asked me why I’m not in a bigger rush to reinvest 100% of my house sale proceeds (~$1.8M) in this bull market. If I did, I’d still have $815,000 less in risk exposure because I paid off the mortgage.

The first reason why I’m not in a rush to reinvest the proceeds is because it’s a lot of money and I don’t want to lose it. I’ve redeployed about 60% and am slowly re-investing the balance each month. The second reason is because I need firepower just in case I find a sweet property deal during the winter. The final reason I’m in no rush is because I still have roughly $1,000,000 in mortgage debt, meaning that with a current cash balance of ~$900,000, I’ve already got Maximum Exposure + $100,000 in leverage to risk assets.

A million bucks! What a dream. Once you have the cash you can promptly fly to Macau, bet it on black and turn it into $2 million! Or, you can lose it all and spend the rest of your remaining years wondering what were you thinking.

Getting to at least one million dollars in net worth is a nice milestone to achieve. I firmly believe the majority of people reading Financial Samurai and other personal finance sites which don’t constantly hawk credit cards will be able to achieve millionaire status.

If I were to guess the exact percentage of Financial Samurai readers who become millionaires in their lifetimes, I would say 65%. It doesn’t sound like a huge amount until you read the data below. For the remaining 35%, you’ll have more money than if you hadn’t started reading personal finance sites.

Since 2009 I’ve received dozens of e-mails from readers saying they’ve busted through the $1 million net worth figure thanks to aggressive saving and investing. Many have mentioned they wish they had discovered the personal finance world sooner. But better late than never I say!

So what about the rest of the 300+ million Americans who were fortunate enough to be born or gain citizenship to our great country? What are their chances of living the champagne dream and caviar lifestyle?

(audio version)

Everybody should have a net worth target to shoot for by age, work experience, and income. Targets will help you stick to your financial plan and motivate you to do more if you’re falling behind. I’ve updated my net worth target chart for 2018 and I’d like to discuss the premise behind the numbers.

These target figures are for those who:

• Take action rather than complain about an unfair system
• Max out their 401k and IRA every year
• Save an additional 20% or more after taxes and 401k/IRA contribution
• Take calculated risks through investments in various asset classes
• Build multiple streams of active and passive income
• Focus on the big picture and doesn’t nit pick with minutiae