As someone who has been writing about financial independence and escaping corporate America since 2009, I’ve developed several rules that serve as the backbone for achieving FIRE. They are simple, but not easy. Ignoring any one of them can set you back years.
Below are the first two rules as a reminder, followed by the third rule that many people overlook until it’s too late. If you do not follow the third rule, you will have no way out when you've finally had enough.
Lucky for you, you're reading this post so you won't look back on your life with this financial regret.
The First Rule of Financial Independence: Don’t Lose a Ton of Money
If you lose a ton of money through improper risk exposure, you ultimately lose time – the most valuable asset we have when trying to break free from work as soon as possible. A 50% decline in your portfolio requires a 100% gain just to get back to even. At a 10% annual return, that recovery takes 7.3 years.
You cannot afford to waste seven prime years of compounding because you chased the hot stock of the month, went on margin, or bought growth stocks at peak valuations with little savings buffer. In most cases, these “bets” aren’t really investments. They’re disguised gambles born out of impatience and a desire to YOLO invest.
To better protect yourself from financial destruction, estimate your risk tolerance by calculating your FS-SEER. Then stick to a disciplined asset allocation model throughout your earning career. When you’re trying to retire early, avoiding catastrophic losses is more important than hitting home runs. The same is true once you’ve given up your day job because you can’t go back to the salt mines.
The Second Rule of Financial Independence: Don’t Extrapolate Your Income to the Sky
Projecting your income forward in an upward curve is how dreams get overextended and finances get destroyed. You start buying too much car, too much house, or too many nonessential luxuries because you assume tomorrow will always be richer than today.
Eventually, your income levels off, declines, gets disrupted by layoffs, or disappears entirely. When that day comes, you feel the crushing pressure of everything you bought, especially if you financed it.
Cars and homes come with endless recurring expenses: insurance, maintenance, taxes, repairs, fender-benders, natural disasters, the list goes on. Since overconsuming housing and cars are the top two personal finance killers, I created the 1/10th Rule for Car Buying and the House-to-Car Ratio to keep lifestyle inflation under control.
Staying disciplined here keeps your savings rate high and your path to financial independence clear. In fact, these are the two most important and relevant personal finance ratios to follow for financial freedom.
The Third Rule of Financial Independence: Build a Taxable Portfolio
The older generations were forgiven for not building large taxable portfolios. Many had pensions, affordable healthcare, and full confidence in Social Security. But if you want to break free from corporate America before age 59.5, you must build a sizeable taxable brokerage portfolio.
Your taxable portfolio is what provides liquidity and passive income to bridge the gap between when you leave your job and when you can access your tax-advantaged accounts penalty-free. For early retirees, this is the engine that keeps the fires of financial freedom lit.
Yet it is the chronic underbuilding of taxable accounts that leads to many of the modern FIRE complications we see today:
1. The rise of Coast FIRE
Coast FIRE is often a psychological coping mechanism – a way to claim “I’m financially independent” without actually being able to retire. In reality, there is little difference between someone who is Coast FIRE and someone who simply maxes out their retirement accounts while working.
The danger is acting like you're FIRE when you're not. It is better to face the truth, then to constantly tell yourself lies to make yourself feel better.
2. The need to constantly hustle after quitting your job
If you don’t have enough passive income from taxable assets, you replace the stress of your day job with the stress of entrepreneurship, inconsistent income, and no employer benefits. Suddenly, you’re running a FIRE podcast asking for donations during a pandemic. You're building online courses that don’t sell, or doing side hustles you never actually wanted.
And eventually, you consider going back to work because making your own money is harder than you thought.
3. Forcing your spouse to continue working
This may be the saddest outcome of not having a large taxable brokerage account. Because there isn’t enough touchable money to fund your lifestyle, your spouse keeps grinding long after they want to stop, simply to maintain healthcare and cash flow. Your dream of joint early retirement becomes a solo fantasy.
No Regrets If You Try
By now, you can see why ignoring the third rule of financial independence may become your biggest regret. Without a sufficiently large taxable brokerage account, early retirement stops being a choice the moment your job turns miserable. You are financially exposed precisely when you most want optionality.
That said, even if you fall short of your original target, there is still real value in the attempt. You made a conscious decision to design your future instead of sleepwalking through it. You forced yourself to save, invest, and think several moves ahead while others stayed trapped in comfortable routines that quietly became cages.
But let’s not kid ourselves. Financial independence is not a mindset or a label you get to claim. It is a condition. If you still have to tolerate a micromanaging boss, a toxic culture, or colleagues who undermine you because you need the paycheck, you are not financially independent.
FIRE demands real change, not theoretical freedom.
Why You Must Build a Taxable Portfolio: Practical Reasons
A large taxable portfolio funds the life you want after you retire early but before age 59.5. That gap must be provided for if do not have enough passive income to cover your basic living expenses.
Even with a disciplined, frugal mindset, FIRE should allow room for joy, especially if you have kids or plan to have kids post-retirement.
Your taxable portfolio becomes the funding source for your largest post-FIRE expenses:
1. A Nicer Home
Sure, you can live in a camper van or move to Thailand if you're Lean FIRE. But eventually, most people want stability, community, and a permanent home base. Take it from me, someone who lived in six countries growing up, worked in international equities for 13 years, and has visited about 60 countries. Traveling gets boring after a while.
If you haven’t purchased a primary residence yet, your taxable portfolio is what will give you the down payment flexibility. This is why some readers pushed back on my article about record-high housing affordability: your gains inside tax-advantaged accounts are inaccessible without penalties if you're younger than 59.5.
Exactly. And that’s the point.
If you want to climb the property ladder while working or during FIRE, taxable assets are your only practical source of housing capital.
2. A New Car
The average new car now costs nearly $50,000, and eventually every car breaks down and needs to be replaced. If you no longer have strong cash flow in retirement, you will have to tap your taxable brokerage account. It can be painful, but if you need personal transportation, it is unavoidable.
Just like with home buying, liquidity equals leverage. You can easily save 1-5% off the price of a house or car if you pay cash thanks to your taxable brokerage account.
3. Independent School Tuition
If you want the option to pay back-breaking $20,000–$75,000 a year for private school when you're FIRE, you need cash flow or a large taxable brokerage portfolio to draw from. Otherwise, public school is the only option.
I’m a supporter of public schools, having attended them since immigrating to America in 1991. There’s tremendous character-building value in navigating challenges early. The real world is a harsh place to operate.
But I also understand the advantages of independent schools: more customization, smaller class sizes, better support, and, in some cases, greater safety.
The challenge is that the ROI of education is declining due to technological disruption, especially from AI. Many kids will finish 17 years of schooling only to find themselves underemployed or mismatched with the job market.
Still, if your cash flow can support grade school tuition, spending money on children’s education is one of the best ways to decumulate in retirement.
For working parents, as written in my WSJ bestseller, Buy This Not That, I recommend earning 7X the net annual tuition per child before enrolling – an upgrade from my original 5X rule due to declining educational returns. Your finances must be solid before taking on such a luxury expense.
4. Unsubsidized Health Insurance Premiums
Sadly, many people are afraid to retire before 65, when Medicare kicks in, because healthcare can be unaffordable before then. Medicare costs about $250 or less a month on average, usually with 20% coinsurance. Having a large taxable portfolio helps you overcome this fear of breaking free and keeps you free despite egregious 7%+ annual premium increases on average.
The reality is, even low digit multimillionaires are qualifying for healthcare subsidies that were originally meant for the elderly or less wealthy. As long as your income is below 400% of the Federal Poverty Limit for your household size, you will receive some level of subsidy.
The Recommended Target Taxable Portfolio Size
Because maxing out all your tax-advantaged accounts is the baseline recommendation for anyone pursuing financial independence, you can use this baseline to determine your target taxable portfolio size. The larger you can build your taxable portfolio, the better.
If you want a specific objective, aim to max out your 401(k) and build your taxable portfolio to at least the same size of your 401(k) or the combined total of all your tax-advantaged accounts. Once you get to 1X, keep going! Hitting this ratio puts you in a strong position to retire before 59.5 without stressing about early withdrawal penalties.
Yes, I know this financial target isn’t easy. But the most worthwhile goals rarely are. Even if you fall short, simply aiming for it ensures you’ll accumulate far more in your taxable portfolio than if you never tried at all.
Since there is no annual contribution cap on taxable investing, your main limiting factor is your income. Therefore, not only should you continue pushing for raises and promotions at your day job, but it’s also extremely helpful to take on side work outside your normal hours. Every additional dollar earned can be funneled directly into building the freedom-producing portfolio you’ll rely on once you leave corporate America.
Don’t Look Back With Financial Regret
Nobody wants to reach their 60s or 70s wishing they had worked a few more years, saved a little more, or built that taxable portfolio when markets were cheap and compounding was on their side. Regret doesn’t show up early. It shows up late – quietly at first, then all at once while you're alone with your thoughts.
The biggest regrets I’ve seen over 16+ years of writing about financial independence fall into three categories:
- “I didn’t start investing early enough.”
- “I spent too much when times were good.”
- “I wish I had more flexibility now.”
All three regrets trace back to the same root cause: an insufficient taxable portfolio.
Your Taxable Portfolio Is Your Freedom Engine
Tax-advantaged accounts help you retire by 60. A taxable portfolio lets you retire before 60.
If you want true autonomy – the ability to walk away from a bad boss, spend more time with your kids, pursue passion projects, relocate when you want, or simply protect your spouse from unwanted work – your taxable portfolio is the key.
Build it deliberately. Build it consistently. And build it large enough that it becomes impossible for your future self to feel regret.
If you follow the three rules – avoid catastrophic loss, don’t extrapolate income forever, and aggressively build your taxable portfolio – you’ll reach financial independence not by luck, but by design.
Readers, are you actively building your taxable brokerage portfolio? If not, why not?
Get Your Year-End Financial Checkup
One tool I’ve leaned on since leaving my day job in 2012 is Empower’s free financial dashboard. It remains a core part of my routine for tracking net worth, investment performance, and cash flow.
My favorite feature is the portfolio fee analyzer. Years ago it exposed that I was paying about $1,200 a year in hidden investment fees – money that’s now compounding for my future instead of someone else’s.
If you haven’t reviewed your investments in the last 6–12 months, now’s the perfect time. You can run a DIY checkup or get a complimentary financial review through Empower. Either way, you’ll likely uncover useful insights about your allocation, risk exposure, and investing habits that can lead to stronger long-term results.
Stay proactive. A little optimization today can create far greater financial freedom tomorrow.
Empower is a long-time affiliate partner of Financial Samurai. I've used their free tools since 2012 to help track my finances. Click here to learn more.
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