You Need to Cover Your Expenses NOT Your Income
I was at the gym yesterday and had a conversation in the sauna; the guy was excited that in 3 years he’d have a fully vested pension from the USPS and could think about retiring.
He said his big issue was that he earned “around $100k” per year and his pension was only going to be about $70,000 per year and that he’d somehow have to make up the difference to maintain his lifestyle.
He really wanted to relax and work on his health, but thought for sure that he’d have to make $30,000 more per year after leaving the USPS just to tread water on his current lifestyle.
I politely told him that most likely he was absolutely fine and that all he really needed to cover with his pension was his annual expenses and that would make him Financially Independent.
The simple question I asked him was:
“Do you save any money out of your $100,000 salary?”
And he said yes, he absolutely did. Probably at least 20% or so.
He’s also paying tax on that extra $30k in income. Since he’s a single filer, those dollars would be in the 22% bracket for Federal and at least 5% for the state, so 27% of the additional $30,000 income would be about $8,000 in tax on that extra income.
So, between the $20,000 he saves and the $8,000 in additional tax, that makes up nearly the entirety of the $30,000 difference.
This means his annual expenses look a lot more like the $70,000 he’s going to get in pension and that means he’s already at FI once he can retire in 3 years.
The key here is this:
You don’t need to replace your income. You simply need to cover your expenses.
This is why FI is always in your control. It’s just about what your life costs.