FI Works: The 'Middle-Class Trap' is Nothing to Worry About
I was a guest on the most recent episode of the BiggerPockets Money podcast where I debated the existence of the 'middle-class trap' with Mindy and Scott.
This led to hundreds of comments in our Facebook group after Scott posted some significant thoughts on the matter.
If you haven’t listened to the episode yet, it’s an essential one, as it speaks to the broader FI strategy and whether it still works (Hint: It definitely does).
My thoughts on some of the essential points:
· There is no set FI Number. Scott and Mindy came up with a fictional $2.5 million as a FI Number, and some listeners have confused that with “middle-class” or ChooseFI somehow saying $2.5 million is FI. I have never said such a thing, and in fact, ChooseFI has always said the starting point to FI is “what does my life cost annually?” Then you multiply by 25 to get your FI Number, not some made up number.
· The ‘middle-class trap’ is not real. Having money in pre-tax retirement accounts is truly winning the FI game. There are so many ways to access retirement accounts before 59.5 (ChooseFI Episode 475 is a must-listen), and to do so at an extremely low effective tax rate (0% in many cases), that to imagine your money is trapped is just a simple misunderstanding of reality.
· Many people who feel “trapped” simply aren’t at FI yet. Your net worth includes your home equity, but your FI Number does not. Your FI Number is made up of your investable assets, so you would exclude your primary residence home equity. You aren’t “trapped” with significant home equity and significant assets in pre-tax retirement accounts – you’re crushing life in such a great way and you have so many options! But for many of the examples of people who feel this middle-class trap, they simply aren’t FI yet or they’ve made a choice to keep much of their net worth in their primary residence in a HCOL area. This doesn’t negate the concept of FI – it just means these particular people made choices on how to live their lives.
· You must be willing to sell assets (stocks/mutual funds/ETFs, etc.) when the time comes. This was the aspect of Scott’s argument that really surprised me: Because a majority of people in a YouTube poll said they’d have a hard time selling assets, it was somehow confused with the entire FI strategy not working. This is ridiculous. If you set a plan in place for 15 years to build a net-worth largely through the stock market, you MUST be willing to sell some of them when the time comes to cover your expenses in FI. You’re a saver and I know this might be hard at first, but it’s essential or else why do you have all these assets? The entire point was to build up a large enough base to live off these assets. That means you have to sell some of them.
· You turn your assets into income, regardless of type. People in niche financial communities (real estate, dividend investing, etc.) often think that one type of “income” is better than others when it comes time to live off your assets. My contention is it’s all a matter of choice. Selling mutual funds covers your life expenses, so you’ve turned assets into a type of “income.” Or, for significantly more hassle and time, you can take those same mutual funds and buy a business or rental real estate and get income that way. Far less optimally, you can build a stock strategy around high dividend paying companies, but in a large sense, this “income” is just another way of selling shares, with much less flexibility. You must turn assets into income and most of us in the FI Community think selling mutual funds/ETFs/stocks is an ideal way of doing that.
· There’s no purity test to FI. Another controversial aspect of Scott’s posts was a purity test he setup that suggested that just because he couldn’t find many people who solely lived off the 4% rule of selling their equities that it somehow implied FI didn’t work as described. This is the height of silliness, as we all know our financial lives are complicated and you’ll most likely have some other type of money coming in, no matter how big or small it may be. It doesn’t invalidate the fundamental premise of FI that you can live off ~4% of your assets annually just because you happen to have a small business or a pension or rental real estate or even a job that brings in some income each year.
· FI works. Nothing has changed and there’s no reality to the middle-class trap. Instead of leaning into misguided fear and lack of awareness of how to access our money, we all need to take a deep breath and realize this is much ado about nothing. The fundamental principles of FI continue to work and I see nothing that can or will change that. FI is based on what your life costs and you control that. But let’s be clear, you will make choices over where to invest and allocate your assets, and you simply must be willing to turn those assets into income when the time comes.
FI Calculator From the Community
The FI Thinker included this post in our new ChooseFI Local site and forum and wanted to link it here and include their description of the tool:
“Most FIRE calculators feel static, you get a single date without exploring tradeoffs. I wanted a dynamic, interactive tool for planning my financial future, so I built one! Check it out here at The FI Calculator. Its free, private, and ad-free. Key features · Test “What-If” Scenarios: Adjust sliders to see how changes, like saving 200 more a month, impact your timeline instantly. · Compare Strategies: Model Coast FIRE, Barista FIRE, and more to find the perfect path for you. · Analyze “One More Year”: Quantify how working a bit longer affects your outcome. Plus, you can stress-test plans with historical data or Monte Carlo simulations.”