This section is intended to allow interested parties to better understand common terms and phrases in the Financial Independence (FI) community. Learning what various FI terms mean will help in your journey to achieve the financial freedom and making “paid work optional” a reality for you and yours should you choose to follow the path outlined by may others.
Helping better understand the Financial Independence (FI) Terms on your way to “paid work optional” by age 59 and half
*Disclaimer: The content on this website or any blog posts is not intended to be investment or life advice. Readers should consult with their legal, financial, and accounting specialists and spiritual and/or life coaches to provide insight on their personal and specific circumstances as each situation is unique. The website and any blog posts are written for entertainment purposes only.
Emergency Fund
Emergencies are a fact of life. Some “emergencies” can be planned for, such as car repairs. One is aware that the statistical likelihood of an eventual car repair is almost certain, but when the repair will be required in an unknown. Standard best practice is to have saved 3 to 6 months of your annual expenses in case you have an unexpected job loss or “emergency” to cover such expenses. It’s easier to pay for emergencies with an existing fund, versus using a credit card or borrowing money from another source which may have high interest rates.
“Excessive” Retirement Trends
In October 2022, the Federal Reserve of New York reported that the pandemic created an “excessive” retirement trend, which was “almost 1½ percentage points above its pre-pandemic level, representing an increase of more than 3½ million retirees and accounting for essentially all of the total shortfall in the LFPR [Labor Force Participation Rate].” However, the Report acknowledges that retirement would have likely risen more gradually as a result of the aging Baby Boomer population, even without the pandemic. According to the Federal Reserve Report, there are additional notable factors in this “excessive” retirement, these include, approximately two-thirds of the total increase in the excess retirements were age 65 and older at the start of the pandemic, with a particularly sharp increase in those age 70 and older. Further, and perhaps more staggering, for those age 65 and older in the “excessive” retirement cohort, increased more than expected for Whites relative to Blacks and Hispanics, and for those with a college education relative to those without. The other one-third of the “excessive” increase is in individuals aged 55 to 64 when the pandemic began.
Family FI
We are proof that Family FI or Financial Independence (FI) is not a thing only for the “tech bro’s.” The pathway to FI may be slightly different for families but you and yours can still enjoy a luxurious life.
We created Family FI here at fi59andahalf.com to describe a family that is consciously on the path to build wealth but prioritizes family needs. For example, this includes one parent pausing or working part-time to raise children may take priority over other financial decisions. Family FI is not necessarily the fastest pathway to FI like some in the FIRE Movement. Our plan to make “paid work optional” by age 59 and a half is still faster than traditional retirement. For us, making intentional and careful decisions was the key.
Fight Club
Fight Club Provides Confidential Devastating Money Knock Out. Great movie quote endures, “The things you own end up owning you.” Fight Club is a 1996 first released novel by Chuck Palahniuk. In 1999, the novel was adapted into a film of the same name, starring Brad Pitt and Edward Norton. The film underperformed at the box office but later gained a cult following. Pitt played the charismatic Tyler Durden. While the film is a complicated combination of mental illness, violence, and many other things, none of which we advocate for or endorse, Fight Club’s Financial elements capture the desire for freedom from unfulfilling day and night jobs. We are not advocating to “quit your job” (not just yet) and call the Retirement Police to let them know you are not coming back to the office.
Financial Independence (FI)
Financial Independence (FI) or FI for short is a movement and community of individuals who have achieved or on the pathway to achieve having enough money to stop working or make “paid work optional.” One does not need to be officially retired. The FIRE movement or Financial Independence Retire Early is a sub-group of the FI Community and typically seeks to cease working long before age 59 and a half. Personal Finance Expert, Suze Orman proclaimed she “hated” the FIRE Movement on Paula Pant’s Afford Anything Podcast in 2018. To be clear, FI is much broader than the FIRE movement.
FI Number
An individual, couple, or family’s FI Number is determined by the amount of money they need to achieve Financial Independence (FI). An FI Number is often confused with household income or adjusted gross income. In the Financial Independence community, an FI Number is based off of annual spending or the amount of money an individual, couple, or family plans to spend annually with the added calculation of being able to generate enough funding through investments or other sources on an annual basis to reach that goal. Many in the Financial Independence movement use the FI Number multiplied by 25 as the baseline, as noted in the FI cult-like leader Mr. Money Mustache in his post “The Shockingly Simple Math Behind Early Retirement. Of course, Bill Bengen is known as the Godfather of “the four-percent rule” or 4% rule in which he determined withdrawal rates using historical data.
Pre-tax retirement accounts or tax-deferred accounts
Pre-tax retirement accounts, also commonly referred to as tax-deferred accounts, are retirement accounts that an individual contributes to before government taxes are taken out. In the United States, examples of pre-tax retirement accounts generally include traditional individual retirement accounts (IRAs), 401(k)s and 403(b)s. The term pre-tax means that the individual puts off paying taxes on the money contributed to these types of accounts, including any potential earnings they may generate. However, the government collects taxes on pre-tax retirement accounts or tax-deferred accounts when the funds are withdrawn for retirement or certain circumstances where an additional tax-penalty is assessed if the withdrawals do need meet certain criteria. Typically, pre-tax retirement accounts do not allow for a taxable withdrawal until the individual reaches age 59 and a half. Thus, part of the reason for the website known as fi59andahalf.com
401(k) pre-tax retirement account
A 401(k) is an employer sponsored pre-tax retirement account or tax-deferred account, is a retirement account that an individual contributes to before government taxes are taken out. Employees eligible for a 401(k) can save a portion of their salary, subject to annual limitations. Some employers may offer the added benefit of matching a portion of their employees’ contributions if certain requirements are met, such as the employee contributing a certain percentage of their income to their 401(k) account. Contributions are tax-advantaged.
The term pre-tax means that the individual puts off paying taxes on the money contributed to these types of accounts, including any potential earnings they may generate. However, the government collects taxes on pre-tax retirement accounts or tax-deferred accounts when the funds are withdrawn for retirement or certain circumstances where an additional tax-penalty is assessed if the withdrawals do need meet certain criteria. Typically, pre-tax retirement accounts do not allow for a taxable withdrawal until the individual reaches age 59 and a half. Thus, part of the reason for the website known as fi59andahalf.com
403(b) pre-tax retirement account
A 403 (b) pre-tax retirement account is a type of pre-tax retirement plan or tax-deferred retirement plan available for employees in public schools, charitable 501 (c) (3) tax-exempt organizations, and certain faith-based organizations. The non-profit sector 403(b) pre-tax retirement account is similar to a 401(k) is an employer sponsored pre-tax retirement account or tax-deferred account, in that an individual contributes to before government taxes are taken out. Employees eligible for a 403(b)s can save a portion of their salary, subject to annual limitations. Some non-profit or public sector employers may offer the added benefit of matching a portion of their employees’ contributions if certain requirements are met, such as the employee contributing a certain percentage of their income to their 401(k) account. 403 (b) pre-tax retirement account contributions are tax-advantaged. The term pre-tax means that the individual puts off paying taxes on the money contributed to a 403 (b) pre-tax retirement account, including any potential earnings they may generate. However, the government collects taxes on pre-tax retirement accounts or tax-deferred accounts when the funds are withdrawn for retirement or certain circumstances where an additional tax-penalty is assessed if the withdrawals do need meet certain criteria. Typically, pre-tax retirement accounts do not allow for a taxable withdrawal until the individual reaches age 59 and a half. Thus, part of the reason for the website known as fi59andahalf.com
Health Savings Accounts (HSA)
The United States federal government created health savings accounts (HSA), better known as HSAs, which is a pre-tax type of savings account that lets you set aside money to pay for qualified medical expenses. Under current law, you may contribute to an HSA only if you have an HSA-eligible medical plan (sometimes called a High Deductible Health Plan (HDHP)) — generally a health plan (including a Marketplace plan) that only covers preventive services before the deductible. An HSA may earn interest or other earnings, which are not taxable. By using pre-tax dollars to fund an HSA to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your out-of-pocket health care costs. HSA funds generally may not be used to pay premiums.
While you can use the funds in an HSA at any time to pay for qualified medical expenses, you may contribute to an HSA only if you have an HSA-eligible plan (sometimes called a High Deductible Health Plan (HDHP)) — generally a health plan (including a Marketplace plan) that only covers preventive services before the deductible. An HSA may earn interest or other earnings, and these earnings are tax free, which is why the Mad Fientist refers to HSAs as “the ultimate retirement account” (thus using pre-tax retirement accounts or tax-deferred accounts). Employers with High Deductible Health Plans (HDHP)s, banks, credit unions, and other financial institutions offer HSAs. When you add money to your HSA, you lower your taxable income. Your earnings are tax free. Under current law, an HSA is always yours, even if you leave the plan.
Paying Yourself First
My parents were Prodigious Accumulators of Wealth (PAW)s as described by Thomas J. Stanley and William D. Danko. The biggest way they did this was by “paying themselves first” each month. Money for retirement came out of my father’s paycheck even before it was taxed. This strategy also limited the psychology of money because my parents never even saw the money they were putting into a pre-tax retirement account. The mortgage, car payments, any monthly expenses my parents had were budgeted and accounted for and any other expenses, such as “entertainment” only happened if there was enough money. My parents did have built in entertainment dollars budgeted, such as college basketball season tickets or passes for the local symphony orchestra; things that they were passionate about but at a reasonable discounted price.
The Millionaire Next Door
This is part of a title of a book by Thomas J. Stanley and William D. Danko who studied millionaires. The true title is The Millionaire Next Door: The Surprising Secrets of America’s Wealthy in which even Stanley and Danko discovered the unexpected. Admittedly, Stanley and Danko had some preconceived notions of millionaires as flashy individuals with expensive tastes; what they found was the opposite.
The Psychology of Money
The Psychology of Money is the study of human behavior as it relates to money. Many factors can influence an individual’s behavior of money. The Psychology of Money is a phrase popularized by Morgan Housel in a book by the same name.
Retire at age 59 and a half
fi59andahalf.com is dedicated to individuals, couples, and families looking to maximize life’s finite resources, especially those assets more precious than money to retire at age 59 and a half. Gaining financial independence (FI) and making “paid work optional” on their journey to retirement is only part of the equation. Traditionally, in the United States persons retire at age 65. Pre-tax retirement accounts or tax-deferred accounts do allow individuals to begin withdrawing funds at age 59 and a half under certain circumstances.
Retirement Police
In August 2024, as part of our 100 Month journey we ended up revealing the thrilling plot to energize the Retirement Police. The Retirement Police is a shortened version of the “Internet Retirement Police” as noted in the Financial Independence (FI) community. Mr. Money Mustache has been a leader in taking on the “Internet Retirement Police” who believe you are not really retired if you make “paid work optional” or “work for fun” as noted by Jacob Lund Fisker of Early Retirement Extreme.
W-2 Job
A W-2 is a required tax form as part of being employed through an employer. The Financial Independence (FI) community often refers to paid employment as a “W-2” job.