10 Ways to Reduce Your Expenses and Gain $200k or More

Becoming financially independent can be a slow process, taking many years to achieve.

Simply lowering your expenses, allowing you to save more money and increasing your savings rate, will help you retire even earlier.

If you reduce your expenses you can retire years earlier!

Let’s say you currently save $2,000 per month. You make a budget, and determine that you can cut out $1,000 in expenses per month.

If you compare saving $2,000/month vs. $3,000/month- you might be surprised that after 10 years, you will have almost $200,000 more.

This is assuming a conservative average yearly return of just 7%. The higher your return, the larger the difference will be after 10 years.

Initial Monthly Investment:$2000/Month Invested$3000/Month Invested
10 Year Total Contribution $237,120$355,680
Interest Earned (10 Years)$151,840$227,760
10 Year Total$388,960$583,440
Monthly Investment Comparison with 7% Yearly Return for a 10 Year Period (with 2% Increase in savings each year)
If you make small changes today, they will translate into LARGE changes in the future.

How can you reduce your expenses?

Here’s a list of expenses you can reduce or cut out entirely.

Spare no expense from your reduction!

Start cutting away at those expenses today!
  1. Rent/Mortgage
    • Get a roommate. You just reduced your rent by 50%. If you get two roommates, that’s a 67% reduction!
    • House hack- Get a mortgage on a house or duplex, and rent rooms to cover the mortgage bill.
  2. Car
    • Stick with used vehicles
    • Pay in cash
    • If you get a loan, pay it off entirely
    • If you live within walking or biking distance from work, consider not owning a vehicle
  3. Monthly Subscriptions
    • If you rarely use the subscription, cancel it
  4. Water Bill
    • If your water bill is high, look up ways to lower it.
    • Fix leaky faucets, lower consumption
  5. Gas bill
    • I use heated blankets in the winter to lower my heating costs
  6. Groceries
    • Plan your meals and only buy what you need
    • Use coupons and find deals
    • Buy nutritious foods- usually healthier foods are also more cost effective
  7. Car Insurance
    • Routinely check for lower rates
  8. Internet
    • Routinely check for lower rates
  9. Cell Phone
    • Find a Low Cost provider. I recommend Mint Mobile, $15/month for 3GB data.
    • Don’t buy the latest model every year.
  10. Find Frugal Tips

The $2,000 vs. $3,000 per month is a real example. This was my situation just a few years ago. I was able to cut out $1,000/month by being mindful.

My monthly savings is higher now, since I have a higher income and now have a partner.

Where can you cut out or lower expenses? How much more can you save?

Budgeting to Help you FIRE

If you live on a fixed income, budgeting your monthly expenses will help you FIRE earlier.

Many financially independent people, attest that budgeting helped them reach their goals and allowed them to retire earlier.

Knowing where your money is going is half the battle.

If you know where your money is going each month, you can find problems and solve them.

When is the right time to start budgeting?

Last month, but this month is fine too. You probably won’t get it right the first month, and that’s okay. You will eventually get the hang of things and your budget will flow easily.

If possible, run all of your monthly expenses through a single credit card or checking account. This will make things easier to track because all of your expenses are coming out of one account.

In your budget, you should include the following:

  • Housing & Insurance
  • Food/Groceries
  • Utilities (power, water, gas/heat, toiletries)
  • Car/transportation/gas & insurance
  • Health Care
  • Phone
  • Internet
  • Debts
    • Car loans
    • Student loans
    • Credit card loans
    • Other loans
  • Non-Monthly Bills
    • Car registration
    • Car oil change & maintenance
    • Taxes
    • Haircuts
    • Gifts (birthdays/holidays/etc)
    • Pet care
    • Doctors visits
    • Medicine/Vitamins
    • Clothing

Including “non-monthly” expenses in your budget will help you prepare for expenses that don’t occur on a routine basis. You can set these budgeted amount in a separate account until you actually have to pay for these expenses.

For an example, if you know your car registration is $120/year, you would divide that amount by 12 months and budget $10/month for “car registration”. You would set that $10 into an account used for “non-monthly” expenses.


If you have any debt (not including a mortgage), I recommend having a 1 month emergency fund to start with. Then focus all your extra cash on paying down the debt.

If you’re out of debt (or once you get out of debt), make your emergency fund 3-12 months of expenses.

What’s next after making a budget?

Determine where you can reduce your expenses. What can you cut out or lower?

  • Monthly Subscriptions
    • If you rarely use the subscription, cancel it
  • Water Bill
    • If you water bill is high, look up ways to lower it.
    • Fix leaky faucets, lower consumption
  • Gas bill
    • I use heated blankets in the winter to lower my heating costs
  • Groceries
    • Plan your meals and only buy what you need
    • Use coupons and find deals
    • Buy nutritious foods- usually healthier foods are also more cost effective
  • Car Insurance
    • Routinely check for lower rates
  • Internet
    • Routinely check for lower rates
  • Cell Phone
    • Find a Low Cost provider. I recommend Mint Mobile, $15/month for 3GB data.
  • Find Frugal Tips
Where to build a budget?

There are many tools that could help you budget. The most basic is pen and paper, however there are many Apps available that can help you! Here’s a few that I’ve used myself.

Once you have budgeted for 3-4 months you should have the hang of things and budgeting will become second nature and take you significantly less time.

Mrs. FFR and I have been budgeting since we’ve combined our expenses and it has helped us reach our goals faster and more efficiently.

Strive to always be under budget

What tools do you use to budget?

Work From Home (WFH) – A test of “Retire Early”

I like my career well enough to stick with it and have a reasonable level of happiness and fulfillment . I would probably be content with working until my 60s.

However, I strive for more fulfillment and more free time to pursue hobbies and for more quality time with my wife and future family. I strive to eventually work side-hustles or start my own small business instead of my current career.

Although I do find some enjoyment in my career, if I were to be handed my FI dollar goal today, I would quit my job tomorrow (well, not tomorrow – I would finish the current projects I’ve been working on first).

Since the coronavirus pandemic of 2020 started in March for the USA, I have been working from home. At the time of writing this blog, it has been 7 months and I have been in the company office 4 times.

7 months working from home has given me a small taste of early retirement and I love it.

As I reflect back on my WFH stint, I can define many ways my life has improved and I am thankful for it.

My lab and her mini-me at day care
  • More time
    • My company office is a 55 minute drive from my home. If I include my lunch hour, I gain 3 hours of my life back at home
  • Exercise
    • I will often lift, do yoga, run, or bike before work, at lunch, and/or after work. My schedule is so flexible now.
  • Dog Time
    • We have a 1.5 year old black lab. I am able to bond with her more, train her, walk her, play with her, and spend extra time with her.
    • Doggie day care – She still goes to daycare once every other week or so to socialize, but we have been able to cut back and save money.
  • Money Savings
    • Since I no longer have to drive to the office 5X a week, my gasoline bill is way down
    • Since my monthly mileage is lower, my car insurance rates dropped around 10%
  • Quality Time
    • I am able to spend more quality time with my wife. If 2020 were pandemic free and a normal year, I would be gone 11 hours a day 5X a week and I would be traveling internationally an average of 1 week per month.
  • Time to Pursue Other Hobbies & Interests
    • Although my job is very hectic and busy (my company supplies to healthcare and we are swamped), I still have extra time to have fun.
    • I have pursued starting this blog, road biking, and I am (re)learning to code (a skill I learned in college 10 years ago).
    • I go on long walks everyday which really relaxes me and clears my head.
    • The wife and I started a vegetable and fruit garden. I really enjoy tending to it.
    • I have time to make my yard look great- my push motor-less rotary lawn mower is my friend.

Even though I am still working a full time job, the 3 extra hours in my day have given me a small glimpse of early retirement. I greatly look forward to it and will keep diligently working towards it.

Although the pandemic has caused difficult struggles for many, I am trying to look on the positive side and find things I am grateful for.

How has the Coronavirus Pandemic affected your work / life balance?

How to Calculate Your Savings Rate & Help You FIRE Sooner

Your savings rate is a very important aspect of FIRE. The more money you save, the less you spend, and the faster you retire and become financially independent.

With the below simple formula, you can calculate your savings rate too!

The Simple Math
Savings Rate Equation

Savings Rate = Savings/(Gross Income – Taxes)

I will calculate my savings rate as an example, and will use my monthly gross income minus my taxes and monthly savings.

[In the example below I use what my monthly savings would be, if I were out of debt- like I plan to be in Feb 2021]

  • Monthly Savings: $6,800
    • This includes both mine and my wife’s company matches (8% and 4%)
  • Gross Income: $13,500
  • Taxes: ~30% or $4,000
  • Plugging these values into the above equation: 72% Savings Rate
Ways I Plan to Increase my Savings Rate

72% isn’t bad, but it isn’t the best either. We can always do better. Here’s what I will be implementing to increase my savings rate in 2021, when I am out of debt.

  • Reduce HOA fees by $100/month.
    • I live in a new development, HOA is still ran by the developer. In 2021, the homeowners will take over the HOA and remove unwanted services (primarily lawn care) and reduce the HOA from $150 to $50 a month.
    • This change will add 1% to my savings rate
  • Reduce Grocery and Misc Expenses by $150/month
    • We will lock in our budget a little tighter
    • This change will add 1.5% to my savings rate

As you can see, a small change of $100/month adds about 1% to our savings rate.

What can you cut out of your budget to increase your savings rate?

Roth IRA Conversion Ladder- 5 Steps to Use the Golden Tool to Climb into Financial Independence

Many individuals pursuing Financial Independence / Retire Early often wonder- where will my money come from if I retire before the age limit for withdrawing from retirement accounts without penalty? This age limit is 59.5 years in the USA. If you retire at 30 years old, how would you avoid the 10% early withdrawal penalty fees?

Individuals can withdraw from their 401k or IRA early without penalty if they plan 5 years in advance and incorporate the Roth IRA conversion ladder strategy. This awesome loophole allows you to get your cash out, penalty free, to live on in early retirement!

The Roth IRA conversion ladder is a fantastic tool for those that are planning an early retirement. The Roth IRA conversion ladder strategy is neat tool, knowing how it works long before you plan to retire is critical to seeing you up for success. There are also other methods of getting money our of your IRA or 401k penalty free.

Section 72(t) of the Internal Revenue Code

Since we are talking about early withdrawals from retirement accounts, I cannot leave out Internal Revenue Code section 72(t) and 72(q)!

These sections in the IRS code can provide early withdrawals PENALTY FREE – called substantially equal periodic payments (SEPP).

Why does the IRS have this blatant loophole? It is intended to be used by those that are no longer employed (retired early) to be used for expenses, such as food.

Once you start the SEPP, it cannot be stopped for 5 years or until you turn 59.5 years old, whichever is longer.

How Much Can You Withdraw Through SEPP?

The amount you can withdraw per year with SEPP is determined by the government in the form of a “reasonable interest rate”, which is 120% of the Federal Mid-Term rate which is 0.46% for October 2020.

This equates to about $2,174/year withdrawal payment per $100k in your retirement account. If you have $1M in your retirement account, that’s $21,740 per year. However, your withdrawals will be taxed as income, but will avoid the 10% early withdrawal fee.

Roth Conversion Ladder

Wait- these meat and potatoes look nothing like a Roth conversion ladder!

Now on to the meat and potatoes- the Roth conversion ladder. This is the best loophole that can be used to minimize your taxes in early retirement, outlined in the steps below.

  1. Contribute money to a Traditional 401(k) and/or a Traditional IRA.
  2. Retire early- you’re now in a lower tax bracket.
  3. Roll portions of your traditional balances periodically into a Roth IRA and let the money sit for a minimum of 5 years.
    • Roth contributions can be withdrawn penalty free after 5 years.
  4. Withdraw your principle penalty free!
  5. Rinse/Repeat

For an example, lets say you need $40k to live on each year, you would do the following:

  • 5 Years before Retirement: convert $40k of traditional accounts to a Roth IRA
  • 4 Years before Retirement: convert $40k of traditional accounts to a Roth IRA
  • 3 Years before Retirement: convert $40k of traditional accounts to a Roth IRA
  • 2 Years before Retirement: convert $40k of traditional accounts to a Roth IRA
  • 1 Years before Retirement: convert $40k of traditional accounts to a Roth IRA
  • Year 1 of early Retirement
    • Use the “5 Years before Retirement” conversion as your income (tax free!)
    • Convert $40k of traditional accounts to a Roth IRA
    • Repeat “Year 1 of early Retirement” steps for year 1, 2, 3, 4, 5….
The Roth IRA Conversion Ladder

See, this is looking like a ladder now right?

You don’t necessarily have to do the conversion 5 years before retirement- especially since you’d be hit with a tax bill for the conversion. I recommend living off of taxable accounts, SEPPs, and/or contributions you’ve made to Roth accounts your first 1-5 years of retirement.

Remember, traditional to Roth IRA conversions are taxed as ordinary income so it is best to space out your conversions appropriately to minimize your tax bill.

Why Not Just Contribute to a Roth IRA and Roth 401k in the First Place?

It’s actually quite surprising really- you can have tax free contributions, tax free growth, and tax free withdrawals by starting with Traditional accounts and then later converting to a Roth IRA!

  • You don’t pay tax on the money you contribute to a traditional IRA nor traditional 401(k)
  • When you retire early and convert your a chunk of your traditional balance to a Roth IRA, you will be in a lower tax bracket. However, you will have to pay taxes on the conversions since you didn’t when you made the contribution, right?
    • If your conversion is your sole income and it is equal to your exemptions, deductions, and credits every year, you can perform the conversion TAX FREE!!!
  • Of course, since your conversion is now a Roth IRA- you can withdraw the contribution PENALTY & TAX FREE!!!

Will You Use a Roth IRA Conversion Ladder When You Retire Early?

The Roth IRA Conversion ladder takes much fore thought and planning (5 years), but it will pay off in your early retirement.

I will be utilizing the Roth IRA Conversion Ladder when I retire early by employing the below strategy:

  • Max out Traditional 401(k), 403(b), and Traditional IRAs every year, but 1 year, from now until retirement.
  • Max out Roth 401(k), 403(b), and Roth IRAs for 1 year (this will give me a $50k base to live off tax free for my first 1-5 years in retirement)
  • Potentially utilize SEPPs through 72(t) for some supplementary income in early retirement.
  • If SEPP and Roth does not supply me with enough income in years 1-5 of early retirement, I will pull from taxable accounts – my Vanguard mutual funds and ETFs.
  • Start Roth IRA Conversion Ladder year 1 of early retirement.

How are you planning to pay yourself in early retirement?

FIRE Mental State to go Along with Your Savings Rate – Financial Independence, Retire Early

For many, saving for FIRE is a slow journey. For me, my goal is to be FIREd in 8-12 years.

If your outlook for FIRE is many years away, how do you stay focused on your goal?

FIRE is not a financial diet, it’s a lifestyle change

The key for me, is making FIRE my lifestyle. In my teens and early 20s, my lifestyle revolved around purchases that I didn’t need with almost every time being unsatisfied after buying that “new, cool” thing.

I changed by realizing what is more satisfying to me: watching my money grow.

In my teens and early 20s, I was 50 lbs over weight. I tried many fad diets, and saw little results in the 1-2 weeks spans I was dieting. My weight would go up or down 1-3 lbs no matter if I was dieting or not. I was baffled with dieting for many years.

Weight loss and saving money are both slow journeys with big payoff in the future

My problem was that I was focusing on the now and not the later. I had to delay my gratification and keep it simple. I ate less and exercised more for 1 month and lost 5 pounds. This longer term positive feedback and simplicity encouraged me to keep going.

In less than 10 months I lost 50 lbs.

I now apply this principle to my money. It will grow slow, you have to be patient. You have to stay the course. Your investments will likely fluctuate, but in the longer term you will have more money and be happier.

To FIRE successfully, stay in the FIRE mindset. Listen to FIRE podcasts, read FIRE forums/blogs/books and don’t get discouraged by friends and family that tell you it’s not possible.

It is possible. You can find an abundance of success stories online.

I can do this. So can you.

How do you stay the course on your FIRE journey?

28 Ways to Live a Frugal Lifestyle and Increase Your Savings Rate

What is frugality?

Being frugal is being mindful of your spending and intentionally spending your money on items you need while getting the best overall deal for your purchase.

Being frugal is not being cheap. If you buy only with the intent of buying the lowest cost option, you may sacrifice quality and in the end spend more money.

Better quality equals better value. The essence of being frugal

For example, if I were to buy the cheapest running shoes I could find for $30, they may last me only 100 miles and cause me to have stress fractures. Where if I bought a good quality running shoe for $90, I would avoid the stress fractures entirely and have the shoe last for around 500-600 miles.

If I were to keep re-buying the same cheap shoe every 100 miles, my total cost would be $180 for 600 miles, or double the cost of the good quality shoe for the same life.

This was a lesson I learned the hard way.

Why should you be frugal?

Being frugal means you are able to spend less money overall, increase your savings rate, and therefore reach financial independence sooner.

28 Ways to be More Frugal

These are 28 ways Mrs. Free Runner and I use to practice frugality. We are always adding to the list and looking out for deals.

Find the best deal!
  1. Couponing and price matching
    • Any time you buy something, do a google search for a coupon. Also search the websites of other big box stores and Amazon.com. Many big box stores will price match their competitors, including Amazon.
    • Look for coupons before you plan on buying, not in the check-out line. Have a plan.
  2. Honey
    • I use Honey to automatically apply coupons and promo codes to online purchases.
  3. Bike or walk to work (or carpool)
    • If you are able to bike or walk to work, every time you do it you will be saving money. Your wallet, and your health (and future wallet from less medical expenses) will be thanking you.
  4. Find low cost or no cost hobbies (or hobbies that make you money)
    • Running and biking are 2 of my most favorite hobbies and besides buying the initial equipment, don’t cost me very much. However, this is not for everyone.
    • Many local libraries have books, videos, magazines, and newspapers available for free.
    • Walking your dog is free. In my case I’ve made around $26 this year so far from money I’ve found literally laying in the street.
    • Do you have a hobby you can monetize? Even better!
  5. Cook nutritious meals
    • Nutritious meals are not only healthy, they tend to be more filling and more cost effective!
  6. Meal plan
    • Have a weekly plan of what meals you will be cooking. This will limit buying of unnecessary food that you end up disposing of after expiration.
  7. Start a vegetable and fruit garden
    • Growing your own vegetables and fruit takes a bit of initial work in the spring, but pays off very well. I suggest starting with tomatoes, squash, and potatoes.
    • Right now, we grow cherry tomatoes, spaghetti squash, zucchini, peppers, garlic, sweet potatoes, and green onions.
  8. Can your vegetables and fruit
    • If you have excess vegetables, more than you can consume – look into canning to preserve them. There are many guides online. You can also turn berries into a jam, preserves, or jelly.
  9. Make your own bread
    • Making your own bread is much more cost effective than buying bread, and tastes much better once you get the hang of it.
    • I routinely make loaves of bread, English muffins, and pizza dough.
  10. Avoid debt
    • Debt costs you money in the form of interest. Interest is an extra charge for not waiting until you can pay cash.
  11. Wait
    • Think you need to buy something? Sleep on it. Often times I realize I don’t actually need that thing. I get more joy out of adding money to my savings funds.
  12. Use Craigslist, eBay, and Facebook Marketplace
    • Buy used – you can literally buy almost anything through all of these sites. Look for good quality and be sure to meet the sellers at safe locations.
  13. Thrift shops
    • Keep an eye out for good quality products at your local thrift shops as well.
  14. Cut the coffee shop and restaurant visits
    • Spending $5 at the coffee shop 5x week adds up fast. If you need coffee like me, buy a thermos and make it at home. I buy whole beans and use a thrift shop grinder and French press to make my own coffee (and it tastes much better).
  15. Buy bulk
    • Buy the bulk products where it makes sense- check the price per item to make sure the bulk pack is cheaper (do the math).
    • Don’t buy bulk products that expire and you couldn’t possibly use before expiration- example a 5 gallon container of peanut that expires next month.
  16. Buy quality
    • I gave the example of running shoes in the beginning of this article. Buy things that will last.
  17. Reuse
    • Think twice before throwing something away. I had some old 2×8 boards that I was going to toss, then I realized that I was planing on buying shelves for our garage. Instead of throwing away the boards, I sanded them down, stained them, and mounted them to the wall.
  18. BYO- Build your own
    • Instead of buying it- build it! Since we’ve become homeowners, I’ve built a custom slim table to go behind the entire back of our sectional couch, planters with a post to hang string lights, and the garage shelves. I have many more plans.
  19. Barter
    • Barter when it makes sense. Example- don’t barter with the cashier at Walmart; do barter with a car salesperson and sellers on eBay/Facebook marketplace/Craigslist.
  20. Cut out unused subscriptions
    • Do you pay for a subscription service? Write them all down. For the next 1-4 weeks write down how often you used those services. If you used it, did you enjoy it and can you use a free alternative? Cancel the ones you don’t need.
  21. Routinely get quotes – insurance, internet, etc
    • There may be a similar service that costs less. When you find one, get a quote and call your current provider. They may price match the lower offer, saving you the hassle of switching, but saving you the money too.
  22. Use credit card offers & cash back offers
    • Before the COVID-19 pandemic, I traveled 20% for my work (the 3-years before that, I was at 80% travel). I always used cash-back or point credit cards on all my work related expenses and paid off the cards before it carried over and accrued interest charges. Because of this, for the last 3 years my wife and I have yet to pay for flights or hotel rooms when we vacation (and we do so 3-4 times a normal year).
    • Be careful – don’t let interest charges hurt you!
  23. House Hack / Rent Hack
    • House hacking could be owning a house and renting rooms out to roommates or owning a duplex, living in one half while renting out the second half. In many cases, those pursuing FIRE make enough money from the renters to cover their mortgage and put money in the bank.
    • Rent hacking can mean the same thing, but also includes renting out a dwelling with other co-renters to reduce the overall individual rent payments.
  24. Reduce your consumption
    • Do you enjoy 3 bags of potato chips a day? Think about your high consumable products in your life and how you can reduce your usage.
  25. Heated Blankets
    • Living in the northern Midwest US, we get some cold winters. Instead of heating our whole house, we will maintain our temperature in the low 60s, wear layers, and use heated blankets if needed. Our energy bill was greatly reduced the first month we did this.
  26. Refinance your mortgage
    • Mortgage rates are at record lows. You can save a lot of money on interest alone by refinancing. Look out for the best deal and consider the time you have left on your loan against any refinancing fees. Make sure the refinance will actually save you money.
  27. Make a budget
    • Having a budget helps you know what your expenses are and will give you a benchmark of what you need to and can reduce.
  28. Auto Invest
    • Set up automatic investments. If your money isn’t in your checking account, it’s harder to spend.
    • We have our Roth 401k, Roth 403b, and HSA taken out of our paychecks, and we have our Roth IRAs and mutual funds auto deposited.
    • I also use Acorns round ups for an additional fractional amount of savings and Robinhood to invest into ETFs.

We use all of these frugal tips ourselves, what do you do to be frugal?

The FIRE Movement – Financial Independence, Retire Early

The wrong type of FIRE

What is FIRE?

It’s not the exothermic chemical process of combustion nor a meaning that you got fired from your job, FIRE stands for Financial Independence, Retire Early.

Financial Independence

Financial independence is when you have a net worth high enough that you can cover your expenses without your money running out.

Technically speaking, you have assets large enough that they generate an income through growth- either in the stocks, bonds, real estate, and/or other assets.

The income or growth generated is equal to or larger than your expenses.

Retire Early

This part is mostly self explanatory. You retire before the typical retirement age (65 in the USA).

FIRE means savings as many pennies as possible

The FIRE Movement

The main goal of FIRE is to aggressively save a large percentage of your income so that you can become financially independent and retire early- in your 20s, 30s, 40s, or 50s.

Typical savings rates are 50-75% (or more)- the higher your savings rate, the quicker you’ll be able to retire.

Frugality plays hand-in-hand with FIRE. The less you spend, the more you can save.

Boosting your income and keeping your expenses the same is another goal of FIRE. The more money you have, the more you can increase your savings rate.

Why would people want to retire early?

Many people either do not enjoy their careers or enjoy other activities more than their careers. This could be time with family, volunteering, sports, gardening, or any activities that you enjoy and find a purpose with.

Do you find little purpose in your career? Does your work cause more stress than good? Would you rather be pursuing other things in your life?

Maybe FIRE is right for you.

There are different forms of FIRE-

  • Coast FIRE
    • You have your savings at a level where if you stopped investing completely today, you will be able to FIRE in X years assuming an X% growth rate.
  • Lean FIRE
    • You can live off your investments, but you would forever have to be very frugal.
  • FIRE
    • You have enough savings to cover your expenses and a little extra with a 3-4% withdrawal rate.
  • Fat FIRE
    • You have significant savings where your yearly withdrawal rate is a very small percentage of your overall savings (less than 1-2%) and this completely covers your expenses with extra leftover.

Mrs. Free Runner and I are pursuing somewhere between FIRE and Fat FIRE.

What type of FIRE is your goal?

The 4% Rule – Just Save 25x yearly expenses and Retire!

This sounds too easy to be true, right? Wrong- it actually is that easy. Just save 25 times your yearly expenses and you will be prepared to retire. Once you are retired, you will live off of 4% of your nest egg each year in retirement.

4% Rule

How does 25X yearly expenses and 4%/year relate? It’s simple math divide 1 Year by 25 and you get 4%.

If you have yearly expenses of $40k/year, you will need $1M to retire ($40k x 25).

Where did the 4% rule come from?

The 4% rule was published by financial advisor William P Begen in his 1994 paper “Determining Withdrawal Rates Using Historical Data“. Based on historical data, he discovered that retirees could safely live off of 4%/year (adjusting for inflation/deflation each year).

Why 4%? Why not 3% or 5%?

To answer this question, let’s look at the different scenarios he tested.

Bengen tested portfolios invested in 50% S&P 500 Funds (stocks) and 50% Bonds and he used this assumption to test a range of withdrawal rates. He looked at a 50 year historical range and tested each year as the starting year.

Stocks will rise and fall over the years, but 4% withdrawal rate will keep you safe
  • 6% withdrawal rate
    • 40 scenarios had the money last less than 40 years
    • 10 scenarios had the money last 50 years
  • 5% withdrawal rate
    • 23 scenarios had the money last less than 40 years
    • 19 scenarios had the money last 50 years
    • The remaining scenarios lasted between 40-50 years
  • 4% withdrawal rate
    • Only 5 scenarios had the money run out in less than 40 years.
    • Most scenarios had money left into 50 years of retirement.
  • 3% withdrawal rate
    • All scernarios lasted 50 years.

It is worth noting that a 75% stock / 25% bond allocation actually improved that withdrawal rate scenarios. Begen recommends investing as close to 75/25 stock/bond as possible.

So why isn’t this the 3% rule?

Clearly 3% is a safest withdraw rate. 4% is very safe, in most cases the money lasts 40 Years or more. If there is a recession – will you reduce your withdrawal rate? Will you go back to work part time? Reducing your withdrawal rate for a few years would have a great impact of extending the time before your money runs out, the study showed.

I personally have a target much greater than 25X our current yearly expenses, that is due to Mrs. Free Runner and I planning for 2-4 children (and paying for college), wanting to have extra spending money, a better sense of financial security, and to leave an inheritance to our children. Our goal is to save $2.5M in 14 years which would put us at about 63X our current yearly expense (I know way overkill).

However, it is nice to know that we can retire even earlier if we need too. Using the Financial Free Runner Retire Early Calculator, we could retire in 8 years with $1M, or 14 years with $2.5M (assuming 7% average rate of return).

What if you save more than 25x your yearly expenses?

Well, that’s awesome! Way to go you! If all things are the same, then you will have a withdrawal rate of less than 4%.

If I use my example of $40k yearly expense and save 30x of the yearly expense, I will have $1.2M. If I withdraw $40k per year, that will only be 3.3%.

Will your money run out?

Whether you choose a 3% or 4% withdrawal rate, your money will likely never run out. Let’s say you achieve an average rate of return of a conservative 7%, and inflation equates to an average of 3% per year and you withdraw 3%, your money will actually grow by about 1%.

How does this post change your goals?

3 Key Differences of Roth IRAs vs Traditional IRAs- and Which to Choose for FIRE

Saving for retirement is very important, especially in pursuit of FIRE. If your goal is to retire early, what is the best IRA for you?

In this blog, I’ll explain the 3 key differences and explain why I choose one over the other.

Traditional IRA


  • Money you contribute to a Traditional IRA is not taxed.
  • All money (contribution and growth) you withdraw during retirement is taxed as income
  • You receive an immediate tax benefit every year you contribute to a Traditional IRA (assuming you meet income limitations)
  • If you expect to be in a lower tax-bracket when you retire, Traditional is probably right for you.


  • Contributions are pre-tax or can be after-tax
  • 2020 Max Contribution is $6000
  • 2020 Max Contribution if over age 50 is $7000
  • Anyone can contribute


  • Withdrawals are taxed as income after age 59.5
  • Penalty free if withdrawn after age 59.5
  • There are mandatory distributions after age 72.

Roth IRA


  • Money you contribute to a Roth IRA is taxed as part of your income.
  • All money (contribution and growth) you withdraw during retirement is not taxed.
  • You receive no immediate tax benefit each year you contribute to a Roth IRA.
  • If you expect to be in a higher tax-bracket when you retire, Roth is probably right for you.


  • All contributions are after-tax
  • 2020 Max Contribution is $6000
  • 2020 Max Contribution if over age 50 is $7000
  • Anyone below a certain income limit can contribute (Single – $139k, married filing jointly- $206k)


  • Withdrawals are tax free after age 59.5 and after 5 years
  • Penalty free if withdrawn after age 59.5
  • There are no mandatory distributions

Which one is better?

Determining whether Roth or Traditional IRAs are better for you, is not a hard question to answer. The main point you have to ask yourself is, do you want to pay taxes now or do you want to pay taxes later?

I prefer to pay taxes now, the opportunity for tax free growth is too attractive for me to pass up. My goal in retirement is to pay as little taxes as possible, so Roth IRA is right for me. We contribute to Roth IRAs, Roth 401k, and Roth 403b.

For those of you that make above the income limit to contribute to a Roth IRA, you can do what is called a “Backdoor Roth IRA”. Essentially you contribute to a Traditional IRA, then immediately roll it over to a Roth IRA. You have to do this separately each year.

When you roll the IRA over, you will have to pay the taxes on the money because you are converting from a pre-tax to an after-tax account.

Another benefit of Roth for FIRE pursuers

Contributions to Roth IRAs can be withdrawn penalty free after 5 years – leaving your hard earned money available for use in early retirement

Roth IRA, Roth 401k, Roth 403b, etc contributions only (not growth) can be withdrawn penalty free after 5 years.

When you retire early, your Roth account can become part of your income stream. If you max out a Roth IRA and Roth 401k each year as a married couple for 10 years, your contributions would total $500,000 ( [$6k+$6k+$19k+$19k]x10).

My goal is to not have to withdraw from Roth accounts before age 59.5, but it is nice to know this money can be available penalty free.


For those pursuing FIRE, I recommend Roth accounts if you want to pay taxes now and none in retirement.

However, if you want to do some planning I highly recommend Traditional accounts, because of the tax loophole you can use to avoid taxes and penalties in early retirement.

However, performing a Roth conversion ladder could leave you with no taxes now (on your contributions) and no taxes later when you withdraw the money. How this is possible is covered in my blog on Roth conversion ladders.

When you retire, would you rather pay an income tax or none at all?

Current USA tax brackets for 2020 range from 10% to 37% depending on income level, with Traditional investments- you will be paying just that, 10-37% of your withdrawal amount.

If all your income is pulled from Roth investments, your income taxes will be 0%.

What retirement accounts do you invest in?

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