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Apr 24 2021

Living Life 4% at a Time: Financial Independence

Visiting Universal Orlando without kids, a taste of early retirement

The golden rule in the financial independence/retire early (FIRE) space is to amass investable assets worth 25 times your annual expenses, that is, you live off 4% of your investments, adjusted for inflation. So, during the first year of retirement, you withdraw 4%, during the second year, 3% plus the amount needed to cover inflation, and so on.  

The original financial planner that introduced this idea was William P. Bengen. If you want to dig into his article, Determining Withdrawal Rates Using Historical Data. His work in 1964 was followed up in 1998, by three professors of finance in the Department of Business Administration, Trinity University, San Antonio, Texas, affectionately nicknamed the Trinity Study.

The Trinity Study analyzed withdrawal periods up to 30 years. While it did not account for taxes and transaction fees, the study did account for inflation. The Study concluded that stock-dominated portfolios (75% stock/25% bonds) would last 30 years 98% of the time based on all historical data.  

Plus, the math is easy with the 4% rule. Examples are often represented by showing someone that can live on $40,000/year (though in most places, I would consider that EXTREMELY frugal). They just need to make it to the 2 comma club for a nest egg of $1,000,000 to FIRE.  

$40,000 / 4% = $1,000,000

Or as it is more commonly stated

 $40,000 x 25 = $1,000,000

In the second year of FIRE, adjust for 3% inflation and you would withdraw:

$40,000 x 1.03 = $41,200

Should I trust the 4% rule?

When you are starting from a negative net worth (more debt than assets), or you’re socking away your first $100,000, your FIRE number is just a concept to move you to action. It doesn’t really need to be that accurate. But the closer you get, the more comfortable you need to be with that number.

The key finding from the Trinity study that keeps me from blindly following the 4% rule is the very first conclusion they draw,

“Early retirees who anticipate long payout periods should plan on lower withdrawal rates.”

I’m looking at 45-50 years here and FIRE is no longer an abstract concept. I don’t feel like abstract generalizations are good enough anymore, so my FIRE number has become more complicated. I use a more conservative 3.5% withdrawal rate for my planning purposes. 

Our income in retirement will come from a pension for Mr. FIF and assets invested primarily in low cost index funds. We will also keep our mortgage with a rate of 2.875%. It is unusual for early retirees to keep the mortgage, but it is our only debt and that rate is amazing! 

In order for us to feel confident in our financial independence, I have broken out our FIRE plan into these four components:

FIRE ComponentThe ExplanationFIRE #
Kid’s College (529s)We have saved for 2 years per child at an in-state school, plus each child has another year of school paid for as benefit from Mr FIF’s educational benefits from his military service.8 x In-State Tuition
MortgageI consider the mortgage separately from my annual spending. Since our mortgage payments will not change with inflation like the rest of our spending will, to estimate it with inflationary spending would be an over estimate. You can add the payoff amount to your FI number, but I also see that as a little conservative. So I actually used a present value calculation for an annuity with a 3.5% ratePV(3.5%/12, remaining mortgage payments, -monthly principle and interest payment, 0)
Spending over Pension (not including mortgage)This is where the standard FIRE number calculation comes in. I have settled on a safe withdrawal rate of 3.5% of our annual estimated spending above Mr. FIF’s pension (which is adjusted for inflation every year).(Annual retirement spending – pension – mortgage payments) / 3.5%
Components of our FIRE #

Expenses, the real key to FIRE

I’ve tracked our net worth since 2010 because I’m a money nerd. I used Microsoft Money originally, but Microsoft quit supporting it, so then I used Quicken for many years, but then I got very annoyed with their insistence on forcing me to update (read: PAY) for a new version every 2 years, or they would no longer support importing my account balances. Enter Mint, Personal Capital, and so many spreadsheets. I’ve settled on a mix of my own tracking Google Sheet, Personal Capital, and Tiller, which is probably still overkill, but did I mention, I’m a nerd.

FI# Includes 529 Requirements

Mint is ok for tracking expenses, but Personal Capital does that too and so much more. I love the dashboard. It offers a snapshot of my net worth (to the extent I’ve loaded all my accounts into it). It also shows a budget widget that compares how much I’ve spent to last month. I only have two complaints for Personal Capital. One is that two-factor authentication (the additional annoying step of needing to get a code texted to you) for my bank and investment accounts often break the import. Sometimes it fixes itself and sometimes I have to spend too much time figuring out why it doesn’t work. The second annoyance is that once you have $100,000, they offer a “free” call with one of their advisors. Remember, as the saying goes, if the product is free; you’re the product. Have no doubt, with Personal Capital; you are the product. I still look at it almost every day though for a quick and easy estimate.  

I ended up building a Google Sheet that tracks my annual net worth as in the above picture. It also tracks monthly net worth for the current year, monthly income and spending, and all of my quirky FI calculations. I still need to clean it up and put some dummy numbers and instructions in it, and then I’ll offer it to the masses or the three of you reading one of my first posts.

Where are we on our FIRE journey?

*Updated as of November 26, 2022

We sold a rental property in 2021, the proceeds of which allowed us to “fully fund” the 529s for our kids. As discussed above, fully funded for us was approximately 8 years of In-State Tuition. I consider the 529s checked off, so I don’t consider their balances as part of my FI # anymore since I won’t be able to draw on them for retirement expenses. I track it as part of our net worth, but not as part of the FI # and FI assets (assets we’ll be drawing down in early retirement) going forward. I also don’t include our real estate as part of our FI # for the same reason. So our real FI journey looks more like this.

FI # w/o 529 Requirements, FI Assets do not include 529s and Property

As you can see, we just barely hit our FI # at the end of 2021, but I kept working. As the market retreated, so did my FI assets. I finally retired in October of 2022, when my FI assets had dropped to about 84% of the my originally calculated FI#. Check out So Come On and Let Me FIRE to read more about how I made the decision.

Written by Mrs. FIF · Categorized: FIRE

Nov 12 2020

No Spend September Has Us Selling All The Things

Puff with Mini FIFs donut piggy bank

Let’s be honest… I spend a lot of money. And I don’t even mean “my family”. I mean I spend a lot of money. Mr. FIF spends very little. He’s picked up our grocery shopping task (to lower the bill because I spend too much) and he does the home improvement spending as well. 

Not the best way to hold myself up as an example for the FI community.  Now in my defense, we are family of 6 and it takes a lot of food, clothes, and utilities to keep us running (or at least that is what I tell myself). 

Of the variables I have control over in my Financial Independence journey, one of them is absolutely EXPENSES.  If you can live off of less, you hit FI faster!

So Mr. FIF and I decided we would try out an experiment. An experiment that we forced our kids to participate in too. 

NO SPEND SEPTEMBER

The kids were not very excited about No Spend September, but we tried to make it fun.

Here were the rules:

  1. Necessary spending still allowed, but try not to spend more than REALLY necessary, no extra splurges at the grocery store, just groceries
  2. Kids were not allowed to spend from their saved allowance, but still earned their allowance for the month
  3. We COULD SPEND the cash in our pockets (it doesn’t count if Personal Capital doesn’t see it)
  4. We COULD SELL things to put more cash in our pockets
  5. Kids could do extra chores for CASH payments that could be spent

The spending cash stipulation was made for a few reasons. We wanted to soften the sacrifice, see what we really were probably spending too much on, and increase the kid’s motivation for doing work around the house and getting rid of things we don’t need that are just sitting around the house.

So we still ate out a few times in the month because I sold a dresser that has been sitting in the hallway of our new home for months because I just hadn’t gotten to it. But I really needed a cheeseburger. 

My teenager, FIF Jr. painted the neighbor’s fence for over a hundred bucks! He also helped with a variety of outdoor chores we needed help with. He now has a one year subscription to his PlayStation (he was saving for the annual subscription because it was cheaper than the monthly subscription, I’m so proud!).

So, how’d we do?

 12 Mo. AverageNo Spend SeptemberMoney Saved
Necessary Spending$5,477$4,814$663
Discretionary Spending$3,003$1737$1,266
Total Spending$8,480$6,551$1,929

Necessary Spending went down mostly in gas and home maintenance/improvement categories. Mr. FIF really limited his Home Depot and Lowes trips to those that were necessary. As for gas, I’m not sure why it dropped, maybe we weren’t driving around to spend our money? 

You may wonder why Discretionary Spending didn’t go to $0 during a no spend month. Some of the categories I mark as discretionary are really only discretionary for an emergency, like the kid’s college fund. If one of us lost our job, we could cut that, but not just for a no spend challenge. As I already mentioned, liquor is tracked as discretionary, but we weren’t willing to sacrifice it for this challenge. 

 You may be asking SO WHAT?!

The real impact of lowering expenses if you can sustain it looks like this:

$1,929 x 12 = $23,148 / annual expenses

$23,148 x 25 = $578,700 (using the 4% rule)

So if I could keep it up, I could reduce my investible FI assets by a whopping $578,700! I don’t really expect every month to be a no-spend month. But it did illuminate some categories we could cut back on without feeling like we’re missing out or sacrificing too much like eating out.

Written by Mrs. FIF · Categorized: FIRE

Nov 12 2020

The Money Experiences That Shape Us

View out my window growing up

I was raised by a solidly middle-class couple. They were living the American dream. They bought a house, both worked, and had 2.5 kids (ok just 2). I remember always having whatever I needed, never feeling like there wasn’t enough – true privilege. My mom handled the finances for the family and credit cards were a normal part of paying for our lifestyle. Many Christmases were paid for on credit cards; back to school shopping, credit cards; birthdays, credit cards. My mom refinanced the house several times to pay off credit cards, and now 45 years after building a very modest home, she still has a mortgage to pay.  Now all that being said, if we had money problems, I didn’t know it.  Nobody really talked about money. 

My parents had always told me that they did not save any money for college (or retirement for that matter, but we’ll get to that in other posts I’m sure).  So I went into my high school guidance counselor’s office and asked what the cheapest college was.  Her response, “Well, the United States Air Force Academy is free.”  Wait, what?!  Ok, that sounded a little crazy, is there anything less hard core? “If you got an Air Force ROTC scholarship, college could be free and you could go anywhere.”  Where do I sign up?  I applied and ended up getting a three year scholarship.  Thus, with some help from my parents, I graduated with very little student loan debt and had it paid off in the first year of active duty military service.   

Now by the time I stuck out on my own, I had formed the opinion that credit cards were evil. I was about to go off to military technical training after graduation and I was going to do it with a clean (credit card) slate. I had one visa card and a store-branded credit card that I paid off AND CANCELED before I left. What I soon learned is that it is hard to rent hotel rooms (where we had to stay during technical training) without a credit card. Cue misty-eyed call to parents.  Mom put that room on HER credit card until I could get the military travel card (which took time because I was brand-spanking-new.  So, maybe credit cards weren’t so evil. 

Now, Mr. FIF has a completely different money upbringing that I. He was raised by loving parents who were also faithful Catholics. They had very modest incomes and we’re also the same age as my grandparents. What that meant was they both lived through the great depression as part of their childhood. So they knew what it felt like to not have enough. They taught my husband serious lessons in frugality. For birthdays, they got to choose between going out to eat or a gift.  Not both, one or the other. I only point this out to call attention to the start difference between our childhoods. Though, like mine, his parents were not able to set aside money for college and he received a full four year AF ROTC scholarship. 

Mr. FIF and I balance each other out. I have learned to weigh how much a thing is needed or valued before spending money on it and Mr. FIF has learned that people things can bring people joy even if the thing does not have objective value to him. Needless to say, I handle Christmas shopping in our family.

Written by Mrs. FIF · Categorized: FIRE

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