What’s your financial independence number (FI/FIRE number)? Are you being too conservative, or are you cutting things close? Do you even have one? Today, we’re taking a deep dive into this hotly debated topic to help you build a nest egg that will support your early retirement!
Welcome back to the BiggerPockets Money podcast! How much money do you actually need to retire? For years, the four-percent rule has been the “official” stance of the FI community. But why is it, then, that so many people continue saving and investing when they can comfortably retire? In this episode, Scott and Mindy talk about their own FI numbers, how they calculated them, and how their financial positions have evolved over time. You’ll learn whether the four-percent rule still works today or if you need a larger buffer!
If you’re worried about inflation, one of the best things you can do is keep your living expenses in check. This might seem out of your control, but there are several ways to either lock in certain costs or eliminate them entirely. We’ll discuss the many advantages of a paid-off house, self-managing your rental properties in retirement, and a one-time investment that could help you save thousands of dollars over your lifetime!
Mindy:In the fire community, one of the most frequently asked questions is, what is your fine number? I’ve asked this a ton of times. It’s one of my go-tos. It’s a great icebreaker. Everyone wants to know if their fine number is too low, too high, too conservative, or hopefully just right. More often than not, people are too conservative. Have you inflated your fine number just to be a little too high and could this be impacting your retirement today? We’re going to talk about that in just a few minutes. Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my nose, his own risk tolerance. Co-host Scott Trench.
Scott:I don’t think you could have come up with a beta introduction for me if you tried. Mindy BiggerPockets has a goal of creating 1 million millionaires. You are in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting, as long as you actually know what your number is. Today we are going to discuss how to calculate your FI number and what you may be doing wrong. We’re going to talk about why your FI number may be too high, too conservative, and why that may be costing you a number of years and why the traditional ways of calculating your fine number, the 4% rule, are already baking in the most conservative assumptions that you probably need to plan out for your portfolio. Excited to get into this today.
Mindy:I am too, Scott. Let’s jump right in. I’m going to put you on the hot seat. Can you give us a refresher for our audience how you calculate your fine number?
Scott:First of all, this is such an issue because it’s the whole game, right? The question is how much do I need to retire? Everyone who is ever exploring the concept of financial independence retire early. The FIRE movement has to have an opinion on this number. The official stance of the FIRE community, I say that a little bit in jest, is the concept of the 4% rule. There is a large body of research starting with the Trinity Study and work developed by William Bangin, who we’ve had here on BiggerPockets Money and followed up and expanded on by Michael Kitsis, who we’ve also had here on BiggerPockets. Money supports generally the conclusion that the 4% rule is the answer to how much do you need in order to retire la the 4% rule states that if you have a portfolio and withdraw of a 60 40 stock bond portfolio and you withdraw 4% of that portfolio or less, you never in history would run out of money over a 30 year period and it goes further than that and explains that in most cases, you end up with more money at the end of 30 years than in retirement.Then you began your retirement with. Now this sparks the debate in the FIRE community. Well, if I’m retiring at 30 and I want to live to be a hundred, that 30 year component of the Trinity study and all this work really gives me the heebie GBS here. And as a result, while we generally all agree on the math and that the 4% rule is a great answer to the question, how much do you need to retire? We never, never find anybody in this entire industry doing this for years who has actually retired permanently on the 4% rule in a 60 40 stock bond portfolio in an early capacity with no other side bets, cash position, pension jobs, whatever. So how did I do it there? Is that answering the question? Framing it right?
Mindy:I think you are correct with, I have two little changes. You said never has anybody run out of money in history retiring on the 60 40 with a 30 year horizon, and it’s actually 96% success rates. So there are a couple of times when you retire into a period of high inflation, prolonged high inflation, so you’re retiring in the sixties into the seventies hyperinflation. That was a time when when you ran out the money year 30, you know what? You might’ve actually been correct. Year 31 I think is when the bank account dipped below zero. So there are a few different points but let’s say a money ending 30 years with next to nothing is not an acceptable FIRE plan. So the point either way is the same when it comes to thinking about the 4% rule as the iron law of can you retire early?
Scott:Yes. However, I will argue back against people who are like, well, we’re in a period of high inflation now. First of all, inflation is already coming down. It wasn’t a prolonged period in the seventies. And second of all, if you got yourself to the position of being financially independent, chances are really good. You’re checking in on your finances at least somewhat. I don’t personally do it, but my husband does it every single day, which is way too much for me, but I know that I don’t have to because he’s doing it every single day. He’s keeping an eye on it. If there was a downturn, if there was a prolonged downturn, we would do something to right the ship. We wouldn’t just be like, well, it says we’re going to have to be withdrawing 4% every year. So that’s what we’re going to do. And even if we run out of money, there’s no way to change it. I mean, just a little bit of difference will change your whole financial outlook. You could stop spending money for a year, go get a job or a part-time job or something for a year. So I think that not only is this the most common question, what’s your fine number, but this is also a really big source of debate between people who say 4% isn’t conservative enough. So I hope to dive into that a little bit with you today, Scott. Have you calculated your FI number based on your spending? And the 4% rule
Scott:I have, and I’m way past it at this point, frankly, which is a really interesting position to be in because I’m in the same bucket as essentially every other person who, well, I haven’t left my job, but every person who has actually left their job and retired early finds themselves in my experience in this position of having well beyond that number from a FIRE planning perspective.
Mindy:Yes, and I think that our current timeline is part of the reason for it. We started, my husband and I started pursuing financial independence about 11 years ago. We reached it fairly quickly, although we were halfway there. I continued to work. He continued to work. Our nest egg has grown and doubled and doubled again, and then a little bit more. So we are not in a position to worry about our finances, but I can see how somebody who is listening to this in 25 years is like, oh, well, she did it with a huge stock market tailwind. We’ve had a crazy market for the last, what, 20 years? 15 years, 20 years? Oh, I’m sorry, I’m forgetting about 2008. How can I forget? About 2008 for the last 10 or 15 years, we have had a crazy market. So I think that there’s a lot of things to consider, but also overwhelmingly people are too conservative with their original FI number.
Scott:Let’s put ourselves in the shoes of someone listening, and if you’re listening, let us know in the comments or on Facebook if you disagree. But if I’m going back 5, 6, 7, 8 years ago and I’m thinking about the journey to financial independence, the target is a net worth of between one and a half and two and a half million dollars inflation adjusted for the vast majority of people listening to this podcast. That will be the target. And when you’re on the journey there, that backs into a 4% number. I think that most people who are on the journey to FIRE back into a 4% rule number, and what we see is when people approach or even surpass that number, they’re not actually able then to retire. And that’s where the conservativeness comes in, right? Because people listening to the podcast who are on that journey are like, I’m totally fine with the 4% rule.I get the math and I’m still shooting for it. But what we’re I think addressing here is that the reality of once you get there is that most people tend to go way beyond it or have backup plan after backup plan after backup plan for it. And so that brings up the two I think conflicting problems or the big argument in the fire community about this. Number one is, hey, there are a number of cases in history where you will end up with less money at the end of 30 years than you started with on a nominal basis, which is an unacceptable outcome for a lot of people in the fire community because they plan to live more than the 30 years of traditional retirement planning. And the second is that the 4% rule assumes and Mr. Money mustache put this beautifully in a 2012 article called How Much Do I Need for Retirement?It assumes that the retiree will never earn any more money through any part-time work or self-employment projects for the rest of their lives. It assumes that they’ll never collect a single dollar from Social Security or any other pension plan. It assumes that they’ll never adjust their spending to account for any economic reality like a huge recession. It assumes that they will never substitute goods to compensate for inflation or price fluctuations like taking a vacation in a cheaper area one year versus doing something different in another year. It assumes that they’ll never collect any inheritance. It includes that they will never spend less as they age, which is a typical pattern that we see in a lot of retirees. So those assumptions are also not baked into this 4% rule analysis. And so those are the two tug and poles on there, but I think that it doesn’t change the reality that every case of FIRE that I have come across to this point has involved someone starting with this goal of the 4% rule and going beyond it before actually pulling the trigger and quitting.
Mindy:While we are away on a quick break, we want to hear from you, do you know what your fine number is? Submit your answer in the Spotify or YouTube app. Okay, we’ll be back right after these quick few ads.
Scott:Alright, let’s Phi Noli jump back in
Mindy:And I think you’re correct, Scott. We haven’t found anybody who is solely living off of their 4% rule withdrawals and not having any other side businesses. However, I do want to call out millennial revolution. They have their portfolio that they retired on and all of their additional income that is coming in now is going into a different bucket. They are pulling out of this main bucket, their 4% rule retirement bucket. They are only spending the money that they’re pulling out of there and they are living well within their means off of this money. They said that they have been doing this for 10 years and they have more money now than they did 10 years ago while continuing to withdraw 4% every year.
Scott:Think about that example though. That’s the fun part about this, right? B Bryce and Christie, right? We had them on the show here at BiggerPockets Money too, right when they were starting this journey and they’re like, they’re geniuses. They get all this, they know all the math behind this. They wrote a book called Quit Like a Millionaire in the Space that’s really popular. You should go check it out. If you haven’t read it yet. They know what they’re talking about and they can’t even do it. They have to have the side income stream just in case their experiment doesn’t work out of traditional financial independence. And that’s the conundrum. That’s the topic today is yes, that number that is too conservative, it’s too much. They didn’t need the other side of things there because the math generally works. It’s got a real high enough hit rate that if people did it, they would retire on time and spend the minimum amount of time working and the maximum amount of time in retirement on that. But nobody can actually mentally do that without some sort of side bet.
Mindy:Well, I don’t know that they have a side bet on purpose. I think their blog just started generating income and they wrote a book and that generated income and little other things generated income. I don’t think they set out to say we don’t believe in the 4% rule, so we’re going to make extra money. I think it just happens that they’re making extra money. The same has happened for my husband who has been retired for seven or eight years. I can’t remember now. It has happened for I am making more money now than I have ever done before although I do have a job, which is one source of income. I have a real estate agent license that’s another source of income. We have dividends from index funds. We have dividends from stocks that weren’t started out as dividends. There’s all these little buckets that start coming in and it feels like, so your plan is too conservative. It almost feels like you can’t stop it. Our original number was $1 million and I think that might have been a little aggressive for us because we have started spending more money, but also we have started spending more money because our nest egg has grown so much. So it’s kind of a chicken and an egg thing.
Scott:Well, look, we have this dynamic and we have wonderful math and we’ve had the people who do this research on the show and one other call out about Bill Bangin is Bill Bangin did this research and then maybe a month or two after he was on the show, maybe even a month or two before he was on BiggerPockets money, he went 70% to cash with his own personal position because he feared market correction and he didn’t use his rule to do that and he was totally fine with that. And that’s a psychological and personal preference for all of this. It’s not necessarily good retirement planning or a way to maximize wealth necessarily, but this is the guy who did the original study, couldn’t even adhere to it or didn’t adhere to it maybe is the different word. Chose not to adhere to it for what I’m sure are great reasons for him, but that’s the conundrum. So we have great math and we have no literally zero examples in six years and 550 plus episodes here of people who have actually done this.
Mindy:And if you have, email [email protected], [email protected] and let’s tell your story because we do truly want to tell your story. We just haven’t found you yet.
Scott:Let’s take that and say how does this factor into the plan here? Well, the plan should be amass 25 times your annual spending. That’s where we things start and know just that you are going to want to go beyond that unless you are the person who we’ve been looking for for years who will actually pull the trigger at the 4% rule with nothing else on top of that. And again, we would love to have you on the BiggerPockets Money podcast when you do that at that point or within a percentage, 1% or so of that inflection point. So that’s the plan. The plan is get there and know that that’s the beginning of the end and you’re going to move on to other parts of the process here. Then we can get into talking about more nuances from fire. And what’s kind of been interesting to me is these concepts of lean fire, regular fire, chubby fire, fat, fire and all of the things in between. And one of the things, Mindy, that I have been thinking about is inflation and protecting against this desire to maybe so kind of want to spend more as life progresses rather than keep spending flat and how to plan for that. Right? And so do you have any ideas around how someone who’s preparing for fire can lock in core expenses so that they’re protected from rising costs and inflation as much as possible?
Mindy:Well, there’s always going to be things that you cannot control. The cost of food is going to continue to go up. The cost of gasoline is going to continue to go up. You can hedge your bet by having an electric vehicle and solar panels on your house and then you’ve mitigated your gasoline cost. You’ve mitigated some of your heating costs, some of your work around your house costs, assuming that the sun doesn’t go out. Of course you can buy a car with cash so you don’t have a car payment. You will have some repairs and you’ll need to be saving for those. But that’s not the overwhelming majority of your vehicle expenses. It’s the payment itself, the gasoline and a little bit of upkeep. You can buy a house and not be tempted to move and move and move again. Get a fixed rate mortgage, pay it off completely either way, your annual expenditures are going to be far less with a fixed rate, interest rates, fixed rate loans, or removing that cost altogether while you’re on your FI journey. So you have the paid off everything. I think would be the best choice. But there are some things that are not going to be predictable when you are operating under a, I am spending X per year, you still need to pay attention to what you’re spending. It’s so easy for your spending to go up. So if you think you’re spending $50,000 a year, check
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