Doubts and questions
How many millions of dollars must we put away to be contented for the rest of our lives? Do we still have to work until we’re 67? Is it possible to retire early? How much do I need to retire?
Our humble beginnings
My wife and I are roughly of the same background. We are both physical therapists trained in the Philippines. We lived and worked there for a few years after graduation and so we know how scarce money is. We are frugal and we only spend money if we must, or at least justify that we had to.
For me it was uplifting to earn more than what I was making in my home country. Take note that the last job I had only paid $1 an hour. When I started working in the U.S, I remained frugal. I had to be. But then I realized that I could buy more stuff, eat fancier meals, and go to places I never thought of travelling. I felt more accomplished. Heck, I thought that riding planes are only for mega-rich people, but there I was flying out once or twice a year.
I learned of the financial independence movement about 3 years ago, but to me it was just another hipster group. These people must be ultra-savers, I thought. They must be miserable, depriving themselves of all life’s pleasures just so they don’t have to work.
Not my cup of tea, I said.
I always followed sensible advice. First, I pay myself a portion of my salary the moment I earn it. And then, I am free to do whatever I want with the rest. Feeling like I can have my cake and eat it too.
It is just that easy, right?
Maybe that is what the FI people are doing too? They must be doctors, lawyers, or businesspeople then. That is why they can shove money into their bank accounts by the truck loads. Because I do not really see how I can live a comfortable life, while saving enough to retire early by doing what I am doing?
It must be trick!
I had gotten the habit of listening to podcasts on my drive to work. I came across one called How-to-Money. They are two best friends educating listeners on how to reflect on and spend money wisely. The cheap person in me was itching to know these tricks!
Through the topics and their guests, I was surprised to find out that what they are doing is nowhere near deprivation. That the people that had achieved or still working towards financial independence are not all doctors, lawyers, or businesspeople. The tools to realize this goal is within most people’s reach. There is a means to know how and when to get there.
I shared this with my wife, and we started to implement some of the life hacks I learned, but we were still set to stay in the tried-and-true path to working until the clock says it’s time to go home, until our ages or our bodies tells us it’s time to stop, whichever comes first. That is what we came here for, we said to ourselves. We worked hard to get the opportunity to work and reach the American Dream, and we will take our sweet time getting there at the same pace as everyone else.
The FI number
On the show, I heard of this thing called the Financial Independence Number. This is the amount of money that one needs to save to be considered financially independent. It is how much you need to be free, thereafter work becomes optional. Others sometimes call it F.U. money. It is a standard, but you can modify this number based on your personal needs.
It did not make sense to me at first. It could not be that easy? If retirees in their 60s needs millions, then early-retirees must need gazillions!!
How do I know what we will need in the future? Prices go up all the time, what then? Do we need to eat one meal a day or live in our cars to make this work? And why 4%?
What is the 4% rule of thumb?
In 1994, retired financial adviser, William Bengen formulated this concept as a rule of thumb for safe withdrawal rates during retirement. This was based on his early research of stock returns and retirement scenarios in the past 75 years.
This suggests that you can safely withdraw 4% of your total retirement fund every year and it will last for at least 30 years. That 4% is strongly dependent on your annual expenses, thus the formula.
How magical! How is that possible?
It is possible because this fund is invested in the stock market that earns and average 8-12% interest every year. But due to the innate nature of the stock market, the rate of return on your fund will not always be the same every year. Some years it will be as high as 30% or as low as -35%, and this all depends on how the economy is doing.
As I understood it, on years where the stock market performs well, 4% of that fund will equal to more money. If the stock market performs poorly, the dollar amount will be less. If you only live on 4% of your current balance every year there will be enough principal, so it continuously earns money and theoretically you do not run out.
I highly recommend the book, The Simple Path to Wealth by JL Collins as an excellent resource for deeper dive on how to grow your wealth for retirement by investing on low cost highly diversified funds. This was able to answer my questions on the why and how of investing and most importantly it thought me how to react to the intrinsic changes in the stock market.
Before being exposed to financial independence, I had no idea how much I need to retire. Why would I? I am still decades away. I had no knowledge of investing of any kind because I always thought that it was gambling and that only rich people gamble. I would rather just keep my money in the bank where it is safe and insured.
My first exposure to stocks investing was when I became eligible to participate in my company 401k. My manager and coworkers told me to at least contribute the employer match to get the free money and let them manage it. So, I did. I went for the default fund allocation and ignored the high fees.
In 2016, I was also convinced to buy a universal life insurance that is tied with the performance of the stock market. Until I found out, years later that it was not the greatest choice as I thought it would be for my goals.
In 2017, after much deliberation, I opened a taxable investment account on Wealthfront, a robo-advisor company, and put excess cash there. I thought that if the money is not in my checking account, I would not be tempted to spend it. In the first year I only put $100 a month, but I had increased my investments since then.
It turned out to be a great decision because my investments now are being managed and rebalanced for a fee of 0.25% annually, a fraction of the cost compared to most money management company. It is an excellent starting point for handsfree investing and training ground for beginners like me.
Get your first $5000 managed for free at Wealthfront by clicking here.
Annual Expenses: The Cost of Needs and Wants
This includes everything that you need to live your life. From the food that keeps your body going, to the bills that keeps your home running, and the various purchases that makes your life interesting.
As a couple, we are merciless at not paying full price for anything. But in 2019, we found ourselves justifying purchases even if they did not make sense. We had subscriptions to dozens of streaming services, we bought phones every year and buy gigs upon gigs of plans that we could not even fully use.
To take advantage of all our subscriptions we stayed up later at night to binge watch while munching on junk food. We went out to try and retry restaurants most days of the week and then went home realizing that it was not good food anyway.
On holidays, we went to outlet malls for the fear of missing out on a good deal. The excitement of not knowing what bargain we will find thrilled us. Unaware that they will be just another thing to add to the pile of stuff that we thought will make us happy. We often keep pieces of clothing, trinkets, and toys that we do not use out of sight to hide the regret of our impulse buys.
We maintained a budget then, but we were very generous with it. The purpose of the budget then was to tell us if we can spend more rather than save. If it was not enough, we felt sorry that an item had to stay in our online shopping carts because we had to wait for our next paycheck.
Fortunately, we were not buried in debt, but we were not intentional with our purchases neither. We were looking at others, seeing their smiles with the shiny thing their holding, wishing we had that too, forgetting to ask ourselves, how much do we really need to be happy?
Our Annual Expense in 2019 added up to $83,400. This is how much our lifestyle costs; that is why we were working so much, to sustain our needs, but mostly to feed our wants. We mistook buying things for what we wanted, when all that we desire is Time.
Rethinking an intentional life
How much do I need to retire?
2019 FI Number: $83,400 x 25 = $2,085,000
Our 2019 lifestyle will cost us over $2 million dollars to maintain when we retire. We do not even know where to start. I have been working for 5 years and my wife 3 years, but we were nowhere near that.
Also, remember that our lifestyle was unintentional. That number did not move our happiness meter in any significant way, but rather we were more tired, unhealthy, and broke.
It is a lot of money and a whole lot more hours of driving and late-night documenting. We had some contemplating to do if we want to have a chance at being financially independent.
- How are we able to accumulate $2 million?
- What are we willing to sacrifice to get this? more time?
- Is it possible to live a happy and intentional life with less?
- How long until work is only optional for us?
- What little things can we do to get there faster?
- What would that life look like?
- How much do I need to retire?
In the moment, please take time to reflect on how you are doing. Know the cost of your needs and wants, your FI number. See if it is consistent with what you want your life to be now. Ask if you are living your life with intention.