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 rough of the same background. We are both physical therapists trained in the Philippines. We lived and worked there for a few years after graduation, so we know how scarce money is. We are frugal and only spend money if we must, or at least justify that we have to.
It was uplifting to earn more than what I made in my home country. Take note that I had only paid $1 an hour in my last job. When I started working in the U.S., I remained frugal. I had to be. But then I realized I could buy more stuff, eat fancier meals, and go to places I had never thought of traveling. I felt more accomplished. I thought riding planes were only for mega-rich people, but I was, flying out once or twice a year.
I learned of the financial independence movement about 3 years ago, but 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 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 truckloads. Because I do not see how I can live a comfortable life while saving enough to retire early by doing what I am doing?
It must be a trick!
I had relived to 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 that what they do is nowhere near deprivation. Those who have achieved or are 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 on 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. So 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 the Financial Independence Number. This is the amount of money one needs to save to be financially independent. First is how much you need to be free; after that, work becomes optional. Others sometimes call it F.U. money. It is a standard, but you can modify this number based on your needs.
It did not make sense to me at first. It could not be that easy? If retirees in their 60s need 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 daily or live in 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, which will last for at least 30 years. Of course, that 4% strongly depends 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 and earns an average of 8-12% interest yearly. But due to the innate nature of the stock market, the rate of return on your fund will not always be the same yearly. In some years, it will be as high as 30% or as low as -35%, depending on how the economy is doing.
As I understood, 4% of that fund will equal more money in years when the stock market performs well. 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 into how to grow your wealth for retirement by investing in low cost highly diversified funds. This answered my questions on the why and how of investing, and most importantly, it taughtme how to react to the intrinsic changes in the stock market.
Before being exposed to financial independence, I had no idea how much I needed to retire. Why would I? I am still decades away. I had no knowledge of investing because I always thought it was gambling and only rich people bet. I would rather just keep my money in the bank where it is safe and insured.
My first exposure to stock investing was when I became eligible to participate in my company’s 401k. My manager and coworkers told me to at least contribute to 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 convinced to buy universal life insurance tied to the stock market’s performance. Until I found out, years later, that it was not the most excellent 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 was not in my checking account, I would not be tempted to spend it. I only put in $100 a month in the first year, but I have increased my investments since then.
It turned out to be a great decision because my investments are now being managed and rebalanced for a fee of 0.25% annually, a fraction of the cost compared to most money management companies. It is an excellent starting point for hands-free investing and a 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 the sticker price for anything. But in 2019, we justified purchases even if they did not make sense. We subscribed to dozens of streaming services; we bought phones every year and 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 it was not good food anyway.
We went to outlet malls on holidays for fear of missing out on a good deal. The excitement of not knowing what bargain we would find thrilled us. Unaware that they would be just another thing to add to the pile of stuff that we thought would 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 was to tell us if we could 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. Instead, 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 Expenses 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 mainly to feed our wants. We mistook buying things for what we wanted when all 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 over $2 million to maintain when we retire. Yet, we do not even know where to start. I have worked for 5 years and my wife for 3 years, but we were nowhere near that.
Also, remember that our lifestyle was unintentional. That number did not move our happiness meter significantly; instead, we were more tired, unhealthy, and broke.
It is a lot of money, hours of driving, and late-night documenting. So 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?
At 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.
We are a Pinoy Physical Therapist duo living somewhat unconventional but intentional lives. In this podcast, we want to learn how Filipinos worldwide in different industries and walks of life earn, spend, save and invest money to achieve Financial Independence.
We are NOT certified financial advisors, analysts, or CPAs. Investing strategies shared in this article and the website are not financial advice but our opinions for educational purposes only. We want you to treat our content as a preview to do your research so you can make intelligent financial decisions.