Assets went up 1.44% from last month due to a combination of continued contributions with some small market gains. However, our spending was again up, pushing our average monthly spending up by about $170. Factoring it all in, our assets were down from 15.0 to 14.6X our monthly expenses. More on our spending below.
The Final Countdown!
We are officially one year away from beginning our transition to our early retirement. We have actually been in transition for the past 3.5 years when we had little EE. Since then, Mrs. EE left the full-time work force and has been working 30 hours/week. At the same time, I gave up a portion of my workload and went from a frantic pace to a normal 40 hour work week while also burning through a bunch of vacation time. However, we still feel consistently far too busy and are ready to take much more drastic next steps.
The first big step will happen in one year. I plan to leave my job by the end of next April. My goal, even before I had any idea if it was possible, was to retire by age 40. Next May, I will turn 41. The time has come to proverbially shit or get off the pot! Over the next year, we will be shifting our focus in life and in writings for the blog away from our original focus on building assets, investing and general financial education to the specific questions and challenges we will face during this transition.
As always we encourage any feedback and welcome the bad as well as the good. Over the past 2 years since starting the blog, we have been sporadic in our writing and even worse with our marketing. Despite this, we seem to have developed an awesome core group of regular readers, some already FI and others at various stages of the journey with us who are very knowledgeable. We are grateful for all that we continue to learn from your feedback.
Our Flawed System
We have gotten a good bit of positive feedback regarding our system of tracking our progress towards FI. To recap, we update our investment asset values each month. This includes all retirement and non-retirement accounts and cash savings. We track all expenses each month and keep a rolling average of our annual spending. For example, our spending for this April kicked out our spending from April 2015 as we average the most recent year. We then present our progress as a multiple of assets X annual spending. Using the assumptions of a 4% withdrawal rate, you are financially independent when investments reach 25X annual expenses.
We think that tracking progress in this way is great when starting out for two reasons. First, when starting out with a high savings rate and a low asset balance, your new savings will be the dominant driving force in your asset gains. Thus, you will see consistent gains in your asset value in all but the most drastic market downturns. This positive feedback loop is very encouraging and motivating. Second, this method forces you to focus on your spending. This is vital to those who want to achieve FI quickly. It is far easier to cut $1,000 of annual spending than it is to save $25,000, even for very high wage earners. Tracking expenses in this way makes this very apparent.
We have discovered two problems with this system as we approach our FI number which maxed out at over 18X and currently sits at 14.6X our spending. They are the opposite sides of the coin as to why this system is so good.
We have previously discussed the concept of crossing a line, where your investment returns far outweigh anything that you do with saving. This is definitely a good thing as it is a sign that you have accumulated substantial assets. However, it is challenging psychologically. For example if you have $50,000 and add $5,000/month, you are seeing a 10% return for the month even in a flat market. However, if you have $500,000 and add $5,000/month you have only a 1% improvement in a flat market. In months where the markets are up or down by only 2%, it becomes very apparent that you have little control over asset value. Market forces now have much more influence than you do. This can be challenging psychologically as it can feel that you are wasting your time by continuing to save, when in reality saving is still very important as you are accumulating substantial amounts of shares over time.
Also, our spending has a disproportionate effect on our number. While this is good to be aware of, it also can lead to false assumptions. The 4% rule is based on having constant expenses, adjusting only for inflation annually. This is simply not how people live, especially those retiring very early and going through different seasons of life. Looking at our numbers, it looks like we have taken major steps backward over the past year, when in fact we feel very good about our direction. Despite an overall relatively flat market (with lots of short upturns and drops), we’ve seen a 6-figure increase in our asset values.
Our philosophy is that we don’t have to have the assets to support the living expenses that we have during our working years. We need to be able to support the expenses that we will have in our retirement. These are potentially two very different things and we each have to make an accurate assessment of whether our spending will remain constant, increase or decrease after we quit working. We are consciously choosing to spend a bit more now, knowing that we would not be able to sustain that level of spending on our current assets.
Where Are We Spending More Money?
Tracking our expenses allows us to see where our increased spending over the past year has been going. We are able to divide it into 3 categories.
- Health Care Expenses: Part of this is the traditional sense in which people think, aka health insurance. My contributions to my work provided insurance plan have increased by $200/month. At the same time we are now responsible for higher deductibles. This is actually not a terrible thing as one of the things that has us hanging on to full-time employment is the idea of having health care provided by my employer. Now that we are paying a substantial share of these costs anyway, it makes it less scary to leave my job. Assuming ACA subsidies stay the same (a scary and potentially dangerous assumption), we won’t pay all that much more having to buy our own health insurance. The other portion of these health related expenses is that we continue to experiment with a more organic, whole food diet and the use of supplements as first discussed here. We plan on this being a permanent change as well to some degree. However, we are starting to get a little better at simplifying and prioritizing. As we get more efficient with shopping and designing our menu, I think we can reduce what we are currently spending. All in all though, I don’t see us ever going back to cheaper health insurance costs or the lower cost diet we formerly ate so we will simply have to figure out a way to cover these expenses.
- Travel: We have decided that we are not going to worry too much about what we spend on travel while still working. If we want to fly across the country to ski for a weekend, we feel it is worth it. If we want to stay in a hotel when traveling with little EE rather than camp for improved comfort, we will. While we are still working, we realize that we don’t have a lot of flexibility in our schedules and we are living in a place with poor proximity to good skiing, climbing and hiking. Therefore, we need to pay to play, often premium prices. When we retire, we plan to reverse our current living situation. We will build our lives around living close to the things we want to do and travel to our current home town to visit with family. We will be able to play much more for much less cost. We will be able to travel for longer periods of time and stay for far lower costs. We also decided to invest some time to learn about travel hacking with the Travel Miles 101 course. As we get better with these techniques and have more flexible schedules, we will be able to travel much more for much less cost. All in all, I don’t worry about this being spending that we have to sustain long-term and feel that it is far better use of our money to enjoy life now instead of worrying if we can save a few thousand dollars a year more. However, this spending makes our FI numbers look really bad as every $1,000 we spend is the equivalent to $25,000 we should have saved by our formula.
- Home Repairs/Maintenance: We made a final decision that we will be putting our home on the market and have met with a realtor. This means doing a number of cosmetic projects including landscaping, fencing, painting, power-washing, etc. We feel that it is a far better investment of our time and money to pay to have these things done for us when time is at a premium. We would much rather use our time on things more important to us right now such as our marriage, little EE, developing side hustles that will provide long-term ongoing income, our hobbies, friends, and charitable endeavors. While this is a significant expense now, these projects are in no way annual expenses. In the long run we will spend far less on our overall housing costs as we are looking to significantly downsize as part of our early retirement plans. Therefore, we are not really worried about sustaining this spending. However, like the travel expenses, this current spending makes our numbers look substantailly worse.
So that’s where we are with our spending and why we seem to have hit a wall in our progress towards FI, even as our asset value consistently grows.
So what do you think? Are we being realistic with our assessments and smart with our moderation in saving as we come down the home stretch to FIRE? Are we just trying to justify reckless spending which is a sign that we are getting soft and lazy? Are we setting ourselves up for hard times if we have to cut back spending later? Share your thoughts below. We appreciate you honest feedback!