August Update// Mixing The Math and Emotion Of Retirement Planning
Our chart took another small tick upward this month. Investment values rose .91%. Expenses were very consistent as we spent $30 less than we did last August. Add it up and our assets as a multiple of annual spending improved from 20.2X to 20.6X.
As projected earlier in the year, our month to month spending has been steady or decreasing over the past year even as our lifestyle improves. Our spending on food continues to trend downward even as we eat a progressively more organic, lower carb, whole food diet that most people would associate with high costs. We also just did another long weekend with free hotels thanks to our continued success with travel hacking.
The only area that my short term spending predictions were wrong is that commuting costs would be eliminated, since I continue to go to work daily. 🙁 On that front, I did meet with my boss this past week and increased my 401(k) contributions. This will allow me to max out my plan for 2017 before finishing up working in the end of November. 🙂
Work and Retirement
Last month, I wrote a bit flippantly that in a worst case financial scenario that an early retiree could “just go back to work”. A reader, Donna, called me out in an excellent comment. I am grateful for the feedback, as it challenged me to be a better writer and better explain my position. She wrote:
“Ah, yes, but don’t forget to consider that if the “financial world starts collapsing around you”, it may be a lot harder to just “go back to work” making the same salary you make now. If I were out of the IT field for 5-10 years, my skills would be way out of date and employers in fields that change rapidly will probably not hire someone who’s 50-60 years old with that kind of gap in work history.
I think a lot of FIRE folks in their 30s or 40s always project ahead to their 50-60s, and picture themselves feeling exactly the same as they do in their 30s and think they can just pick up where they left of in their higher-paying careers if they need to. But trust me, for the average person, if you’re tired of the grind when you’re 40, it won’t be any better when you’re 55. 🙂”
I can not agree any more with this comment. However, we have already cooked this thinking into our “Ultra Safe Early Retirement Plan”. Yesterday, I had a post published at “Can I Retire Yet” that expanded on this idea. It explained how we redefined retirement to allow us to change our lifestyle both sooner and with more confidence than we could have with a more traditional retirement.
Because we plan to continue to pursue projects that are interesting to us and add value to others, I do actually think it will be pretty easy for us to find paid work if we need to. To flip that, I think the type of people that we have become on the journey to FI will make it hard for us to not make some ongoing money.
The 4% Rule and The Math Of FIRE
Recently, the Mad Fientist interviewed Michael Kitces, who has done substantial research on the math behind retirement planning. While the whole interview is excellent and highly recommended, the big take home point that is relevant to this discussion is that even small amounts of “post-retirement” income radically change the retirement planning equation.
To Donna’s point, we may not be able to go back to similar jobs making similar salaries to what we are now. However, this is the beauty of our plan.
By building our assets to be at or near FI, we can eliminate the need for ongoing saving. Savings and income taxes represent the vast majority of where our current income goes. Eliminating the need to save eliminates the need to make high incomes, and thus avoids paying taxes at high marginal tax rates.
We can make 25-30% of our current pre-tax household income and get by without touching investments. We can make 10-15% of our current income and live strictly off of dividends and interest from our investments without spending a penny of our principal. In our minds, this is about as safe as it gets.
Math + Emotion = A Good Plan
When starting out, I think that we got overly focused on the math of early retirement. We thought that FIRE was simply a matter of mastering investing, taxes, and safe withdrawal rates.
However, there is a large mental component to this whole process as well. Often there is a feeling of overwhelm for those trying to get started. This can be followed by over-romanticizing retirement as we get some wins under our belts, creating the mental challenge of being satisfied and happy while on the path to FI. Then fear and anxiety start kicking in as it comes time to pull the trigger on making major life changes.
Having a solid plan means having a solid grasp on the math of retirement and mastering your personal numbers. However, it also means thinking long and hard about the mental components to get started, stay on course, and then not get caught up in fear and anxiety that lead people to be afraid to make changes.
For more on the topic of mixing math and emotion of early retirement, click over to “Can I Retire Yet?” to read my newest post “Conquer 3 Criticial Early Retirement Challenges by Redefining Retirement.” Then let me know what you think below.