July Update//Achieving Our Goals and Managing Our Fears
After a few months of flirting with it, we finally crossed the line of having investments exceed 20X our current annual spending.
This was our original goal. We achieved it three months after our original target financial independence day. Our initial reaction was excitement and joy.
Then we started thinking a bit about what these numbers all mean. This can make us skeptical and even cause a bit of fear.
A Pessimistic Outlook
Stocks sit near all time high valuations. I acknowledge that stock values have no cap on how high they can go. I don’t predict when market corrections or crashes will happen and I don’t pretend to know how low they will go. Still, anyone who looks at the linked graph of historic stock market valuations and jumps into traditional retirement without concern would be careless and even a bit delusional in my opinion.
Bonds continue to have an even worse outlook. Current 10 year bond yields are 2.26% as I write this. This is far short of meeting the needs of a traditional 4% “safe withdrawal rate” let alone a 5% withdrawal rate implicit for someone with 20X expenses saved. This is before accounting for the effects of inflation.
Bonds create a lose-lose-lose situation going forward. If bond yields remain stable, they are too low to meet spending needs. There is little room for rates to drop to raise the value of existing bonds and any drop in rates lowers future yields further. It will take a substantial rise for bond yields to match spending needs and this will decrease values on bonds that will need to be sold until the low yielding bonds are flushed out.
Finally, we keep a small percentage of our portfolio in cash. With interest rates hovering around 1%, this is a near sure guarantee to not even keep up with inflation.
All of this creates an uneasy feeling and has us questioning how valid our retirement assumptions are.
A Bit of Optimism
Joel and Alexis of the blog FI180 developed the concept of “The Milestones of FI”. According to their milestones, we are at “Flex FI”, defined as having savings equal to 20X annual expenses. They write, “The idea is that at this milestone, you could potentially pull the early retirement trigger if you’re flexible with your annual spending!” (I would add: or if you plan to continue to earn some income.)
They also write that, “Starting an annual draw here is equivalent to following a 5% safe withdrawal rate, which, according to the Trinity study, has an 82% chance of success, even if you are completely inflexible with your withdrawals.” Given the numbers above, I would say that is overly optimistic for someone starting in today’s current environment. I would estimate the chance of success at 50/50 or less.
Still, they make some great points for someone where we are. The best was this: “As long as you watch your portfolio carefully over the years, there’s not much to fear. Your worst case scenario, after all, is everyone else’s every day scenario: you go back to work.”
A Bit of Perspective
A regular theme of these updates is that we try to give some perspective on the process of working toward FI. Markets go up and down. Spending goes up and down. Emotions go up and down.
Things are never quite as good or simple as they may at first glimpse seem. Things are also never quite as complex or bad as people commonly think. The truth generally lies somewhere in between. The key is often finding that bit of perspective.
The last passage that I highlighted from the FI180 post is consistent with the concept of “fear setting”. Summarized into one sentence, fear setting means you visualize the worst case scenario and then look at it objectively and ask yourself if it is really something worthy of your fear.
Let’s imagine that we make it only 20 years and completely run out of money. Somehow, we missed every warning sign and failed to correct course and went on living our current lifestyle despite the financial world collapsing around us.
This would mean that we would have spent considerable time on our relationship and our physical, emotional, and spiritual health which too often get neglected by our busy work lives. We would have experienced two decades of outdoor adventures when we had our health. We will have spent a tremendous amount of time with our daughter creating a bond and shaping her values during her formative years. (If we invest enough time to keep her on her current career trajectory, we may even be able to avoid the cost of college and keep the money we have set aside to fund a few more year’s living expenses.)At the end of that worst case scenario, we’d end up in a pretty standard place for many Americans. We would be in our early 60’s, broke, and dependent on social security. Or as Joel and Alexis wrote, at some point we would have simply gone back to work. In either case, the worst case scenario isn’t so bad. It is reality for the majority of Americans.
It is wise to not wear rose colored glasses when projecting the future. However, all of us on the road to FI have put ourselves in an amazing position in life. Fear needs not control us.
How do you manage fear, doubt, and insecurity as you navigate a path to FIRE that is outside what most people can relate to? Have you tried “fear setting” or any other particular techniques that have been particularly helpful. Share your thoughts below.