July Update//Achieving Our Goals and Managing Our Fears

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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.)IMG_4404At 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.

12 comments on July Update//Achieving Our Goals and Managing Our Fears

  1. Love the end of this piece, in particular. Worst case scenario is unlikely, but even then the payoff is pretty good: a lot of time spent with family and on what matters to you, and then you just take up the same burden everyone else does every day…work. Not too shabby, and certainly nothing to be paralyzed with fear over.

    I took a peek mid-way reading your post, and it turns out we’re 20x FI, too. Great minds, and all that. 🙂

    1. Agree. And don’t get me wrong I don’t ever want to be in that standard average place, but if running completely out of money is what we fear than we need to acknowledge that it is not only very unlikely but it is simply not the end of the world. Congrats on your own progress towards FI!

  2. Great post and congrats. That is an exciting achievement indeed. At the risk of being “Debbie Downer” remember that the 4% rule was initially researched to allow a good chance for a 30 year retirement without running out of money. It was never intended to infer that a portfolio would last forever. While I believe that, if you pay attention (as you note in your post), it is likely that you can stretch it out, it would be prudent to approach things from the point where William Bengen (creator of the rule) left off in his research.

    Again, kudos for hitting this milestone. Keep it up!

    1. No arguments here Oldster. If you take a look at some of our other writing about our plans, our planning has evolved and we are not planning a traditional retirement. If we were, we would not be pulling the cord so early. Thanks for the encouragement and the reminder!

    1. The last 5 years have been great from an investor’s point of view. I am not so sure my next 5 years will be so smooth if we started today. I know you are not a traditional index investor and so have other risk management mechanisms built into your investment process, but we do not and so we are planning outside of our traditional investments (i.e. earning some additional income).

  3. I’m at 2%/48x or will be when or if I ever start withdrawing. My two day a week side gigs are currently supplying 100% of our expenses so this is kind of hypothetical to me. However I think 5% is reasonable because a) you could easily earn some part time cash doing something you enjoy, actually you probably are already doing that with your excellent blogging and b) you have demonstrated the ability to control your expenses quite well by now. The idea that anything is going to slip up on somebody as bright as you is, well, crazy. You got this! And congratulations! I was having so much fun at my corporate job, weird I know, that I blew years past FI before I even noticed.

    1. Appreciate the feedback. As noted in the comment above, my wife is in the same position you were and plans to keep working part-time which will keep our WD rate at between 0-1% (or we may even continue to have a positive saving rates early in “retirement”). I would feel better (whether necessary or not, which we could never know until after the fact) with savings in the range of 33-50X as you have achieved with our long time-frames for retirement, especially with current economic conditions noted above and current political environment which makes medical insurance a massive wild card in trying to plan. Cheers to you.

  4. 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. 🙂

    And if you’re in your early 60s and on social security when you need to go back to work, you’re going to be subject to the earnings test.

    No doubt you’ve covered your bases, just consider what your plan might be if you need to go back to work and can’t go back to your current career.

    1. Good points Donna. We definitely are not big risk takers. We have built in plans to continue making money in our retirement and we also are not anywhere close to living on a bare bones budget when we are sharing our numbers so we will have a lot of flexibility on both sides of the equation. We do not take risk management lightly, the point of this post is that we tend to get overly fearful when it is not necessary.

  5. The worst case scenario is a great perspective: It is indeed where a big chunck of people will end up! It is something to think about, also for us.

    My wife wants to change careers, I for now resist a little as I would miss the cash flow too much! and yet, worst case, we will be only having Belgian social security. And that is when she earns close to 0€. She can do better than that!

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