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When Is Enough, Really Enough?

So we have this Master Plan to leave Corporate America, sell all our stuff (house included) and travel the world continuously.

There will come a time where we know we have enough and will be able to break free of the golden handcuffs for good.  But how will we know when enough, really is enough?

We know that the year we leave will be the year our lifetime earning potential has likely peaked.  It’s not like we can go on a five year vacation from corporate America and expect to land back making what we were making when we left. Not to say that can’t happen, but it’s not likely for us.

From an earnings perspective alone, we know we have already won the job lottery.  We worked so hard to hustle our way up to this point and in some ways it feels incredibly wasteful to leave so early. I know that if I stay, I could continue the climb up the ladder and could continue to increase my earnings potential but why stay? I guess seeing our healthy Mint report balances go up is a nice way of keeping score; but it’s just numbers. It’s just money. There’s a whole world of experiences we are missing out on by staying; so that is why we choose to take a different path.

You reach a certain point of diminishing returns where the sleepless nights, the long commutes, the office politics and the “must respond” emails that happen on your vacation just make it not worth it anymore.  So we choose to leave “the title” and the future potential “big numbers” to focus on other life goals like family, friends and travel.

So when you try to figure out “your” retirement number, there are tons of calculators to choose from online.  The problem is, most of them make some pretty terrible assumptions for someone that may be thinking of retiring early.

First off, they almost always assume that you will be spending about 75% of what you were making in your last year of employment.  They also assume that you are retiring in your 60s and that you are making something close to a median income.

These calculators are built primarily by Financial Services companies and two things are generally true about them.

  1. Their business model is to have you grow the largest investment account with them possible.
  2. They have no interest in you leaving the workforce early.

They also don’t want to spend time developing a tool that is built to handle “extreme” or outlier situations like our own.

When I input all of our information, the calculator usually breaks.  If it doesn’t break it says we need like 10+ Million dollars to retire or that we would run out of money in a few years.  None of this made sense to me since we only spend 20-25% of our income.  So I got off the pre-packaged calculators and went to the personal finance blog sites to see what others who actually retired early are using.

The common theme we found from reading countless articles in the FI community is that you typically need 25 times your annual expenses to retire based on the 4% rule (Also referred to as the conclusion of the “Trinity Study”)

To summarize the Trinity Study:  They modeled every 30 year period for the entire life of the stock market (150 years of history) and found what you would be left with depending on the percent you withdrew each year. If you take 4% of your balance of your retirement investments each year to live off of, nearly 9 times out of 10 you would end up outliving your retirement account.  That’s pretty good odds so a lot of people use the 4% as their go-to rule.

If we were subscribers of the 4% rule, we would have been retired already. While the Trinity study works 9 times out of 10, we don’t ever want to find ourselves living in a situation where we are the “1 in 10”.  We recognize that with our already high savings rate, we have the ability to be more conservative just by working a couple more years. As you lower this percentage you get closer to a 100% success rate based on the model which we feel much better about. So what are we looking at here?

We are instead going down to 2.5% because we NEVER want to be forced into working unless it’s a choice we are making.  That in our minds, is true Financial Independence.

Why so conservative?  Well, we see that there is a lot of uncertainty right now in the markets, the country and the future.  We are primarily exposed to index funds and they have a higher than average Price to Earnings (P/E) ratio at the time of this writing.  The indexes are breaking all sorts of records, and they may continue to do so or not (We don’t claim to actually know what the future will hold).

So let’s look at the failure modes of the Trinity Study (1 in 10).  Most of the failure modes are when someone retires when the P/E ratios are high and then there is an immediate correction or recession.  Since P/E ratios are high right now and may continue to do so when we want to pull the trigger, we want to go with as low of a percent withdrawal rate as we can in order to shelter us from this possible outcome.  So 10% failure may be true for over the last 150 years, but I think it is somewhat higher than 10% when P/E ratios are high.

So how did we come up with 2.5%?  Well our goal is to never draw from the principal of our investments (the actual shares).  We want a mix of indexes (our portfolio) to return cash in the form of dividends and interest to us that equals close to 2.5%.

This means we need to have 40 times our annual expenses to retire.  If stock prices go down but dividends / interest payments are fixed, we don’t really care as we are getting close to the same inflation adjusted returns to pay our expenses.

So the Spendy Sorcerer already let you guys in on our current spending rate of $40,000 per year.  So that would mean we would need $1.6 Million (40 x $40k) to FIRE.  However we don’t want to live in this palace anymore, rather we want to continuously travel and we want to be able to comfortably fund whatever adventures are available to us (within reason).

Due to this we ended up digging a little deeper and modeled 5 different potential annual travel / lifestyle scenarios. Now we had to also consider that our health insurance / health costs could skyrocket (now that our employers would no longer be helping and the Affordable Care Act is up in the air).  In the end, the highest model of the five scenarios put us at a $55,00 spend rate  annually.  So that leaves us at a target FIRE number of $2.2 Million in investable assets (40 x $55k).

The biggest risk we have going this route is that we may work longer than we needed to.  If we are wrong however, we can always readjust the withdrawal rate upwards which is a much better scenario than having to adjust the rate downwards after pulling the retirement trigger with the 4% assumption.

So now that we have our target number, let the countdown begin!


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