June 2020 Update: 41% To Financial Independence

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By Art July 25, 2020

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Instead of providing monthly updates, I will be providing biannual updates so I can actually tend to my other projects. I started this series to reflect on our goals and share some things I learned while working towards our financial goals.

I hope you get some value from this and if you haven’t already, check out the free tools I use that are helping us keep our financial house in order.

Our Progress to Financial Independence (FI)

Progress (%)

41.36 %

To Financial Independence

Those of you who have been following my story for a little while know that I am quite the workaholic. During my last update (December 2019) I talked about reducing my hours at work. Well, it turns out I did, but not by choice. The outpatient PT clinic I used to pick up 8 – 16 extra hours per week closed down due to the pandemic. While they have recently opened up, I do not anticipate they will need me to return anytime soon.

On the bright side, my full-time job as a home care physical therapist has ramped back up to almost 40 hours a week. It is the first time that I have returned to a 40-hour work-week since 2015 so I am finding more time on my hands than I am used to. This doesn’t mean that I am spending my time lounging around though.

I have been working on a few projects, one of them I should release by the next update if things go well. Stay tuned!

2018 (Start of fi journey: 12-19%)

January – 11.62%
February – 13.74%
March – 14.55%
April – 15.04%
May – 16.40%
June – 16.74%
July – 18.30%
August – 19.33%
September – 19.79%
October – 19.29%
November – 19.97%
December – 18.81%

2019 (2nd year: 19-33%)

January – 20.96%
February – 22.22%
March – 24.09%
April – 25.16%
May – 24.89%
June – 26.03%
July – 26.69%
August – 27.31%
September – 30.43%
October – 30.43%
November – 31.32%
December – 32.55%

2020 (3Rd year: 33-?%)

January – 35.32%
February – 33.03%
March – 30.09%
April – 34.60%
May – 38.21%
June – 41.36%

Learn More About Financial Independence

Toggle through to learn what Financial Independence (FI) means and the VITAL role it plays in allowing you to live your best life.

Financial independence (FI) is described as when your assets generate enough passive income to pay for your necessary and discretionary expenses without having to be employed or dependent on others.

These assets are usually in the form of stocks, bonds, real estate or other businesses

FI allows you enough financial security where you can retire and have your expenses covered by the income generated by your assets.

If you’re like most people, you are planning to retire or semi-retire at some point in your life, but even if you plan to work for as long as you can, I am sure you would prefer to do so out of enjoyment rather than necessity. Nearly everyone is working towards financial independence whether they know it or not.

Ultimately, FI allows you to have more options and freedom. It allows you to be free from worry about how you would pay for your bills if you lost your job, got injured, or needed to care for your family.

It would also allow you to travel, spend more time with loved ones, explore hobbies, give back to your community, or sit on the beach without worrying about needing to go back to work.

SOUNDS GREAT RIGHT?

Now, what if I told you you could have this level of freedom before you are too old and wrinkly to enjoy it?

Most people wait until they can claim social security because they haven’t saved enough money, but there is a community of individuals who are way ahead of the curve. They have achieved financial independence decades ahead of their peers.

If you want to learn how to do the same, keep on reading!

If you haven’t heard of the 4% rule, you will today. It is a popular method to determine how large your portfolio needs to before you retire. Nearly everyone in the FI community starts at the 4% rule to determine their FI number.

The 4% rule is a rule of thumb used to determine how much a retiree should withdraw from a retirement account each year. This rule seeks to provide a steady income stream to the retiree while also maintaining an account balance that keeps income flowing through retirement.
– Investopedia

For Instance, if you have $1,000,000 properly invested, you should be able to withdraw $40,000 ( inflation-adjusted) per year without drawing down from your principal.

That means your lifestyle does not exceed $40,000 during the first year of retirement.

After the first year, you adjust for inflation each subsequent year.

If we assume a 3% inflation rate, you can withdraw $41,200 ($40,000 * 1.03) in the 2nd year and $42,436 ($41,200 *1.03) for the 3rd year.

To calculate your FI number we need to use the inverse of 4%, which is 25.

It took me a while to get it, so here is the math:

4% = 4/100 , Inverse = 100/4 = 25

Now let’s say you’re a nerd and kept a budget for the last year. You know exactly how much you spent in each category and you add up the total to be $60,000.

Use the inverse of 4% (25) to calculate how much you need by the time you retire.

$60,000 x 25 = $1,500,000

So you need $1.5 million to retire based on the above example.

All of the above comes from research called the Trinity study.

Our plan:

For us, the 4% rule was a great place to start, but everyone is a little different and we wanted to be more conservative.

Therefore, we are now using a 3% safe withdrawal rate (SWR) which means we have to save 33x our projected annual expenses. Some may argue this is too conservative, but we’re comfortable working a little longer for some extra security.

Using this method is not perfect, but it is a great place to start.

If your number looks TOO HIGH and you believe there is no possible way you can accumulate that amount of money even if you invested aggressively:

Check if you included recurring expenses that you do not plan to keep during retirement. These are typically any debts you owe or children that you will no longer need to support. If you find them, remove them from your FI number as you do not need to draw down from your portfolio to fund these expenses.

Maybe you’re just getting around to saving your first $1,000, $10,000, or even $100,000. It gets easier and more possible the more you save. Don’t let your belief’s limit your potential.

Maybe your current lifestyle is way too inflated and you do not intend to downgrade during retirement. If so, you need to be realistic about what is possible. It’s likely you either have to cut back now or cut back later.

If your number looks TOO LOW and you feel it is not enough for retirement:

This may be the case depending on where you are in life. This equation becomes more accurate the closer you are to retirement because you have a better idea of your current and projected expenses.

Maybe you’re used to seeing results from those retirement calculators that estimate how much you’ll need based on a percentage of your income. Those are usually pretty inflated because they usually aim for you to need 70% of your income to live. For instance, if you make $100,000, they will project your retirement to need 70k per year. For me, that is much more than I need to live on per year, but to each their own.

If you want to start your own path towards financial independence, I would start with this resource from a friend of mine. He condensed many books we’ve read into a 48 page PDF.

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Art

Art is the founder of Flexcents, a blog created in 2018 to help others reach their fitness and financial goals through sharing insights as a physical therapist, personal finance nerd, and self-directed investor.

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