This is the financial goal of many. Or at least one monumental goal along the road to financial and socioeconomic success. Financial independence (FI) is when your money tree, aka investments, provide an annual return equal to or exceeding your annual cost of living. Everyone should understand the basics of this number or at least have a realistic estimate in mind. Gen Z dropped the ball on “realistic” in a number of surveys thinking $150,000 would be enough to retire 40 years from now.

As discussed last week, wealth at its simplest form divides into two distinct phases, the “accumulation phase” and the “maintenance phase.” Financial Independence is the transition point from the “accumulation phase” to the “maintenance phase”. Or at least the option to transition. You no longer NEED to “accumulate” income to maintain your standard of living – or whatever standard of living you used to calculate your FI number.

My apologies to those who read about my definition and calculation of FI last week. A commonly accepted FI number is 25x your annual cost of living, which assumes a 4% annual withdrawal rate. If you and your better half live off $100K, your FI number as of today is $2.5M. If you have an affinity for shiny things as many high income earners do (and that is not a bad thing), your FI number could easily be $3-4M+. The “maintenance phase” is about maintaining your nest egg to maintain your standard of living.

FI Number

The most important factor for the maintenance phase is to have correctly calculated your FI number. Did you account for new hobbies? New vehicles, travel, and/or vacations? Idle hands and all…It’s tough to get back on the proverbial horse after being out of the game for 20 years when the accounts dry up at age 65. And don’t put the financial burden on anyone else for the sole reason of using an inaccurate FI number to set a retirement date. Not cool.

This applies to me because I work so much that I don’t have time to spend my earnings. I suspect that will change after retirement, so account for lifestyle changes. Periodically I will recalculate my FI number for my own knowledge, but it doesn’t need to be truly dialed in until retirement become a reality of the near future. Whatever you do, don’t underestimate.

Your FI number may need to be slightly greater or less than 25x your annual cost of living. My FI number is relatively low for two reasons. ONE – I expect to reach it within the next 6-7 years. Less time for inflation and a predictable cost of goods. The younger you are, the greater buffer room I would include. Besides, as a big fan of giving anesthesia. I’m not looking to leave the game anytime soon.

If you are 70 years young, life is likely a bit more predictable. There is more timeline to the left than the right. Valuable and important time nevertheless. You should be able to hone your FI number a bit knowing your habits and expectations going forward. Lots of living to reference.

 

TWO – I’m not wooed by shiny things. Material possessions get in my way.  I don’t anticipate my cost of living growing exponentially. If it can get the job done and still provide the desired experience, it will do. Think vehicles, houses, clothing, ect. I’m a functional kind of fella. Reliable – good. Excessive – overrated.

Confession:

I splurged twice in the past 9 months. I bought a pair of boots for $500. Really nice Tecovas. Don’t mind that I budgeted and saved for a pair since undergrad. I’m kind of picky about the fit of western boots and I struggled to find a replacement for my daily drivers of 12 years. Best $171 I have ever spent.

Second splurge is leatherworking as a hobby. I’m in for almost $400 total. Big spender. It’s my call activity. Orientation for this job started with 14 weeks of 24/7 call after graduation. Call remains heavy as I am in the process of booking 11 of my 13 weeks off and anticipate 180+ days of call for 2023.

Preservation

Successful retirement through a financial lens boils down to wealth preservation. Remember, after reaching FI, you don’t need to have any earned income or put away any more money. If you have the means, a safety cushion is never bad. Occasionally I hear people reaching 2x FI meaning that $100K annual cost of living family went hard in the paint and has a respectable portfolio of something around $5M. Hats off.

Leaving room for life’s unexpected happenings brings a sort of comfort. Not that these events would ever peek their ugly heads from their box of misery, but just in case.

Living over your allotment will eat away at the principle. A shrinking principle balance does not meet the definition for maintaining. There will be good and bad years in the market. The best and worst of feast AND famine. The question is not if, but WHEN and HOW OFTEN?

Cost of Living

FI is based off cost of living. Be careful modifying the only variable in the equation. Live the way you planned on living. Or at least spend what you planned on spending. I’m not going to rehash the importance of an accurate FI number. Be flexible. If your investments are down for the year, take it easy. Delay excessive luxury purchases. Double up on vacations on the good years. This kind of flexibility preserves the principle.

I’m not saying to live your last days with millions left in investments. This is tough because Western culture spends so much money on healthcare during the final months of life. This is not the time nor place to comment on end-of-life care or palliative treatments. No secret that it’s expensive.

If you retire with 1x your FI number, your nest egg will likely decrease over time. It is likely an egg invested in a mix of stocks and bonds returning 8% annually will sustain you the 30 years as it did in the studies. The theoretical 8% annual return accounts for a 4% withdrawal and 3% inflation. I have a post on asset allocation you can read if you are interested in where to invest.

Sustain for 30 years through all markets, not grow. Maintain, not accumulate. The purpose of the maintenance phase is to have enough to financially support you and your family until the end of your days. Good years will strengthen or rebuild the nest egg. Bad years will cause slow erosion. Recessions may leave a sizable dent. And that’s ok. If you want to walk with 1x FI, this is to be expected.

As you close in on 2x FI or greater, the portfolio income during good years overshadows your cost of living. What a phenomenal time to become a philanthropist. I don’t have an issue with inheritances, but I read a study recently showing an inherited fortune is squandered by the next generation 70% of the time. And 90% of the time by the third generation.

I feel it is reasonable and encouraged to aid the next generation along by showing them how money works. Understanding the basics of capitalism and investing. Understanding why certain professions bring more money to the marketplace. Social work is important, it just doesn’t bring money to the market. On the other hand, partnering with Lori Greiner to sell yellow smiley face shaped sponges brings an astonishing $400 million of sales to the marketplace. Social work is arguably more important, but those sponges get people to open their wallets. We bought one for the first time last year and have since repurchased. It is pretty awesome.

Discipline

Jumping off the rollercoaster is not advised at amusement parks nor with investing. As I have said many times, and it remains true today -- Timing the market is a fool’s errand. You have reached FI, so huge gains aren’t necessary. Preservation is necessary. Take your winnings and walk while you are ahead. I’m not saying avoid risk, but preserve the investments that are sustaining your FI status. Be that stocks, bonds, index funds, mutual funds, real estate, venture capitalism, lemonade stands, whatever. Leave the damn money tree to do its thing.

Financially Independent, Retire Early

What better place to bring up the Financially Independent, Retire Early (FIRE) movement than right now? Good movement, but I sense regret. Hopefully not, but possibly. The FIRE movement lives and dies by the FI number. The idea for those looking to retire ASAP is to keep cost of living low, which drastically reduces the FI number. Remember, cost of living is the variable.

 During anesthesia school, I lived off $15-20K annually. I lived in an apartment, primarily section 8 housing, but I paid full price ($500 per month). And I didn’t do anything except school. Just school. And sometimes eat. Unless I needed to do school things.

FI = $15,000 x 25 = $375,000

FI = $20,000 x 25 = $500,000

The folks I see doing this often value experiences and are true minimalists. They live in small houses they purchased. They need the fixed housing cost, so renting is not ideal. Vehicles are not common, so biking to work is the way to go. And everything else is in the minimalist style. That’s awesome to know someone at age 32 is going to retire with $500,000 set aside by working in big tech. Tech was a means to an end and now it’s time to explore other hobbies and passions.

Upside – lots of years to follow your passion without worrying about money. No pressure to work somewhere undesirable. Docs being unreasonable, quit. No respect from the CNO or the other magic carpet hallway executives, quit. You don’t need the money the job provides. Downside – you need to live on the inflation adjusted $20,000 annually forever. You really can’t buy a vehicle valued at more than a couple thousand dollars because it is not accounted for in the FI number. Big vacation, maybe, but not an expensive one. Unexpected health problems – costly.

Many FIRE folks work part time or monetize their hobby. Think travel blog. Maybe selling trinkets online. Great way to pad the nest egg and allow for additional expenses while maintaining the integrity of being FI.

I’m not putting down this way of living or thinking about FIRE. But please be realistic with your FI number and account for the lifestyle you want until the end of your days. Retiring at 32 leaves a lot of time to change your mind about riding your bike everywhere.

Which money to use first?

At the risk of putting readers to sleep – bad anesthesia joke – I’ll speak very briefly to one aspect of the maintenance phase distantly related to the topic. Which investments to live off?

Retiring before 50? Plan on funding this with your personal brokerage account. Without having earned income, this is the ideal time to transfer money from traditional (pretax) to Roth (posttax) accounts. Standard Roth IRA. Backdoor Roth. Depends if you are still part time, PRN, or full retirement mode. The time to move money between these accounts is not when you are making CRNA dollars. Wait until your earned income is low.

Funding from your contributions to a Roth IRA is available for withdrawal, not your investment earnings, but it’s best to let the Roth ride tax free.  Earnings can be pulled without penalty after being in the Roth IRA for 5 years and after the age of 59.5. There are exceptions to the Roth IRA rules such as buying a first-time home purchase, child birth/adoption, education expenses, and medical expenses. Still best to let those dollars ride.

401(k)s can be accessed penalty-free at age 55 using the rule of 55. You can avoid the 10% early withdrawal penalty if you leave your job at or before age 55. That’s the only way you qualify. Standard 401(k) withdrawal begins at age 59.5. I doubt most CRNAs or other medical professionals qualify as public safety workers, but that lowers the age of penalty-free withdrawals to 50.

Retirement accounts such as 401(k)s, 403(b)s, and some IRAs are not forever. Age 75 brings about RMDs or required minimum distributions. This basically says you need to withdraw a certain amount annually. There are exceptions and nuances to RMDs not listed here. Another time friends.

Thanks for reading!