Hello again! As promised from the previous post, here’s a breakdown of my current FI strategy.
4% Rule
My initial excitement earlier this summer is based on running the numbers through the 4% rule.
As a quick review, the 4% rule is based on research from Bill Bengen in 1990s. It puts forth that, on the first anniversary of retirement from paid work, you can withdraw 4% of your portfolio amount to fund your life the following year, and then safely continue to withdraw that same amount but inflation-adjusted (so 4% of your original portfolio amount and then adjust it for inflation) every year thereafter.
For more details and put in punchier terms, read the Shockingly Simple Math Behind Early Retirement by the great Mr. Money Mustache.
If you’re more of an audiovisual learner, I do love the Donegans, who are British Empire Medal-winning (from King Charles himself) FI couple and run the free Rebel Finance School every year (which I highly recommend, along with the Extraordinary Life Course, which is also up online for free).
In this year’s Rebel Finance School, the Donegans sit down with Bill Bengen, the developer of the 4% rule for portfolio drawdown over 30 years and discuss why you can quit paid work way earlier than you think.
3% Rule
Being extra-cautious by nature, Mr. Sparks and I also tried to figure out what we’d need based on a 3% rule. He was particularly inspired after watching one of Ben Felix’s videos (For those who don’t know Ben Felix, he’s one of the more prolific Canadian personal finance figures and one that I quite like due to his evidence-based approach and lack of sensationalism. He works closely with the wonderful Loonie Doctor on their podcast the Money Scope).
Based on a 3% rule and our current savings rate, that would push retirement date to sometime this fall.
Which is also fine, given…
Safety Measures
2 More Years Syndrome?
I have given my division 2 years’ notice about my intent to transition to locuming only. It’s been difficult to recruit – there just aren’t that many of us out there to hire. With the recent political landscape, there has been apparently a record high number of American physician colleagues applying (though follow through is reportedly hit or miss – fair enough. Moving countries is a big decision!). All of my clinical hats are up for grabs in the new job postings for the division, so we shall see what happens. I’m really quite excited to transition into something new, with more freedom, while still getting the chance to do clinical work (with less commitment) and to help out my colleagues all the while.
With two more years of savings on my end – and as I mentioned, Mr. Sparks is not fully ready to retire either – we will definitely have more than enough to fully pull the plug whenever that may be.
Locuming
It’s quite nice to have a colleague who’s already put in a request on my time for 3 weeks a year in the early winter, haha. With covering the part of her caseload that needs the most tending to +/- some of the less urgent stuff, I could easily cover the cost of maintaining my royal college license and provincial license, and then some.
And given how many people go on holidays in the summer – this year, in particular, overlapping quite a bit – I anticipate more times I can help with coverage.
And honestly…it’s pretty neat covering for services I’m on less frequently. Works a different part of the clinical brain.
Flexible spending
Built into Mr. Sparks’ and my FI number is excess spending. In the recent few years, this is in the form of costs related to fertility treatments. We also live a fairly fulsome life with travel, meals out (but not flying business class unless using points, and not eating out all the time). There are many areas in which we can pull back our spending if the markets are down.
Rental suite
When we did renos on the house, we put in place a fully independent rental suite. Can comfortably underestimate the value of this rental suite at $2,500 per month rental income with steady renters. If we extrapolate this out, this turns into $750,000 of FI freedom fund that we did not need to save up.
$2,500 per month x 12 months = $30,000 of annual income (which can be put toward $30,000 of annual expenses)
$30,000 x 25 (remember, 25x annual expenses for 4% rule) = $750,000
Cash Cushion
I had always planned to create a 5-year cash cushion prior to full retirement from paid work. Given we’re not planning to fully retire from paid work, I’ve been hemming and hawing about whether to proceed now or wait till we’re closer to time. Mostly because it makes my soles itch to have so much money sitting around in cash. So I may adjust this to a 2- or 3-year cash cushion in a high interest savings account when we’re closer to time. Will definitely discuss it with Mr. Sparks so that we’re both comfortable.
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And there you have it – how I am running my calculations for retirement.
Would be interested in folks’ thoughts!
Until next time,
Dr. FIREfly
