Alright, so we’ve talked about how your money can work for you if you keep it around, ways to spend more mindfully, cauterizing your debts, and getting started with investing.
“I’m on my way, Dr. FIREfly! …Er, how will I know when I’ve arrived?”
Awesome question!
Personal finance is, well, personal. You are the one to decide if you’ve arrived at your destination. There are some guideposts that others use to determine whether they feel they have arrived, and I will outline some that I’ve come across below.
LeanFIRE
This is the classic form of early retirement and financial independence. Early Retirement Extreme (ERE) and Mr. Money Mustache (MMM) are examples along the spectrum of FIRE who are definitely more Lean-leaning. Lean FIRE involves trimming down the excesses to the minimum – while finding true enjoying in the process and results – and thereby leading to financial independence (and the possibility of retiring early, if you so choose).
I love Mr. Money Mustache’s blog. Super inspirational. Slightly intimidating in terms of the passion. I briefly considered Lean FIRE, but it didn’t feel quite right for me. It may, however, feel right for you! So have a peek at MMM and ERE (I haven’t spent as much time at ERE, but hear it’s also excellent). See if it’s a good fit for you!
MMM spends $40,000 annually on household expenses – for the whole family. I will say, though, that he does not appear to feel constrained in any way, shape or form.
FatFIRE
Physician on FIRE is probably the first person to coin the term “fatFIRE”? I’m not 100% sure on this, but I believe so. FatFIRE annual spending is $100,000…or upward.
Yep. This is probably more in line with what I envision. I am a Fat-leaning FIRE aspirer, lol. $100,000 is a super comfortable number. If Mr. Sparks and I can have portfolios that will jointly generate $100,000 of spending without us worrying about running out of money, this will allow me to sleep soundly at night.
Is this because I want our family to spend $100,000 a year, or for myself to spend $50,000 a year?
Not really. I spent $35,000 in 2018 and $28,000 in 2019 (uh oh, lifestyle creep?! I also had more travel in 2018 – both for pleasure and for career-related purposes) and I lead a super comfortable life, filled with travel, dinners out, going for drinks, etc. (And I think Mr. Sparks probably spends less than that since I travel more…and just spend more, overall). Having another $15,000 per year of post-tax dollars to spend just boggles my mind. I’m sure I could fill it up with stuff if I wanted to – but for now, I really don’t.
However.
It everything should go south, then $50,000 per year of income generated will give a lot of wiggle room to cut down on expenses, trim back the non-essentials, and ride out the storm of a stock market dip – or crash. Plus, I will have a cash cushion to draw upon, built just for times of emergency.
For this little FIREfly, caution is key. I would not be able to sleep soundly at night if each dollar were stretched to the max – it would feel like one breath away from disaster.
Hence, building in a cash cushion as well as lots of buffer room in the portfolio income generation.
The State of FIRE: Calculations
Regardless of your inclination towards leanFIRE, fatFIRE, or somewhere along the spectrum, the general parameters are similar.
Most FIRE devotees follow the 4% rule, based on the Trinity Study, which essentially states that if one withdraws 4% from the portfolio every year, the portfolio is extremely unlikely to run out of money over the course of your lifetime. To withdraw 4% yearly, one would need to save 25x the annual expenses.
Annual expenses/4% = 25
Another neat framework is from OurNextLife, wherein Mrs. ONL explores ways they could support a more luxurious “golden years” traditional retirement as well as more lean early years of retirement. Her math includes pension – which doesn’t exist for us physicians and physicians-to-be unless you have or had another career or are in the military – but we can still consider the wisdom in the two-phase plan. Generally, traditional retirees spend less than they did in their working days. But this is assuming perfect health. And no one has the guarantee of perfect health, even if we do everything right. *sigh*
And if you really, really love detailed math, check out Big ERN from Early Retirement Now. He has a 25-part series on Safe Withdrawal Rates that just makes my eyeballs spin in their sockets, see-saw nystagmus-style (look up a video if you’re curious…). If you are a math lover, however, this is the place for you.
There’s also a handy-dandy calculator called the Crowdsourced FIRE Simulator (or cFIREsim) that you can plug into and it runs calculations looking at your numbers, over your projected time span, based on historical data, to see what percentage of success your portfolio would have had in the past. It’s fun to plug numbers into and see how your theoretical plan might have fared.
So, I’m a bit lazy with my math. I figure if I build in good padding, then I will be okay.
Enter the 3% rule.
Annual expenses/3% = 33
Goal: save 33x annual expenses
For now, this is my goal for saving. 4% rule has a great chance of success. Running some other calculations, 3% rule seems pretty much foolproof. Combined with a cash cushion of 5 years’ worth of annual expenses to draw upon, and built in padding by aiming for fatFIRE, I think I would feel quite safe. A lot of the FIRE community would state that this is overkill. Again though, personal finance is personal! This is my level of risk tolerance, which may very well be different from your risk tolerance.
So, what do you think you will use as your guideposts to FIRE?
Summary
Now we’ve covered leanFIRE, fatFIRE, and the backbones of different ways of calculating when you’ve reached FIRE. Keep your eyes peeled for a fun next post about FIRE milestones to celebrate on the journey!
– Dr. FIREfly
Dr. FIREFly,
Just to clarify … you are aiming for $100,000 / yr @ SWR of 3 % … so a nest egg of 3.3 million PLUS five years of living expenses?
That’s like close to 4 million. That’d be pretty impressive. On the other hand, you have the advantage of youth and a dual physician household. I on the other hand, am in my early 40’s , have a few kids, and my wife makes substantially less than me. Unfortunately, I didn’t “wake up” to FI/RE as early. But then MMM and his successors haven’t been on the scene that long (at least not in a highly visible way), so I might have been just born a few years too early.
I think I’ll go for “medium FIRE” … nest egg of maybe 1.8 million and then try to use geographic arbitrage … maybe live in Costa Rica or somewhere similar.
Best of luck to you. I’m slightly jealous / wish I knew then what I know now!
🙂
Hi Fringe Doc,
Thanks for dropping by! Yup, aiming for $100,000 between Mr. Sparks and I (or $50,000 each) and 5 years of living expenses! This is the current goal, and that may shift over time, but that is where we are setting our sights 🙂
I love hearing from people who are already parents – that’s a step that is hopefully coming sometime in the future, and I wonder how much it will affect finances. There seems to be a wide range of child-raising costs. I got together with a bunch of residents for a holiday dinner this past year, and one of the raging debates was private school or no. (The other was about consults services, lol – we were all from different specialties and there were some strong opinions! Definitely good perspective sharing.)
Your medium FIRE and geographic arbitrage plan sounds fantastic! I think your medium FIRE is above someone else’s FIRE number too – and they have been wandering the world ever since. Of course, the nitty gritty of circumstances varies from person to person. The stories are inspiring though 🙂 And lean vs. fat vs. medium – it’s likely highly a matter of perspective. Maybe it can be renamed “comfy-FIRE” XD
We are very fortunate to live in Alberta where quality private school is highly subsidized. If not, I’d probably home school them (my hours are quite flexible, one of the advantages of practicing pseudo-medicine). Public school is a giant waste of time … designed to create obedient factory workers and cubicle sitters … lowest common denominator mentality, etc. I’m actually jealous of people who can just write a GED and be done with it. I almost wish I had dropped out of high school, worked and invested, and then just wrote the GED at age 18 (way better to just pass a test than to do hundreds of hours of sitting in a room with 30 other restless students and have to turn in pointless busy-work).
One of the other big child-related expenses would be if your kids were in hockey or some other expensive sport (that can easily cost $10,000 / yr / child). We don’t really believe in this sort of thing, so it was moot for our family. We ARE very fitness and health focussed. Our children all have customized fitness regimes they must perform at least 3 times per week and they are permitted “unhealthy snacks” of up to 100 kcal/d (they are responsible for interpreting the nutritional information on any packaging and using a food scale to weigh out their 13 Mike&Ike’s or 1.5 cookies, or whatever).
Finally, the question of how much money to set aside for university education is a popular one to fret over. We threw some money into RESPs for awhile, and then just figured we’d let it ride. We’ll pay for tuition for one degree apiece (well, 4 years anyway). We’ll subsidize their living expenses if they live in the family home (if we still have one at that point), or if we can figure out some other arrangement (e.g. all three of them share a condo or something and help contribute to the mortgage). Neither my wife or I received any financial support from our parents and had to work our way through school. I wouldn’t want to take that opportunity to develop grit completely away from my children, lest they fail to appreciate university. I am also going to require each child to work a minimum of 6 months at a minimum wage job (e.g. foods or retail) while in high school, so they gain an appreciation for what life might look like for those who don’t have as many options.
We are of the mind that the greatest gift you can give your children is to set yourself up so that you are unlikely to become a burden to them (obviously, there are no guarantees in life).
Thanks for walking me through all that! It’s so useful see how other people do things. There’s so much to delve into, but maybe I’ll just pick a couple for now. Do your kids adhere to their fitness regimes and snack calorie allotment? Do you find you check on that, or simply discuss the parameters (maybe the rationale too) with them and let them decide?
I worked a minimum wage job in the summers in high school and alongside laboratory/research positions during university – it definitely helped put dollars into perspective and solidify the value of money. I’ve come across the approach recently where children are given a fairly high allowance, but that’s all the discretionary money they have to spend. They want the toy? Comes out of that pool of money. They want a new cell phone? They’ll have to save up. They want to attend summer camp? They pay for half of it (I guess summer camp is quite expensive). Been musing a bit about that as another way to help solidify the concept of money too.
The kids are left to their own devices re: adherence, but they actually self-police each other (which is hilarious to listen to). I’ll do random audits once in awhile where I ask them to show me their work-out clipboards. There is flexibility built-in. If they don’t want to do calisthenics, they might ask to substitute in riding their bicycles x-distance or x-time, or jump on the trampoline or something. As long as they are “doing something active,” we are not that particular. We just have them document it and try to enforce personal responsibility. As for the rationale, in a previous life I did exercise physiology, so they definitely get more than their fair share of “scientific lectures” on these topics.
We do provide an allowance. Our program is “one dollar per week per year of life” (e.g. the an 8 y/o would get $8 per week). They have to pay tithe out of that. They are responsible for paying for gifts to any birthday parties they are invited to. We keep track of it all in Excel. We give them a ridiculous interest rate (12 % per annum) to encourage them to save. I let them go in the negative also. If they choose to do this, I hammer them with 20 % interest, compounded monthly. They hardly EVER go into the negative. 🙂
At age 16, the allowances will stop for each child. Then it’s up to them to get a P/T job or do a side hustle or whatever. At that age, I was working midnight shifts at the local donut shop (Friday and Saturday nights – killed my social life and I really had to be disciplined to work on projects or study for tests … I also had some harrowing confrontations with drunkards who were harrassing the insomniac old ladies from the nearby high rise, but I digress).
That is, all in all, pretty darned amazing 😀 Love the 20% interest when in the negative, and that they self-police for activity. I can see that being quite effective, lol.
Thanks so much for sharing. This is providing so much food for thought!
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