Updated: Sep 17, 2018
Written By: Mr. Horizon
When I initially brought up financial independence/early retirement to Mrs. Horizon, she completely blew me off. "That’s not possible. No one retires early," she said. I insisted that it was possible but she clearly needed more convincing. One night we sat down at our computers and roughly calculated all the numbers out. Finally after hours of conversing and tweaking the numbers, Mrs. Horizon was convinced that financial independence was not a moon-shot goal but instead a very real and tangible opportunity for us.
Once it was decided we wanted to achieve financial independence, we needed to find a starting point. Through almost all of our research we found it is very typical to use the 4% rule to fund your retirement whether that be at age 65 or age 45 makes no difference. The idea behind the 4% rule is if you withdrawal 4% of the money from your nest egg every year for the next 30 years you are not going to run out of money most likely. In fact you have a 98% chance of having extra money left over. While this sounds fantastic we wanted to eliminate any chance of running out of money. We discussed in detail what makes the most sense to us and we decided that the 4% rule posed slightly too much risk in today’s slow growth economy. We evaluated the 10 year yield on treasures and the dividend rate of the S&P 500 and came up with a value of 3.5% safe withdrawal rule. The reason this number makes sense is because in most cases it is sustainable entirely as passive income drawn from the investment and requires you to take minimal principle. This means we may never have to touch our nest egg at all. More to come on why we have selected such a conservative approach.
Why are we taking such a conservative financial approach to FI? Unlike many in the FI community, we are planning to have a few children during our journey to FI. This means we will likely be hitting FI while we have two kids under the age of 10 living in our house. We must be able to provide for them and we do not want them having to worry about our financial situation. Therefore we cannot have any chance that we would not be able to provide for them. This requires the house to be fully paid for prior to even considering leaving the workforce. It also means we will have large expenses for private medical, dental, and vision insurances once we do decide to leave. We are fully expecting to have to pay nearly $20,000 annually just for insurances. So essentially, our plan to have a family during our journey to FI has been a huge factor in shaping our "Golden Number."
Our conservative 3.5% withdraw rate is not the only way we are ensuring we do not run out of money. In our calculator, which we have provided in the FI Compass page, we also have an inflation adjustment. This allows us to adjust the amount of money needed by 3% annually due to inflation. The goal of the Federal Reserve is to keep inflation between 2% and 3% so we selected the conservative estimate as well here. We also chose not to include any money for Social Security although we will likely begin to draw at age 62. This provides us a significant cushion going into our FI journey.
The 4% rule is a good rule of thumb to get thinking about financial independence and for typical retirement it works perfectly fine. Our calculator is a tool that can help demystify financial freedom. Figuring out how you want to live your life and then finding out how to make the numbers work around that is the best starting point for finding your own "Golden Number." Everyone's journey to financial independent starts with evaluating needs and wants. Understanding your own personal situation is the key to unlocking freedom. The financial indolence journey is not about leaving work it is about achieving freedom. Everyone has their own idea of what freedom is and yours will not look exactly like ours so remember to HYOH!