FIRE.045 Let’s think about THE Number

Well…Money people constantly talk about “the number.”  It’s your retirement number, the target you’re shooting for, the goal, the goal-to-end-all-goals.  I have some thoughts about this super magical number—or more specifically—your goal(s).

When I was 25 I thought about an early retirement around age 55.  I thought how reaching a million dollars would surely enable an early retirement.  Oh, how I could live off the income generated from that magical million dollars.  Well, I’ve read and learned that it turns out “one million” dollars wouldn’t actually be what it was 30 years earlier.  Oops!  Time to rethink think magic number.  You would think business school would have made that more clear—and more importantly taught us three simple words “total market index.”

So if the target is no longer (for many people) the magical million dollars, what is the target?  What is your savings goal?  It seems to me that looking at the issue in reverse may yield the best answer.  Your financial well being is based on what you spend, not what you earn in most cases.  Therefore, understanding how much you spend is critical to your financial well being before and during retirement.

I’ve tracked my monthly spending for 20+ years.  Each month I look at bank statements to log each transaction to get a really good idea of spending, usually to about 98% accuracy or so.  [we’ve learned it really doesn’t change too much over the years if you keep the same house, cars, spouse, etc]

Once you know what your spending pattern is while you’re working, you can then project how that spending may change in retirement (more opportunities to spend?).

Saving 25x (30x?) your yearly spending amount allows for the standard Safe Withdrawal Rate over a lengthy retirement based on many studies of historical models.  Yet based on unbelievably low current and recent fixed income rates the 4% SWR rule places retirees, and especially early retirees in a conundrum.  The first question, can you withdrawal 4% of your portfolio balance on year one—and adjust for inflation in subsequent years?  There is no way to answer this until you are 15, 20, 30 years into retirement.  Well, what about the logic that you spend more early in your retirement, in your “Go-Go” years?  As you, and your body, decide to do less adventurous/active/expensive activities as the years progress you may very well spend less money.  Will medical costs in those later life years increase, most probably.  Will those medical costs be more than your 4% inflation-adjusted spend rate?  Nobody knows your specific case.

The option I am working with is, what if I can use a withdrawal rate of 3%, or 2.5%, even 3.5%.  Some calculations I’ve performed show one half of one percent compounded over 20,30,40 years is DRAMATIC.  I also consider the possibility that my investment portfolio may perform better, or much better, than a worse case withdrawal rate.  Many financial advisors consider this the Flexible Withdrawal Strategy.  Where you withdrawal a little more following a good return year—pull a little more of the high profits— and less following a subpar year—live more basic.  The flexible withdrawal rate strategy seems to come back to controlling your fixed spending requirements for poor return years so you can maximize your Go-Go following the good years.  They say the overall stock market goes up approx 70% of the years.  Seven good years and three basic years every decade seems like a great idea to me.  Maybe you will want to rest and recover those three years from all your Go-Go activities.

My current working plan—being only 3+ years into FIRE— is to stick pretty close to my pre-FIRE spending rate, which was the target for my FIRE spending.  This plan luckily falls well below the 4% SWR.  My wife and I also seem to have stumbled into some flexible part-time working opportunities that we enjoy enough to do it.  We may spend a day or two per week, every few weeks working and gain some nice “playchecks” to buy “extra stuff” or put towards the basic bills.

So, “the number” is really just a checkpoint to allow you to route along the lifestyle you’ve planned to live.  The goal of “retirement” seems to be to have a plan for living life.  Your net worth should be tied directly to living.

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