So, I’m Financially Independent? (Quarter 3 Goal Review)

This post was supposed to be just my standard quarter 3 goal review. A funny thing happened, though. During our goal review process we discovered that we hit (basic) financial independence. That’s huge – but our work isn’t over yet.

Over the last 5 years, we’ve set financial goals, fought back against lifestyle inflation, worked on making solid decisions, and reduced our expenses dramatically. I knew we’d get there eventually, but not this soon.

I plan to share my thoughts about sudden financial independence and what comes next. I’ll do the quick quarterly goal review at the end because consistent process is important to success.

Also – a quick note. It feels very strange to write about our good finances during a time when so many are struggling due to the pandemic and the resulting recession. We are so grateful we started taking action 5 years ago, and recognize our good fortune to have had our employment only minimally impacted by a few furlough days.


Hitting Financial Independence

Most consider financial independence achieved when passive income from investments can cover living expenses. The most common method in the FIRE community is to use the 4% rule. That is, if you have 25X your annual expenses in investments you are financially independent.

So, annual expenses of $40,000 a year x 25 = $1,000,000 FI Target. 

We Are Financially Independent – Technically

Using that method – we are financially independent. Our invested assets are just over 25x our basic, but comfortable, living expenses.

I said in my intro that this was unexpected. We’ve been working at it for several years now, and with greater and greater knowledge. It was certain to happen eventually, but three things contributed to it sneaking up on us.

First – we no longer track our net worth frequently. Early on, when our numbers were smaller and when I was a bit more obsessive, I had a pretty good idea of what my net worth was on an almost daily basis. Now, we check it quarterly – and ignore it the rest of the time. Net worth is a measure, not an action that leads to outcome.

As your numbers get larger a lot (both good and bad) can happen quarterly. When we checked it this time, we realized that our net worth now exceeds 25x our annual expenses. (It’s still short of our actual FI Target – more on that in the next section.)

Second, we’ve reduced our expenses substantially in the past two years. The major change is a reduction of our monthly housing expenses by 80%. We’ve also gotten better about our overall budgeting, and our travel (one of our major expenses) is way down this year. This has freed up extra money for investments, which helps. Most importantly, our basic financial independence number has dropped substantially. That means we need less invested to hit that 25x number.

Finally, we’ve had some unexpectedly good returns this year. 2020 is a horrible year for many reasons. We’ve been fortunate to hold onto our jobs (with some impact from furlough days) and continue to put large sums into the market. We had some extra capital from our downsizing journey that we put in near the bottom in March. Because of the expenses reduction I mentioned, we’ve also been investing heavily throughout. As a result, while 2020 won’t be setting any records, our investments were higher than I’d anticipated during our third quarter net worth check.

The result? Lower expenses + higher than expected net worth = financial independence.

Technically.


We Aren’t Done Yet

Now, don’t get me wrong. As a poor kid who then made and blew good money thanks to lifestyle inflation, suddenly being financially independent is an amazing feeling.

I’m just not celebrating yet. While we hit the basic level of financial independence, we haven’t hit our actual financial independence target. When we do that, I’ll publish a celebration post that doesn’t have a question mark in the title.

We’re very fortunate, but let me explain why we aren’t resting yet:

Withdrawal Rate

We have 25x our living expenses in invested assets. That’s good. I just don’t think it’s enough.

The 4% withdrawal rule is built on a study that examines 30 year periods. We’re in our 40s, and it’s likely we’ll live longer than 30 years. 

I’ve also been heavily influenced by Big ERN’s Safe Withdrawal Rate Series.

Finally, my financial insecurity mindset means I want more saved than many would consider necessary in order to consider myself truly financially independent.

As a result, our FI number is 30x annual expenses (a ~3.3% withdrawal rate.) So, that’s one big reason we don’t consider ourselves fully financially independent yet.

The Life We Want

It’s not just the withdrawal rate, though. I said that we had 25x our living expenses. That’s true and it even includes a fairly comfortable life. We’re not going full Lean FI here. 

However, there are two categories we plan to lift above “comfortable” in our financial independence targets: travel and giving. 

We do both now, but we need to cover an additional ~$10,000 a year in expenses above basic levels to fund travel and giving the way we’d like in any form of retirement. We aren’t quite there yet.

Health Care

Finally, I need to mention health care. Our required expenses estimate does include a decent amount for healthcare. I’m just not sure it’s the right amount. I won’t feel comfortable declaring financial independence until I’m a lot more comfortable with the number.

As educators, we’ve had employer provided health insurance for our entire careers. I know our healthcare costs will go up substantially. I even did an initial search for information to build our health insurance estimates. But, I need to do more.

Also, I’m not sure past estimates are useful right now. If you haven’t noticed, US politics are a mess. The future of the ACA is incredibly murky at the moment. Depending on how the next few months play out, health care costs could change substantially. 

So, while we are technically financially independent I’m not confident of our health care numbers.


What About Retiring Early?

For all those reasons, I’m comfortable claiming the early stages of financial independence but we aren’t where we’d like to be yet. 

Fortunately, neither of us is racing to retirement. We embrace FIOR (financial independence optional retirement.) Hitting financial independence doesn’t automatically mean retirement for us. For the most part, we like our jobs. They’re fulfilling and align with our personal missions.

That said, hitting any level of financial independence opens up options. I’m confident we won’t be jumping on any career shifts immediately…but who knows down the road?

At the very least, I won’t consider anything until July 2021. I’m responsible for a school community, and as you may have noticed we are in a pandemic and uncertainty has never been greater. 

Early retirement isn’t in the cards yet. But, we’ve got all kinds of options before us now.

Unfortunately, even if we did want to leave, I don’t think we’ve adequately set ourselves up for it yet. Which brings me to…

What Comes Next?

So, I’m technically financially independent, but still plan to accumulate more. I may consider a career shift, but not until next year sometime. This might be the most subdued financial independence declaration ever!

Don’t get me wrong, I’m thrilled! I feel a level of security I never have in my life. We live mortgage free with very reasonable expenses. I am confident that even if I never put another dime into investments, we would hit our full FI target relatively soon. This is especially true if I consider our potential pension benefits – which we don’t yet factor in. 

All of this is a wake-up call that it’s time for me to shift our personal journey. During our FI journey, we’ve defined our real expenses better, downsized our house, started maxing out our 403b and 457b to maximize tax advantages, calibrated our risk tolerance, and built up a substantial brokerage balance. In short, we’re confident that we’ve got the accumulation phase down.

However, I haven’t spent the same time and energy learning about and planning the drawdown phase. 

Here’s what I plan to do next as we approach true financial independence:

Get a LOT more accurate estimating healthcare. I’ve always considered this one of those looming monsters, and we *think* we’ve planned adequately. That said, it’s time to focus on the details and identify other options. I’ll be watching the political conversation around health care more closely than ever.

Learn and think more about the equity glidepath that Big Ern discusses in his Safe Withdrawal Series. Our current allocation is 70% stocks, 20% bonds, 10% other (primarily REITs). If it’s even possible we’ll be walking away in the next few years, do I need to switch that up? It may be fine, but I haven’t done the work.

Finally, I need to start learning and planning some tax optimization strategies. Go Curry Cracker is a great resource for this. I just haven’t done the work. We’ve got some money in brokerage, some in Roth, and a lot in retirement accounts. I’m not averse to paying some taxes (social good and all) but I want to understand my options and build a plan to withdraw responsibly.

Technical financial independence is a good feeling. It’s exciting to be shifting from obsessive accumulation to thinking about the future. New learning is always invigorating, and the sense of possibility is incredibly motivating.

I can’t wait to write the full financial independence declaration with all our targets met and clear plans for the next phase!


Goal Review

Generally, in my goal reviews I go in detail through each of the areas, and then summarize net worth at the end. You can see how this worked more thoroughly in the second quarter goal review. 

For a quick overview, we follow a financial goal setting process that includes long-term (net worth), medium term goals, and short term actions. During our check, we rate them this way:

ExceedingOn Track / DoneNot YetAt Risk

For this review, I’ll just summarize our progress in the chart below. In general, we’re on track in all areas including (finally) meal prepping! 

2020 GOALSDESCRIPTIONQUARTER 3 STATUS
Long-Term Goal30x Annual Expenses93.5%
ANNUAL GOALS
Goal 1Max out tax-advantaged investments (403b / 457b)On Track
Goal 2Additional Brokerage Investments of $24000On Track
Goal 3Develop Long Range Housing PlanDone
Goal 4Create a rental house security fundNo longer applicable
Goal 5Implement Consistent Meal PreppingOn Track
SHORT TERM GOALS
Short-term 1Meal-prepping for 3 meals/weekDone
Short-term 2Invest Funds from Matured CDDone
Short-term 3Make $5000 in brokerage contributionsExceeded
Short-term 4Track Expenses / Finalize new monthly expensesDone
Short-term 5Refinance Vacation RentalDone

This is the first time we’ve ever been on track (or better) in any of our goal reviews. I’ll take it.

2020 has been a rough year, but the quarter 3 goal review gives me hope for the future. Maybe my year-long commitment to choose optimism over cynicism is going to work out…

I look forward to the next phase of financial independence planning and hitting our full FI target in (hopefully) 2021!

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