Am I financially independent? (And does it matter?)
It's been two years since I last looked at my overall financial situation to determine whether I have the resources to meet my goals. In those two years, much has changed.
I sold my condo and bought a home in the country. I repurchased Get Rich Slowly. I invested in not one but three other businesses. The stock market has bounced around, I've begun part-time work at the family business, and I've made many other minor adjustments to my daily life.
With all of these fluctuations, I'm naturally left to wonder: Am I still financially independent?
As I've mentioned many times, financial freedom exists along a continuum. For the sake of this article, I'm discussing the fifth stage of FI, the point at which investment income supports standard of living.
At the end of 2016, I was FI (but only just). What about at the end of 2018? Do I still have enough saved to fund my future indefinitely? Let's find out.
The Raw Numbers
Here are raw numbers that describe my financial fitness:
- My net worth at the end of 2018 was $1.33 million. If I liquidated everything that I owned, I'd be left with a pile of cash worth that much money.
- My investment accounts contain $680,000. Of this, $275,000 is in regular investments and $405,000 is in tax-advantaged retirement accounts that cannot be accessed (except with penalties) until I turn 59-1/2, which is in just under a decade. (My non-liquid assets are worth $654,000.)
- My lifestyle currently costs me about $5000 per month (or $60,000 per year). Because everything has been in a state of flux for so long, this is just a guesstimate. I'll have a much clearer idea of my cost of living at the end of March, after I've kept detailed records for three months.
These are the basics. There are some numbers that aren't reflected here, of course. Any increased value to my home from recent remodeling isn't shown here, nor is the value of my business. These numbers don't include potential Social Security income or inheritance because both of these are wildcards.
As I mentioned last winter, my brothers and I were surprised to discover that my mom is a millionaire — at least on paper. In theory, some of that wealth will transfer to me in the future. (In theory.) Meanwhile, the Social Security website shows that if I wait to take benefits until I'm age 70 (which is only twenty years from now!), I'll qualify for payments of $2050 per month. If I take benefits at age 67, I'll get $1653 per month.
But again, these are both wildcards. They're not part of my current wealth, so while I do think about them, I don't include them in plans or calculations. (I think it's a mistake to ever include potential, unrealized money in your financial plans. Don't include potential raises, potential bonuses, potential proceeds from sales. I've seen far too many people get into trouble with this sort of thinking. Serious trouble.)
Back of the Napkin Math
With these basic numbers, we can take a number of different approaches to determine how prepared I am to pursue my goals. Quick “back of the napkin” map says no, I am not financially independent. I have financial security, but not financial independence.
- Using the four percent rule of thumb for retirement savings, I'm nowhere near financially independent. This guideline says that, in general, it's safe to withdraw 4% from your investment portfolio each year without risk of running out of money. My investment portfolio is worth $680,000. That would sustain $27,200 in spending, not $60,000. Even if I were to use a 4.5% safe-withdrawal rate and include my investments in start-up businesses, I could still support only $37,300 in annual spending.
- If I take the same approach and apply it to my net worth — which I'm okay with but most people are reluctant to do — things look better. If my entire net worth were invested in stocks and bonds, it could theoretically support $53,200 in annual spending — or $59,850 if I were to use a 4.5% withdrawal rate. That's just $150 shy of my $60,000 annual expenses.
In short, it's clear that I am not financially independent anymore. With liberal definitions and assumptions, I fall just shy (by about $12 per month). With more traditional assumptions, I'm not even halfway there!
Five Quick Retirement Calculators
So, back-of-napkin math says I'm no longer financially independent. But what about more sophisticated approaches to my situation? What do retirement calculators say?
Before we take a look, let me re-iterate that most retirement calculators suck. They're truly awful. Most use current income to computer how much you need to save for retirement. This is idiotic. Current income has nothing to do with retirement spending.
The brilliant Michael Kitces has messaged me in the past to point out that, from a practical perspective, there is a correlation between current income and retirement spending. This is incidental, though, and doesn't excuse the methodology. For savvy money managers — those who save a lot — current income is a terrible predictor of retirement spending. The worst, most simplistic retirement calculators prohibit users from entering parameters like “I save half my income” or “I want to retire by 40”.
Fortunately, there are good retirement calculators out there. I decided to enter my current numbers into five calculators that I've used (and liked) in the past. Because each calculator is based on different assumptions, and because each calculator emphasizes different parameters, they each provide different results.
- cFIREsim looks like a complete mess, but if you're willing to muddle through the shitty interface you can get some sophisticated results. cFIREsim shows that my current investment portfolio could support $27,538 in annual spending with a 95% success rate. (It'd support my actual current spending with only a 20% success rate.) If I include Social Security starting at age 67 and a theoretical inheritance, I could support $45,413 in annual spending. The downside to this tool? There's no way to factor in non-investment assets.
- FIRECalc 3.0 analyzes past market performance to predict future retirement success. In my case, it suggests that my current investment portfolio only has a 10% chance of lasting until I turn 80. If I base my calculations on net worth instead, there's an 83% chance it'll last that long. Note that the basic FIREcalc model uses only three variables. To gain greater sophistication, navigate with the easy-to-miss buttons near the top of the page. (With this calculator, if I delay accessing my investment portfolio for a decade, there an 80% chance my money will last until 80. There's a 90% chance if I include Social Security starting at 67.)
- The early retirement calculator from NetWorthify doesn't work for me. It's not sophisticated enough to handle my situation. It's useful for folks with positive saving rates, however.
- The retirement income calculator from T. Rowe Price shows that I should only spend $2000 per month if I want my investments to last until age 95. Playing with the assumptions shows that with even a modest monthly income — from this website and/or my family's box factory, say — I'm in good shape.
- Bankrate's retirement income calculator says my savings are enough to support $3000 of spending per month. If I can delay touching my savings by a decade, then I have enough to support my current standard of living.
As you can see, these basic retirement calculators yield similar results to my back-of-the-napkin math. Right now, I am not financially independent. If I want to maintain my current standard of living, I need to earn more. If I don't want to earn more, I need to lower my standard of living.
Ideally, I'd do both.
More Than Money
Now, here's the thing: These retirement tools are all better than average but they each have weaknesses. They're ugly. They're unsophisticated. They have limited functionality. For my money, the three best retirement calculators — the ones I actually use — are the Personal Capital retirement planner, OnTrajectory, and NewRetirement. For the rest of this week, we'll take a closer look at these three tools. I suspect, however, they're going to tell me the same thing: I am not financially independent.
But you know what? Financial independence has never been one of my goals. I've been adopted by the FIRE movement — for which I am grateful — and I've written a lot on the subject, but my actual goal has always been a happy, purpose-filled life. If I manage to achieve financial independence along the way, great. If not, that's fine too.
To me, achieving FIRE is a meaningless goal. Like getting out of debt, financial independence should be considered a side effect of your actions and choices, not a primary aim.
To me, the more important question is: Am I leading a happy, purpose-filled life? Yes. Yes, I am. I have a good life and I like to believe I'm doing good work. Although I no longer have financial independence, I do have a sizable nest egg, a level of wealth that most people never reach.
I am a lucky man.