Back in October I was part of a panel discussion on the What’s Up Next? podcast.
Three of us “older” bloggers joined Doc G and Paul to discuss the subject “Is it ever too late to pursue financial independence?”
The episode will soon be released but if you want to hear what we had to say, you can listen to it here now.
In the discussion Doc asked a GREAT question (which I’ll paraphrase):
Let’s say you had to begin your journey to financial independence today. Your net worth is reduced to zero but you retain all the knowledge and skills you’ve accumulated through the years. How long do you think it would take you to reach financial independence?
What an awesome question, right?
Oh, and he gave me no heads up on it, so I had to answer off the top of my head.
My response was basically as follows (again paraphrasing):
- I didn’t really get started on any sort of financial path until I got married when I was 27.
- Going back and running our specific financial numbers, I found out we actually achieved financial independence (FI) when I was 42.
- Given that span, it took me 15 years to reach FI.
- During that time, I made a lot of mistakes since I was learning along the way. As a result, it took me longer than it should have to reach FI. Hopefully I wouldn’t make those same mistakes again if I was starting now.
- In addition, my income potential is much higher now in my mid-50’s than it was at 27, so I should be earning more.
- And I have a lot more financial knowledge now about what to do to become wealthy than I did then.
So with all those points factored in, I said I thought I could reach FI in ten years.
Even as the podcast was being recorded, I thought “I am totally going to do a post on that and see if 10 years is high, low, or on target.” This is that post!
I wanted to write this post for a couple reasons:
- To lay out what I would do if I had to start over and see how long it would take for those steps to get me to FI.
- Give hope (as well as a roadmap) to those who may be starting the path to FI a bit late — to show them you don’t need 30 years to become FI.
But before we get into the details, let me share some general guidelines/thoughts that will guide us.
Estimating a New Financial Independence Path
Here are a few thoughts on what I’ll be doing as I attempt to estimate my new path to FI:
- These are my numbers. Your numbers will be different. That’s what makes personal finance personal.
- That said, the process will show a general guideline for how to think about FI and plan a way to get there. So don’t discount the numbers simply because you “can’t” do this or that, because my numbers are higher/lower than yours, etc. Read the post and try to get out of it what you can to make your finances better.
- Not surprisingly, my plan will focus heavily on making the most of what I earn, save, and invest. That’s kinda my theme. Plus it worked the first time getting me to FI, so I’m sticking with it. 😉
- At the end I’ll offer some suggestions for what others might consider in case they have lower income, higher spending, started later, etc.
- I will try to be conservative in all my estimates. I use accurate, solid numbers whenever I have them, but in many cases I give myself a handicap by over-estimating costs and under-estimating income. This means my actual results could be better. It also means I have several margins of safety built into my plan (I’ll highlight these as I go along).
Ok, with that out of the way, let’s get to it…
The FI Target
As I explain in my e-series “Creating a Great Retirement“, step 1 in any plan to reach FI (or retirement) is to determine the spending you’ll need to cover all your expenses.
To do this I started with where my budget is today. From there I will use my experience as well as 25 years of data in Quicken to guide me. 🙂
Looking at the past 12 months of spending (FYI, I’m writing this post in October), here’s how our expenses break down:
- Giving: $51,744
- College: $35,810
- Taxes: $25,169
- Travel: $19,788
- Personal: $8,537
- Food: $7,868
- Car: 7,366
- Utilities: $6,808
- Christmas : $5,537
- Medical Insurance: $5,092
- Medical: $4,572
- Reimbursed: $4,453
- Misc: $3,976
- Entertainment: $3,305
- Eating Out: $3,186
- House Insurance: $2,740
- Car Insurance: $2,396
- Home Repair: $2,188
- Clothes: $1,949
- Furnishings: $1,806
- Life Insurance: $848
- Gas: $811
- Car Repairs: $134
Ok, so obviously we are living large. LOL!
But it’s not as large as it might seem since there are unique ways Quicken and I assign “costs” — based on how I enter the numbers. I was an accounting major for the first two years of undergrad so I know how to work the numbers. 😉
My guess is that our “real” spending is around $90k, which is still high compared to my adjusted total for last year (mostly because of travel costs).
ESI Budget Review
Let’s go through each category/number, describe them, and set a new budget number I’d use for my FI budget.
I wouldn’t sacrifice giving in FI version 2, so it’s going to be part of our budget for sure.
That said, the “spending” number above is especially large because it represents assets given to our donor-advised fund. To be clear, nothing is given out of income, but from assets (we donate appreciated index funds to avoid the capital gains and maximize giving.)
Obviously, if we were at zero assets and trying to reach FI, we’d cut back in this area. The minimum we’d ever want to limit giving to is 10% of our gross income, so once we get to the income section, we can figure this number.
Annual cost: TBD
This was the final payoff to our daughter when she graduated plus a few other expenses. It was offset by a fake liability I had set up in Quicken, so the net worth change to “pay” it was zero.
Obviously we wouldn’t have this cost again, so it goes to zero in the new FI budget.
This is one advantage to trying to reach FI at a later age — the kids are likely gone and you’re done with their expenses (we discussed this as well on the podcast).
That said, even if I had kids in college I could have a “come to Jesus” talk and let them know they were on their own.
Annual cost: $0
This one is also going to be highly income dependent, so we’ll save it for the end.
Annual cost: TBD
LOL! I guess Grand Cayman, Florida, and the rest are bye-bye for now.
We could eliminate all travel if we wanted, but that’s probably not realistic.
If we were focused on achieving FI and starting over again, we’d probably go back to spending vacation time with family which is what we did for years. This would mean driving there and back, staying at their homes, etc. so costs would be minimal.
Annual cost: $1,000
These are expenses spent by family members for various “wants” in life. They are accounts that the person can spend without asking anyone for permission/agreement.
For YEARS we had personal budgets of $100 a month for me and my wife. She hardly ever spent hers (I spent mine!) 😉
I’ll assume I could go back to my amount and she’d take half, then we’d split the total between us, each getting $900 a year.
Annual cost: $1,800
We don’t watch food costs that closely (as you can tell). Plus we are down one kid now and another leaving soon.
So for my wife and me we could do a TON better here. I think we could get by on $400 a month for food costs fairly easily.
Annual cost: $4,800
It was a one-time “cost” which was offset by a reduction in what we owed her (so no net worth impact).
Annual cost: $0
This includes true utilities like electricity, gas, and water as well as TV, phone, and internet.
Again, we don’t watch things too closely here (we don’t watch any costs nearly as closely as we did back in the day, as you can tell).
That said, we aren’t wasteful either so we couldn’t save a bunch in our current home.
But, as you’ll see, one thing I’m going to do is downsize my home, which will also downsize our utility costs.
Plus TV can be reduced significantly (I’ll keep my phone and internet as they are). And we could stop paying for phone service for the kids.
So I think we can move from $567 per month to $350.
Annual cost: $4,200
Christmas : $5,537
The big cost here is that we gave five family members $1,000 gifts last Christmas.
Those would be gone.
Annual cost: $600.
Medical Insurance: $5,092
I’m going to have to bite the bullet and go back to work, so I think this category (plus the next one) will go down as I pay lower premiums (since my employer will subsidize them) and have fewer out-of-pocket costs.
It could still be a couple hundred a month for insurance though.
Annual cost: $2,400
These are out of pocket expenses we currently pay, mostly for eyes (I got some cool Oakley sunglasses!) and dental work plus some for physicals and follow-ups not covered. Plus, of course, my regular dermatology check-ups.
My out of pocket with insurance would probably be $1,500 at the most, so I’m going with that.
Annual cost: $1,500
The main “cost” here is estimated taxes that I paid for my daughter which she then reimbursed us through her wedding funds (we deducted what she owed us from the amount we gave her).
So this cost would go away…since it’s not really a cost now.
Annual cost: $0
These are all costs that don’t fit into another category neatly.
For years our costs in this category have been roughly $300 a month and I don’t see that changing.
Annual cost: $3,600
The two big costs in this category are 1) membership fees to our gym ($170 a month) and 2) movies and similar outings.
I can’t see giving up the gym altogether, but we could join a cheaper alternative. Plus with my son leaving in January we’ll move from a family plan to a couple plan.
I’ll go with $75 a month for a gym, plus some various money for a movie now and then.
Annual cost: $1,200
Eating Out: $3,186
This number is obscenely high for one reason: I buy gift cards at the store and then give them to my kids to eat out.
Those days are over and we’re on damage control with the new plan.
Eating out goes to $50 a month.
Annual cost: $600
House Insurance: $2,740
It is what it is for a house our size in our market. We price out insurance every other year at a minimum, so I don’t think it can go much lower (in combination with our other insurances — we combine them with one company to get the best overall deal.)
But as I said, we’ll be downsizing, so I’ll be lowering this cost (we could argue that the cost would be zero for us as it could be rolled into what will become rental expenses). Plus, since I have zero assets, umbrella insurance goes away.
Annual cost: $1,500
Car Insurance: $2,396
We could go down to one car if we really wanted, but I don’t want to — especially if we’re working, so I’ll keep this as is.
Annual cost: $2,396
Home Repair: $2,188
Most of these costs were discretionary, so we can avoid many of them.
That said, things happen so we can’t go to zero.
Annual cost: $750
Hahaha! This is made up mostly of athletic clothing (my preferred retirement clothes) and workout shoes (which I go through like candy working out six days a week and walking 20k steps per day).
I would need to cut back here and it would be pretty easy — I have enough of these clothes to probably last me a decade. I still have most of my work clothes, so I wouldn’t need much there either, though my wife might.
Annual cost: $1,200
These are completely discretionary costs — pillows, curtains, artwork, etc.
We would be on a budget freeze in this area, though some costs would be needed.
Annual cost: $500
Life Insurance: $848
We don’t really need this expense currently, we just keep it because the cost for what we could get is so low.
But if we had a zero net worth, we would need life insurance for sure.
Keeping it as is.
Annual cost: $848
You could argue that this would go up since we’ll be driving more to work.
But we could argue that it would go down as we don’t buy gas for the kids any longer.
Plus it’s in line with what we used to spend when I was working.
So I’ll hold it where it is.
Annual cost: $811
Car Repairs: $134
Haha! This is so low that I wouldn’t feel comfortable where it is now.
Annual cost: $1,000
New, adjusted total: $30,705 plus giving and taxes
See? Told you I could get it down. 🙂
That’s the cost side of the equation. Now let’s look at income.
ESI Income Review
The good news: I’m a pretty high earner. Plus with the kids gone, my wife could go back to work.
The bad news: I have to go back to work. So does my wife (she’d hate this). In fact, when I told her I was doing this post and that she’d have to go back to work as part of our effort, she was less than enthusiastic. 😉
I suspect I could get a position for at least $150k a year at a minimum. $200k is more likely (and on the high end $300k is possible if I was running a company). But let’s split the difference and say I could find a job and earn $175k per year. Consider this margin of safety item #1.
That would be base salary. I’d probably be looking at $20k to $40k in bonuses. Let’s go with $30k and say I hit half of the target. So that’s another $15k in income.
My wife was an audiologist when we met and married. Her training and certifications are outdated, so she’d need to ramp them up.
That said, she’s pretty sharp and has good experience, so that wouldn’t take long.
I Googled “average audiologist salaries” and got $75k to $90k. Boom!!!!
I’ll back off on this a bit to factor in the education she’ll need to get (and the time it takes) plus the fact that she wouldn’t want to work full-time if she could avoid it. But we’re a team so she’s in the pit with me. I’ll go with $60k per year for her. Consider this margin of safety item #2.
That brings us to $250k in salary.
That’s our complete source of income at this point, but I would also begin a side hustle immediately. Based on past experience, I KNOW I could create a $25k blog within three years. So we’ll assume zero in years one and two, but $25k in extra income after that.
BTW, $25k is a low number compared to what I think I could do. ESI Money is around $50k annually and I’m not pushing it hard at all. So consider this margin of safety item #3.
I could get my wife to do a side hustle too, but I’ll leave her be for now. I think that would be best for my health. 😉
So if we’re bringing in $250k in years one and two and then $275k after that, here are our extra expenses:
- Giving (10% of gross income): $25k to $27.5k
- Taxes (income plus all other): $65k
On the tax part…I didn’t want to spend 100 hours filling out a mock income tax form so I took an estimate based on the following:
- What I’ve paid previously when I’ve made in this range (though the Trump tax cuts would probably lower this amount)
- An estimate from an online tax calculator
- The fact that historically we spent 21% of gross income on taxes
Given these, let’s adjust the annual budget to $30.7k (costs) + $27.5k (giving) + $65k (taxes) = $123.2k
Note that I’m building in the higher giving level from year one for both simplicity’s sake as well as to serve as margin of safety item #4.
Taking the numbers above, I did a realism check. They have us spending a bit over 10% of income on living expenses.
This is lower than the 17% we saw for 28 years, but our costs should be lower as we’re being more extreme with expenses while driving income. Doing these two things will naturally lower the percentage spent on living costs.
That said, I’ll give myself a handicap and raise the annual costs to 17% of gross income. Consider this margin of safety item #5.
This gives us a new budget of $46.75k (new costs) + $27.5k (giving) + $65k (taxes) = $139.25k.
Given these costs, our gap, the difference between income and expenses, is $110.75k in the first two years and $135.75k in years 3+.
In addition, it sets our financial independence number at $46.75k. These are today’s living costs. Now we could add giving and taxes here, but we over-estimated the costs anyway, so I’ll assume the increase makes up for these. Plus, as you’ll see, we have so many margins of safety built in that we’d be able to cover any cost increases fairly easily.
To get a future cost estimate, I started by assuming it takes us 10 years to reach FI and that inflation is 3%. So in 10 years the $46.75k in costs will balloon to $62.8k.
Moves I’d Make
Now with income and expenses set, we can get to work. Here’s what I’d do to reach FI as soon as possible:
1. Move to a lower cost of living city.
You can’t always control where you live when you’re looking for a job, but if you’re diligent you can do it within reason, and the assumptions we have above make that a realistic idea.
We’d likely move to the Midwest or South and start our efforts in a smaller to mid-sized market/city. This combination would make for a very affordable cost-of-living.
I would be sad to say goodbye to Colorado, but I would do what it took to reach my goal. Also, I know we could find places to live that we’d enjoy. It’s not like Colorado has the market cornered on great living.
The costs that we’d realize by doing this are reflected above. I also think the salary assumptions would hold true as well. As you know, I love the combination of a high salary and low cost of living city, and that’s what we’d work towards.
2. Move into a smaller apartment that we’d house hack.
Welcome to a 900 square foot apartment, honey! LOL!
Actually my wife would probably be more accepting of a smaller place than I would, but I digress.
I think since I have a short time frame to get to FI, growing with index funds is just going to take too long. The one caveat: I would put in enough in my work 401k to get the full company match. I’d be able to get it at 59.5 anyway if I retired and rolled it over to an IRA, so why not get the free money too?
BTW, I’m not counting on any of the free money in my calculations, so consider this margin of safety item #6.
Other than that, the rest of my money would go to real estate — some to private lending and the rest to actual real estate/apartments where I would buy the place, live in one unit, and rent out the other units. Then as that place got paid off, buy another one, and so on and so on.
3. Start a side hustle and keep it growing.
I’d begin blogging right away and maybe even get a cool URL like FIinFive (FI in 5 years) or something like that to motivate myself.
I think it would be a pretty cool journey and documenting it online would be interesting. Hopefully readers would think so too. If not, I have some other ideas I could go with.
I’m pretty sure I could make $25k after three years. As noted above I could likely make more than that.
4. I would work my career HARD.
I managed over 8% annual raises when I didn’t know what I was doing for much of the time, so I’m thinking I could at least do that now.
I won’t factor in those gains, but if my salary grew “just” 5%, that would be a substantial amount of extra income.
This said, I won’t assume any salary growth in my numbers, so consider this margin of safety item #7.
5. Keep costs low.
There might be temptation to let up a bit as we made and saved more, so we’d be diligent and keep expenses in line.
I have no doubt we could do this since we did it for 25+ years.
It wouldn’t be fun to go back there, but it’s something we’ve done and could replicate without too much pain.
That’s what I’d do if I wanted to achieve FI as soon as possible.
It’s not a long list at all. I’d simply concentrate on the few things I know I could do well to and focus on them big-time.
Said differently, I’d drive my earnings, save a ton, and invest for FI income. It all comes back to E, S, and I. 🙂
I could drag out this post with a blow-by-blow, year-by-year accounting, but I doubt anyone wants to read 10,000 words here today.
Plus we’re just getting an estimate, so a general idea of the outcome is fine IMO. It’s enough to get us a close estimate.
Here’s my line of thinking:
- We have a gap of $110.75k in the first two years and $135.75k in years 3+.
- This nets us $628.75k after five years.
- This is assuming no appreciation and no extra income from the places for these five years. In other words, margin of safety items #8 and #9.
- This amount is roughly what I bought my rental properties for and they churn off about 10% after expenses. Let’s say I put 75% the money into rental units and 25% in private lending. If we assume a 6% income stream from the rental units (margin of safety item #10) and 10% from the lending, that’s annual FI income of $44k (($628.75 * 75% * 6%) + ($628.75 * 25% * 10%)). By the way, living in a low cost market makes buying rental units like this a possibility.
- Couple this with my $25k per year side hustle and we have annual FI income of $69k, well over our TEN-year (even though we’re only five years in) inflation adjusted amount of $62.8k (margin of safety item #11).
- This also assumes that the rents for our apartments wouldn’t increase over time, which they probably would (margin of safety item #12).
Looking at our assumptions plus factoring in all our margins of safety, it looks like we would probably reach FI in less than five years, but I’m happy saying it would take half a decade (margin of safety item #13).
How Could Others Do It
I can hear the screaming now from the “but you have a high income” excuse camp.
Or the “there’s no way I could live on that” complainers.
Or the “I’d never invest in real estate” whiners.
As I said earlier, these are MY numbers, not yours. I’m playing the cards I’ve been dealt.
In addition, it really shouldn’t be any surprise that I’d focus on earning a lot, saving a ton, and investing since that’s what I write about EVERY DAY.
And some are sure to point out that I’m still “working” since having a side hustle is part of my equation. I’ve already addressed the retirement police on this subject. Plus, I blog even now and I don’t need the money — I choose to do it because I like it. So I’d probably like it then as well. It just so happens it helps our finances. Seems like a win-win to me.
With all that said, I do realize that we have some built in advantages (like earning potential, self-control in saving, and investing experience).
So let me offer a few suggestions for those of you that might not be developed in some of these areas — some tips for what you could do to reach FI as soon as possible. I think you’ll find my suggestions familiar…
If you’re looking to close the gap between what you need to reach FI and what you have, here are your options:
- You can earn more. Develop new sources of added income or make current ones higher. This could be at your job, your side hustle, or both. Earning more means that you’ll be saving more, even if your savings rate stays constant. In addition, if you’re starting later in life you can factor in Social Security as part of the income equation.
- You can save more. Review your budget and look for ways to save more. I know it’s personal finance 101, but even the best money managers have opportunities for savings. It’s often about choices – wanting one thing more than another. If FI is a priority, almost everyone can find additional funds.
- You can make more/better investments. Most of the success in investing is simply saving as much as you can as soon as you can. I’d recommend you begin to study real estate as well. Read How to Invest in Real Estate and check out BiggerPockets. Plus look for a real estate mentor to teach you the ropes in your market.
The points are probably made, but let’s be super obvious and summarize with this:
Earn as much as you can + save as much as you can + invest as much as you can at a good rate = hit FI as fast as you can
Plus, there’s nothing magical about five years. If you’re 55 and think it’s too late, it’s not. It’s my belief that most people can get to FI in 10 years if they apply themselves with the correct concepts.
Finally, it’s likely you’re not starting at ground zero, so you have an advantage versus what I did above. You probably have assets already saved, a house you might be able to downsize from and pull out some equity, tons of stuff to sell for cash, and so forth.
For additional guidance and ideas, check out my ESI Scale Financial Independence Calculator and my Impact of Career Growth Calculator. These will demonstrate the levers you can play with to reach FI as soon as possible.
Whew! That was a long process!
Any thoughts, comments, or suggestions?