As you’ve probably noticed, I’ve been doing a series about the different steps to take at different points in your life to ensure that your family becomes a Great Family. As you move into your 40s and 50s, your life settles down and you begin earning the largest paychecks of your career. However, your obligations, both financial and personal, increase as well. Living your life from a position of strength in your 40s and 50s means building up your F-You fund and hitting your F-You number. Your 20s and 30s were a time to increase your career prospects and get the financial basics taken care of. Now is the time to convert your career earnings into real investment capital and build your fortress on top of that financial foundation.
Importance of F-You Money
The importance of having F-You money only grows as you get older. A strong balance sheet is more significant now than it was at any point in your life. Financial obligations grow. Your base life expenses are higher, with a home to care for (hopefully paid off soon or even before you reach your 40s), teenage kids going to college soon, parents with ailing health or who are just having trouble managing their own day to day needs, and the expectation that you’ll support more causes and contribute to those who are in need. Further, your time commitments really begin to increase, and you’ll want to spend less time at work and more time attending family events.
There are more personal and practical aspects to having F-You money at this stage in life as well. Your late 40s and early 50s, statistically speaking, are your prime earning years. Losing these years, if you don’t have F-You money, can be catastrophic for your retirement. Health concerns could become an issue, and frankly, ageism in the workplace is a real thing. A job loss, either due to a health scare like cancer or just a recession-caused layoff, becomes much more difficult to recover from. Also, you’re much more likely to be earning a higher paycheck than most of your coworkers, and higher paying jobs are, by definition, less available than lower paying jobs.
Maybe even more important than the points above, having F-You money brings the ultimate level of optionality to your life. It signifies that you’ve truly made it; you’ve won the game. You can survive forever without a job, meaning that you are less at risk of a crappy boss, a poor economy, or going viral for all the wrong reasons. You have the ultimate freedom, which is both liberating and scary all at once.
With F-You money, your attitude changes for the better. F-You money doesn’t mean you’re an ass to people just because you can. It can also be called No Thanks money, or Maybe Another Time money. With a big pot of capital, you are more apt to gravitate towards places where you can be more impactful. You’re less inclined to deal with those crappy bosses and annoying coworkers and now you’re in the driver’s seat. Bosses can smell desperation – you won’t have any. You can negotiate from a position of strength. Want to take a six month break? If you’re a great employee and don’t care if your employer takes you back or not, odds are pretty high that they’ll let you take those six months and welcome you back with open arms. Want to work from home three days a week? Probably just fine, so long as you are a top performer and can walk away from the job if you really want to.
At this point, you’ll care less of what others think of you and be more apt to go out on a limb. Fear of failure declines, and you may be more willing to take that high risk, but high reward project. Also, you’ll hang out with people that you want, not people that you need to hang out with. Work events take less precedence over family and friends, as you no longer need to do face time with clients and bosses. You don’t need to stick it to the man, but you can, and that makes all the difference.
Getting There is Easier Than You Think
Many people look at what their F-You number is and get demoralized. Don’t. It’s a big number, but it’s not as hard to reach as you think it is. Let’s walk through an example of a couple in Atlanta, Georgia. This is a 30-year old couple with two kids and a combined income of $200,000. $200,000 sounds high, but it would only require these two people to be in the top 10% income earners, in the country, by age 30. Remember that Atlanta is a more expensive metro area, and the median income there is 10-15% higher than the overall country (depending on whose numbers you use). Realistically, earning $100,000 each for a white collar, office job only requires these two to be in the top 20-25% income earners.
Let’s also penalize them in other ways. Let’s assume that they never have any major pay increases from promotions or switching firms, but because they are top performers, their income goes up by 2% more than the rate of inflation (we’re going to use today’s dollars, or the real, not nominal, value for this example). Per the Bureau of Labor Statistics, the average spending in the Atlanta metro is $53,195 per year. Because our couple has two kids and lives in a nice house, let’s increase that number by 20%. Their expenses start at ~$64,000 per year, and grow at a rate of 1% above the rate of inflation. They max out their 401ks ($18,000 each, per year, but the cap only grows with inflation) and pay $7,500 per year for family health insurance (goes up by a real 1% per year). Because Georgia has a 6% state income tax, their take-home pay each month is over $8,200.
Okay, let’s start doing the math. Again, this couple has nothing saved yet for retirement and have not yet started on their F-You fund (both unrealistic), but they’re ready to start. Current after-tax monthly expenses total $5,320, so they are able to save 35% of their after-tax income, or $2,900 per month. Remember that they’re spending 20% more than the average citizen of Atlanta, but because they’re in the upper quartile for income, they’re still able to save a healthy amount. If the market returns a real 4% from here (on the low end historically, but probably realistic over the next 20 years based on current market conditions), this couple can have F-You money between the ages of 48 and 54.
Let’s illustrate how that’s possible. Recall that this couple is saving in both their retirement accounts (can’t be touched until age 59 and a half) and their taxable F-You account. The age they reach F-You money depends on the expected withdrawal rate. Because our couple plans only on using the taxable account during any pre-retirement years (to avoid the penalty), they could use a higher withdrawal rate.
A withdrawal rate from their F-You fund of 5% would let them have financial independence at age 48, whereas a 3.5% withdrawal rate would let them have F-You money at age 54. Again, both of these are without touching any retirement funds before normal retirement. Realistically, a 3.5% withdrawal likely allows their F-You fund to last indefinitely, and they’d still have their retirement accounts to fall back on if needed.
By age 49, not only is there a balance of $1.5 million in their F-You fund, there’s also a balance of nearly $1.1 million in retirement savings. A 5% withdrawal rate for their F-You fund, while not ideal, would hold well into this couple’s 70s, allowing their retirement savings to continue to grow. Because this couple’s expenses are growing at a lower rate than their income, and because the 401k contribution limit is also growing less than their income, they continually put away more and more each year in their F-You fund. As they get older and pay off their home, they may even be able to supercharge their savings rate, or they can just relax and live an even more expensive lifestyle.
This is just one example, but it shows that, while not easy, growing and achieving F-You money is realistic for many upper quartile earning individuals and couples. Those familiar with the concept of FIRE (financially independent, retired early) will be familiar with this as well: the number one determinant in achieving financial independence is your savings rate. Cutting or at least maintaining the same level of expenses through time helps, but increasing your income will be more impactful. From there, the safe withdrawal rate, which for early retirees is in the 3-3.5% neighborhood, governs what balance you need in order to hit the point where investment income matches or exceeds expenses. Simply take your annual living expenses and compare them to 3.5% of your F-You fund value. Once those numbers match, you’ve reached financial independence.
What to Do When You’ve Got It
How to manage your F-You money will be a topic for many posts on this blog. F-You money can come from a portfolio of stocks, bonds, REITs, etc. or it can come from real estate investments or semi-passive small businesses. Each of these has their own benefits and issues, but would be far too long of a blog post to be discussed here.
Most importantly, once you’ve got F-You money, from a practical perspective, you can do whatever you want. You can quit your job, or continue to work there but with less stress and the ability to say no when you want to. You could start over at a new career that provides you a great amount of personal satisfaction but pays you a far lower wage. Or, with a built-in safety net and no more fear of failure, you can start the business you’ve always wanted to. With F-You money, your options are limitless. Your life finally becomes your own.
Your 40s and 50s are the Time
Your 40s and 50s really are the time to hit your F-You number. If you’ve followed the advice of this blog, you got the basics covered in your 20s, super-charged your career and started your F-You account in your 30s, and are now ready to take full advantage of the foundation you built. Health concerns, uncertainty at work, or just the feeling that you don’t want to put up with the same crap you have been for 20 years should push you towards getting that F-You account fully funded. It’s not as hard as you think, and possible for most anyone earning an above median income. Now is the time to reach out and get the life that you always wanted.
Keep building my friends.