For those of you not in the investment profession, let me share a little secret: Most of us are not very happy at our jobs. Many people outright hate them, yet the pay is so good that they can’t fathom leaving for something else. To many who sit on trading desks or as an investment manager, F-You Money is a well-known concept. Big egos, a-hole bosses, and dealing with Compliance and Legal are just a few of the constant headaches. Due to the larger than average compensation, the stress and pressure to perform day in and day out and the need to always up your game is tremendous. A question common among these groups is “What’s your number?”
Your number is the amount of investable capital required so that you can generate enough income with enough margin of safety in order to never work another day in your life if you don’t want to. Most people in the FIRE community are already intimately familiar with this. Your number excludes non cash-flowing assets, like your primary residence, cars, and vacation properties, and as such, it is not the same as your net worth. You cannot live off of assets that do not generate income. Having no debt makes your monthly cash outflow much smaller, allowing for a lower number and increasing your margin of safety.
The broad definition is easy to understand, but of course there are big question marks. When you are considering living for the rest of your life off of this pot of money, with the possibility of never working again, there are going to be concerns. The biggest question mark is how much you can safely withdraw each year without endangering your future. That number is hotly debated and I have added my two cents as well. For this article, and in my personal calculation, a withdrawal rate of 3% is a nice round number that provides a near certain level of confidence in your money lasting for 50 years or more.
The second biggest question mark is your monthly and annual expenses. I’m going to assume that you already know your expenses well, don’t want to meaningfully change them in order to become financially independent, and have factored in health care costs and taxes. If you haven’t done that, there are plenty of good blogs out there that focus on these basics.
With that said, let’s turn our attention to some of the more nuanced conversations around your number.
Levels of Freedom
Your number can be designed to fund any level of financial independence. In theory, your number could be something as low as $500,000. Of course, that number implies a monthly budget of only $1,250, so it is likely not realistic for most people. You could also go the opposite route and work towards a number that provides a ridiculously high level of spending. A portfolio of $5-10 million would safely provide income of $12,500 – $25,000 per month! The trade-off being that you work quite a bit longer and may never reach your desired level of independence.
When I was in the last few years at my previous job and it was dragging me down hard, I came up with different numbers that represent different levels of freedom. For those highly involved in the FIRE community, it’s safe to think about these as LeanFIRE, regular old FIRE, and FatFIRE. Let’s take a look at each and see how they differ from one another.
- LeanFIRE: Your LeanFIRE number represents the amount of capital needed to cover the absolute bare minimum lifestyle that you are willing to live. Instead of shopping at Whole Foods, you shop at Aldi. Instead of buying new clothes, you shop at Goodwill and hope to find some nice second hand clothing. Need a new car any time soon? Nice try, not happening at this budget level. Realistically, this means that you’ll be taking a part-time job or generating money some other way because it’s just too difficult to live at the absolute minimum each month (especially with kids). Anything from being a barista for a few hours a week to a tax preparer three months a year would qualify.
For us, imagining this number meant making several adjustments to our budget. We would take out any vacation money and cut down clothing and auto expenses. We would halt charitable contributions, stop giving ourselves an “allowance” of fun money each month, and cut back on our monthly allotment of “slush money” that’s built into our budget for purchases that don’t fit nicely in other categories. However, factoring in health insurance and a little bit for taxes, we figure we would still need around $4,000 per month. That’s made better by the fact that we do not carry a mortgage or have any other debt but made worse by the fact that we wouldn’t get rid of our vacation home right away. Those would be bigger decisions down the road. All in, our LeanFIRE number, using a 3% withdrawal rate, is $1.6 million. Adding more risk and using a 4% withdrawal rate would bring that number down to $1.2 million.
- FIRE: Our FIRE number is our actual target number for our F-You fund. This number represents an amount that allows you to maintain your current lifestyle without making any major new sacrifices. Assuming you already know your budget well, this should be a fairly easy number to estimate. Do some quick checking on the exchanges for health insurance, perform some quick math on taxes (you should only have to add about $300-$500 per month for taxes, given the tax efficiency of investment income), and divide that new annual expense number by 3%. For us, that number is somewhere in the $2.3-$2.5 million range, so we target $2.5 million.
- FatFIRE: FatFIRE is actually a pretty easy number to calculate. In theory, it’s any amount above your FIRE number, because adding beyond your FIRE number gives you more of a buffer and more fun money. Our goal is to hit our FIRE number of $2.5 million and then begin to invest aggressively in our Get Rich account. However, it’s likely that if we continue to work, save, and invest, we’ll be able to bulk up our FIRE account into something more of a FatFIRE account.
FatFIRE can mean anything to anybody. To us, it means having the freedom to eat out more frequently and at better restaurants. It means taking a vacation and being able to upgrade the whole family to Comfort or First Class airfare, as well as stay at a nicer place on AirBnb. It means being able to positively impact our extended family and our community by spending money on something that doesn’t just benefit our immediate family. It means less concern that the extra charge from Amazon this month is going to cause us to go over budget. In short, it means more than just freedom from ever needing to work again – it means freedom from that day to day worry.
How to Think About Retirement Funds
Retirement accounts add an interesting wrinkle to the FIRE conversation. With the tax benefits associated and ease of funding them through an employer (401k/403b), they make for an easy way to save money. The “problem,” of course, is that you cannot touch those assets until age 59 ½. For those looking to retire earlier than that- potentially much earlier- that restriction becomes an issue. I fully fund my 401k each year. As a high-income earner, it’s one of the few ways for me to reduce my marginal income and as a result, funding it has a very large tax benefit for me. Given this, I would even fund it before adding savings to my F-You fund.
There are two good ways to view retirement funds in regards to your number. The first is to view these funds as your primary source of income once you hit age 59 ½ and if you plan to retire early, spend down taxable assets until you can access those funds. For example, if you are 50 years old, have $1 million in retirement assets, $500,000 in taxable assets, and annual spending needs of $55,000, you can likely already afford to retire. You have about 10 years before you can legally access your retirement accounts. Assuming 3% annual inflation and 5% returns on both your taxable and retirement portfolios, you’ll spend down ~90% of your taxable account by the time you’re able to touch your retirement assets. By then, the combination of retirement assets plus Social Security in a few years allow for a sub 3.5% withdrawal rate on your retirement assets. The process of drawing down taxable assets, letting retirement assets grow, and tapping retirement assets at age 60 can work for a lot of people.
The second way to view retirement assets is to use them to improve your financial lifestyle once you reach your golden years. This is our plan. You can either LeanFIRE or FIRE while you’re under the age of 60, then once you reach 59 ½ you can continue to just let those assets grow or use them to fund a pretty extravagant lifestyle. Someone who LeanFIREs in their 40s can jump to full FIRE at age 60, while someone with enough assets to FIRE in their 40s or 50s can jump to a pretty FatFIRE level when they’re in their 60s and beyond.
Accounting for the Big Spends and the What-Ifs
Any calculation of your number is incomplete without thinking about the big ticket items. The most common things included here are college costs for your kids, health care costs in retirement, and tangible big ticket items like new cars, lake homes, or fancy vacations. In almost every situation, the solution is to save a little more money. The one-more-year syndrome is real and can be dangerous, but if it helps grow your financial security, working an extra year or two is well worth it.
For example, my wife and I have three kids to send through college. While we don’t plan on paying 100% of the bill, just tuition and fees can add up to $25,000 per year. For three children, that’s roughly $300,000 in today’s dollars. Not cheap, but at least we have time on our side. Solution: save more money.
Health care is the other big concern in retirement, either early retirement or at a more traditional age. Again, the solution here is to save more money. You can either set more money aside in a separate account for these types of big expenses, or more likely just save more and add a cushion into your monthly budget. For both college and health care, utilizing tax advantage accounts like 529s and Health Savings Accounts, respectively, can make saving more efficient.
In the end, keep in mind that any of these big spends and what-ifs are likely discretionary. You do not have to pay for your children’s college education. You do not have to buy a lake home or take a fancy vacation. Health care is a little different, but so long as you plan ahead and get proper insurance in place, you’ll likely be okay.
Figure It Out
Like any other plan for the future, calculating your number is full of assumptions. Even if your assumptions are way off, doing the math is something you can’t afford not to do. Figuring out how little money you can afford to spend, how your retirement savings fit into the equation, and what big ticket items may occur in the future are all important.
We’ve broken our number into three separate numbers. One for just the basics, one based on current and expected expenses, and one where we can afford to live it up. We’ve also made calculations based on large expenditures, such as our children’s college educations, and are factoring that into our final total. Doing these basic calculations provides clarity to our future and helps add a level of discipline to our financial life.
Keep building my friends.