The exceptional value of making things visible

magnifying glass and $5 bill

As I’ve written before, my family recently moved to a new home, in a different town. That means we’ve been keeping ourselves busy with lots of chores along with some fun things, plus a hefty dose of learning opportunities! Sometimes learning means reminding yourself about good lessons you’ve experienced in the past, and to which it is worth returning.

Lessons from the garage

We spent the last few days on the herculean task of organizing our garage – chock full of boxes since the move. Our last home had substantially more storage space, including a large garage and basement area – rare for California. Things are a bit more limited in our new abode, despite it being a great home in so many ways. So we’ve been continuing our purge of items no longer needed, organizing what we want to keep into bins, and putting them on the myriad shelves we’ve assembled. It’s amazing what you unearth when you take on these kinds of tasks, isn’t it? You can find the truly valuable things – cherished mementos, relics of hobbies long forgotten, and so much more.

Those things were present all along of course. We simply lost track of them in the clutter of life. Everyone is busy, right? For myself, the lesson here is about keeping things visible. Few if any of us live in museums, of course, with all of our possessions on display. It’s also true that we tend to box up the “extra” things, burying them among our belongings, in some out of sight area. There, they can be easily forgotten, despite them being important, and valued. Our approach has been to use clear storage bins, with items grouped appropriately so you can easily look at a shelf and see all that is being stored. We won’t soon forget what we have after this exercise – one we will need to keep doing going forward for it to succeed.

Lifestyle creep, hidden expenses, and the way out!

Our experience with the garage reminded me of the start of my budgeting journey, something that was central to my retirement decision making process and preparation. As I wrote, itemizing your current true spending rate is vital to determine your estimated spending in retirement. Only by digging into the details can you understand all of those costs easily hidden – things like software subscriptions, meals out, gifts, all those things that automatically renew, and the list goes on. Few people really understand the sum of their spending, particularly as it has increased over time. One of the perils of getting raises and advancing in your career is that your spending generally goes up! By making your expenses visible, you can make informed decisions about what is truly important and should be maintained, vs. what can be reduced or even eliminated.

What I have found effective and very relevant to this topic, is the value in keeping your spending visible. In other words, this shouldn’t be a one-time activity. By regularly tracking of your expenses – in a notebook, a spreadsheet, or with software like my favorite – You Need a Budget (YNAB) – free trial here!, everything is out in the open. You can see how spending patterns change and make adjustments as needed. If your expenses are higher in one area in a given month, you can adjust and reduce spending elsewhere – or take from a sinking fund account set up for that purpose. This kind of process also facilitates conversation with your partner, allowing you to make informed decisions together.

I’m not describing labor intensive work! In the approach I use, transactions are automatically imported into the software and 90% of the time, correctly categorized and my budget adjusts without me doing anything. I do a 10-minute check-in each week and then do a brief end-of-the-month reconciliation and confirm next month’s budget. This small amount of time allows me to keep our finances not only visible and accurate, but provides us confidence that we know the true state of things, and can plan appropriately. This is vital in retirement to ensure you maintain your calculated safe withdrawal rate. And if you’re not retired, this can help keep your spending in check, allowing you to pay off debt more quickly, increase your saving rate, and perhaps reach your financial independence goals sooner!

What examples do you have of the value of making things visible? I’d love to hear from you.

photo credit: “Monument Magnified” by b_ungar is licensed under CC BY-NC-ND 2.0

When can I retire?

retired license plate

Introduction

It’s hard to imagine a more exciting yet anxiety-riddled question, right? This is the big one! First let me start with some humility: I am absolutely standing on the shoulders of giants when it comes to this topic. I’ve been incredibly fortunate to find so many amazing resources from talented and knowledgeable people over the years. This area is the one that like most people, has provoked the most research for me. You’ve no doubt heard and likely experienced the fact that anything involving money can be among the most stressful things in our life. Contemplating pulling the plug on your income and employer-provided benefits certainly provokes lots of anxiety and warrants lots of research! My hope is that I can share a few things that I have found useful and point you to some excellent resources (section at the end of this article).

Before we dive in – a reminder that I am not a financial advisor nor should you consider anything in this post as investment advice. Best practice is always to talk with experts (financial advisors, tax professionals, etc.) about your specific situation before making any investment decisions.

The core concept

From a money perspective, you are ready to retire when you are financially independent (FI: the first half of FIRE!); that is, when you can securely cover your anticipated expenses for the duration of your lifespan without reliance on your current employment income. There’s a lot packed in there, right? This kind of planning is full of assumptions so let’s get that concept out there now. I’m a planner by nature as well as an optimist, and have many long lived relatives, so I’m assuming I make it to at least 95 – or a bit less than another 50 years. In addition to not knowing how long I’ll live, I don’t know how my expenses will change over time. So I chose to make a plan based on my current expenses, with a teenager still at home and paying off a mortgage. Many people explicitly plan on their expenses decreasing over time since they most often do, and also model in planned future income like Social Security, pension, etc. I prefer to keep spending flat, don’t have a pension, and ignore Social Security income given the uncertainty around it in the future – though this is a conservative position. It helps me sleep at night, OK? So the big nut to crack is determining what your spending looks like – and that is the next section.

Before I go there – the FIRE community rightfully tends to take this opportunity to point out that achieving FI does not mean you have to retire early (RE). It simply means you have the freedom to do so when you are ready. Stepping away from the workplace is a very individual decision. It needs to be “the right time” for you and your family. For us, FI came at a time when I was in a fulfilling job, working at a wonderful company surrounded by talented colleagues doing impactful work. In other words, there was no pressure from that side. The decision ended up being pretty easy from a personal perspective. Our daughter was finishing middle school and so knowing that we’d have to move due to housing prices in the Bay Area, the transition to high school seemed a good time to pull the trigger on retiring – the only other option being waiting another four years until she graduated. My wife and I didn’t want to do that. That was our path, and you will need to choose what’s right for you. It’s liberating having the freedom to retire once you hit FI. But many people elect to wait longer than that, or take other approaches like reducing their hours, changing to a less stressful/less lucrative field, etc. There is not one answer to the timing question!

How much money do I want to live on?

This is an essential question as I’m sure you agree. I’ll be honest – for most people this part of the equation takes some real effort, and it’s worth it. I’d hazard the first question to be answered is what are you actually spending right now! Few of us have budgets that we adhere to strictly, as many surveys point out. I had not really budgeted for years, rather looking at things flipped around: for most of my career, I took care of our fixed expenses, “paid myself” by putting away my targeted savings, and then considered the rest available for variable costs (i.e. the fun stuff for the most part). This meant that I didn’t have a great understanding of our true spending. Two years before retiring I started to work out a zero-based budget. At first I just roughed it out to get an idea of what we spent and what cuts we could (and probably should) make. About a year before retirement I got much more serious. I kept coming across mentions of software called You Need a Budget (YNAB) – there’s a really straightforward associated book as well, which I’d recommend. Honestly, this was the game-changer for me. It’s worth a whole post, really. Let’s just say I started explicitly tracking all of our expenses in detail using software, and “giving every dollar a job”. This allowed me to make a true zero-based budget and make adjustments as needed to determine our desired retirement “paycheck”. We then lived on this budget for nearly a year before my last day of work, demonstrating it was achievable even living in the Bay Area. This was another conservative approach as we knew that while we would have one new (large) expense in retirement – out of pocket health insurance (a topic for another time!), many of our expenses would be going down. It is this effort that truly gave us the data and the confidence to finally pull the trigger. No matter your timeline to retirement, if you like the idea of YNAB, please check out the free trial! Understanding your spending is critical to speeding up both debt repayment and increasing your savings. If you use that link and end up signing up, we both get a free month!

OK, but how much do I need to save?

This big topic warrants a series of blog posts so let’s start simply for now. First of all, many people in the FIRE community like to tout the 4% Rule that originates from the Trinity study. In brief, this states that if your annual spending is no more than 4% of what you have saved, you’re in the clear. So you take 25 times this annual spending and that’s the total starting amount you must save. Example: If you plan to spend $5K every month in retirement or $60K every year, you need to save $1.5 million. The truth is more complicated, since it has many assumptions built in. For example, the Trinity study contemplates a 30-year retirement period – too short for what many are aiming to do in early retirement. At the end of the day, it all comes down to calculating your safe withdrawal rate (SRR), which will lead you to how much savings you need to start with. In other words, how much can you withdraw from your savings each year without running out of money before you die. Your own SRR will be determined by the factors you choose to model for your own situation. Many bloggers have written on this topic and I’ve linked one of my favorites in the Resources section below. In short, you must come up with this number. For us, I determined that no more than a 3.5% SRR makes sense, so we needed to save at least 29X our projected annual spending. That assumes no other income is produced by my wife or myself after retirement – this is already not the case. But again, it’s about having the freedom to not need that other income.

Of course given the tax man, the rules around when you can withdraw from pre-tax retirement accounts, etc. it’s not simply about how much money you need to save. There is much more to consider regarding investment strategy, asset location, maximizing tax avoidance opportunities, and so on. These are topics for another time, and another example of areas where resources abound! I’ve linked to a good post on this in the Resources section, as well as to an excellent financial podcast / YouTube channel.

One more (large) factor to consider: what does retirement look like for you? Is it a spartan lifestyle (see leanFIRE advocates like Mr. Money Mustache), a lavish one, or more likely somewhere in between. What do you want to spend your time on? What new things do you wish to learn? It is essential to ensure you know the answer to these questions and have worked through all the details with others in your family. It would certainly be tragic to pull the trigger on leaving the workforce only to realize that you have underestimated your desired spending in the interest of retiring sooner. Take your time, determine your priorities, and plan for the future you want to have!

In conclusion

To summarize, you can securely retire anytime after you have achieved financial independence. That means you have determined your desired (and achievable!) spending in retirement and have sufficient funds saved to cover those expenses for the remainder of your life, including whatever contingency funding your own comfort level requires.

This post is only a starting point; one introducing a few key concepts. I hope you have found it a useful introduction and jumping off point! As you see there are a number of individual factors that need to be considered to determine your own strategy. This doesn’t have to be scary – in fact it can be a lot of fun. Just do it at a pace that makes sense for you. These are very impactful decisions and therefore warrant taking time to really understand the landscape. The good news is just how much great information is out there to help!

Resources

Admittedly I need to put some effort into a categorized resources list for the blog. In the meantime, let me link to some sites pertaining to this article that I think you will find useful.

The Retirement Manifesto is an excellent blog. Fritz has written so much on this topic and I’ve learned much from him. One post I’d recommend is 5 Milestones You Must Reach Before You Retire. As you’ll see, I’ve only covered a couple of them here. Another great one is How to Build a Retirement Paycheck, which digs into some key issues in detail.

The Money Guy Show is a wonderful and entertaining financial podcast. I’ve been following Brian and Bo for eight or nine years I think – first as an audio podcast, now on YouTube. Full disclosure: their podcast eventually led me to sign up with them at Abound Wealth as my financial advisors. I get no compensation from recommending them! I just love the idea of paying it forward given all the benefits I’ve seen from working with them.

Early Retirement Now is a great blog and is perhaps most famous for Big ERN’s exhaustive series on Sequence of Return Risk (SRR). I won’t pull any punches: a 38-part series of SRR posts is not for the faint of heart. But reading it over weeks took me from extreme anxiety about what my SWR could be to a good understanding as well as confidence. This is highly recommended for the financial nerds among us!

ChooseFI is one of the most popular FIRE podcasts and for good reason: Brad and Jonathan have covered so many key topics and interviewed really great guests over the years. This one leans a bit more towards a leanFIRE approach at times but I find many of the topics they touch on valuable.

The financial independence subreddit is a very active community and one that I recommend (with the usual large boulder of salt associated with Reddit). There’s lots of great discussion here and even a weekly Q&A thread that can be very useful when you are getting started. You’ll find a lot of advocates of the 4% rule here so caveat emptor.

If you end up going with YNAB, you can’t beat Nick True’s Mapped Out Money YouTube channel. I have learned so much from his easy to follow videos and you will find tons of people referring to his channel. On a related note, there’s also a very active YNAB subreddit that I’d recommend.

photo credit: “Retired License Plate” by aag_photos is licensed under CC BY-SA 2.0