Attaining Financial Independence
When I first got out of college, I made a list of things that I wanted to accomplish over the first decade of work. I made what I thought were stretch goals, and by the end of that decade, I had exceeded every one of those goals. This wasn’t because I was more intelligent, I was focused, and I measured progress.
A Habit of Goal Setting
This started a habit that I have repeated every decade from my 20s to my 60s. Having a plan for the next 10 years that covered financial, physical, and emotional goals.
Thinking about Retiring
When I reached age 55, I started to alter my long-term investing philosophy from one that focused on growing the money to one that envisioned living off that money or what I think of as my investment corpus.
It Doesn’t Need to be Complicated
Because so many tools are available via the web, monitoring your spending, saving, and investing has never required less effort. Many of the tools are free or low-cost. These tools remove the grunt work of managing money. In 10 minutes per day, I have a clear idea of how much money I’ve spent, how much I’ve saved, and how much we have in our investment corpus.
The S/S/I Numbers
This is my shorthand for Spending/Saving/Investing.
I realized I needed to start thinking about how much money I needed to have in savings (my investment corpus) to run our lifestyle perpetually. How do you do that? I did it to figure out how much we needed to live a reasonable lifestyle without working. Understanding that number is knowing when you have enough to stop working. I did my planning without considering social security benefits to build a margin of safety.
If you need $50,000/year to live for the rest of your life, you can back into what you need to accumulate in your investment corpus by dividing that number by .04.
$50,000/.04 = $1,250,000
The 4% rule is a commonly accepted figure that many financial planners use. It's based on a study by [Willam Bengen]. If you are risk averse, you can plan more conservatively by dividing your annual spending by 3% or 2%, which increases the amount of savings you need to accumulate.
I did this for my own planning and then decided to start living as if my wife and I were retired for the remaining years we worked so that we could increase our investment corpus faster and accumulate more savings.
This caused me to develop two other monthly goals; our spending and savings goals.
The Savings Goal
I realized it was easy for my wife and me to live today on our projected retirement spending. We just decided to spend less on eating out and traveling. My savings goal was in addition to what I was already saving via payroll deduction in my employer’s 401K plan. This was the no-brainer savings that went right into an index fund which my employer added another 50%. That’s right, by savings more I'm granting myself a “bonus” of 50% from my job.
My savings goal ignores that payroll deduction saving. I plan to save more from our discretionary money. The savings number is after-tax money that gets moved into my bank account. I move that money into our brokerage account every few months and invest it in stocks and bonds.
The Spending Goal
This is the number that is left over. I set this number by proposing to my wife a spending level that we could live on comfortably in retirement. Because I won't retire until I reach 65 or 66, that would give us several years to adjust our lifestyle to living at our retirement level of spending. It would prove that we can live at this spending level.
How are we progressing?
We are now in the 5th year of this experiment. We can definitely live well on our retirement spending level. By living this way, we can accelerate the growth of our investment corpus. I’ve made adjustments, and we’ve decided to occasionally spend more money on family travel. Many months we spend far less than our monthly spending level because we have paid off all our debts. That’s right, no mortgage, no car payments. Recently we have taken on some short-term 0% debt to fund improvements to our home. This debt will be paid off over the next two years and will not require any increase in our monthly spending plan.
The Spending/Savings/Investment Corpus (S/S/I) plan makes it simple for my wife and me to keep track of our progress. It also provides a framework for deciding when and how much to spend on discretionary items.
Your numbers will be different than mine. Your target retirement age will be different. That’s the beauty of this system, you decide what numbers you want to target and when you want to stop working for a living.