The Math Is the Easy Part

Achieving financial independence is hard in spite of the math being surprisingly easy.

Here’s the math: 

Mr. Money Mustache tells the shockingly simple math behind early retirement much better than I can.

Save 5% of your take home pay and you’ll need to work 66 years; save 20% and you’ll need to work 37 years; save 50% and you’ll need to work 17 years; save 70% and you’ll need to work 8.5 years.  Yep just 8.5 years.

This is a bit simplistic–but close.

I have my retirement mapped out in mind numbing detail.  And you should too.

But for the smarty pants readers of this blog, it’s not too hard, right?

But here’s what’s hard:  Continue reading “The Math Is the Easy Part”

When Should YOU Claim Social Security?

Social Security is available from the time we turn 62 years old.  But there is a penalty for taking it before our full retirement age–the payment is lowered.  And there is a benefit for taking it later than our full retirement age–the payment increases for every year we defer until age 70.  There is no reason to defer past 70.

For most of my readers, your full retirement age is 67.  For those born between 1938 and 1959, your full retirement age is between 65 and 67.  For those born before 1938, your full retirement age is 65.

Conventional wisdom says if you are in good health, you should wait until age 70 to claim Social Security because that maximizes your payment.  The payment grows 8% per year from your full retirement age until 70.  8% sounds like an amazing increase until you realize you are trading twelve months of payments for that increase.

And conventional wisdom assumes you are living paycheck to paycheck.  You get your Social Security and you spend your Social Security.

If that’s your situation, then you’ll claim it when you need it to pay your bills and put food on your table.

But I suspect many of my readers are in our situation:  We will have other resources available to pay our bills.  We will claim Social Security so we optimize our long-term finances. Continue reading “When Should YOU Claim Social Security?”

The Joy of Working . . . When Working Is a Choice

The job I retired from was with a terrific company.  I spent 17 years working with some of my best friends and even my fake kid.

Each year, the CFO would gather her leadership group–the accounting, HR and IT professionals who reported to her for a “Summit”.  A gathering to share knowledge, communicate updates and, frankly, to spend some time wining, dining and team building.  Attending these Summits was always a highlight in my year–a paid vacation with my buddies.

I retired 14 months ago.  But this year, I was asked to attend the summit.  And wait, it gets better.  I was asked to ***geek alert*** present a short class on one of my favorite subjects–Excel.

Initially, I was both terrified and thrilled.  Terrified because I HATE public speaking.  My hope was that my short speech at my retirement party would be my last.  Thrilled because it was an incredible honor to be asked to return.  I was excited to see my former colleagues and I love teaching people about Excel.  Helping people with Excel was my favorite thing about my old job.

I got over my terror by convincing myself I’d just be sitting at a table behind my laptop screen.  And I was–it didn’t end up being scary once I got started.  It helped that the room was filled with my friends.

It was really invigorating.  The group was super excited to learn new tips and make their processes more efficient.  There was more than one “wow” comment while I was presenting.  How often does that happen?!

And I was asked to stay over–in a beautiful resort and join the group for dinner and shenanigans after my session.  The shenanigans included sake bombs that sent more than one person stumbling back to their room–thankfully, not me.

Oh, and I got paid to do this!  It will help me fund my IRA this year.

I spent a ton of time preparing.  I developed an agenda that allowed both novices and experts to walk away with a couple new tips.  And being ultra prepared helped me get over my fear.  It was so worth it!

If I thought I had to take this on because I needed the money, my fear of public speaking would have been more than a bit paralyzing.  I would have resented the amount of time it took to prepare–especially because I spent way more time on this than I could bill.  Since it was a choice, I could focus on my excitement.

Not needing the money transformed the way I thought about the entire situation.

There are more benefits to being financially independent than I ever expected. 

I expected my financial independence would mean I could replace work with fun activities.  And, yes, I have.

I didn’t really think about being able to pick and choose money-making opportunities based on whether I thought they would be fun.

Last week was a perfect example.  Hanging out with my old friends, making some new friends and being able to contribute again was a rush.  Having people thank me and tell me how they would use what they learned to improve their processes was incredibly rewarding.

Oh and at least one of them wants to hire me to help them one on one.  That sounds fun, so I’ll do it!

But even before I quit my job, my financial independence paid dividends.  My boss was doing everything he could to keep me around.  This gave me a lot more control–I took advantage of it by working from our desert home as much as I felt comfortable.

So I’d say whether you want to retire early or not, save your money.  Save a lot of money.  Save as if you were pursuing financial independence.  The rewards go beyond the ability to replace work with fun–and that’s pretty awesome on its own!

Introducing the FIRE Prowess Score

Once again, I’m adding a link to a blogging chain.

The last chain was a series of articles about drawdown strategies.  A group of bloggers detailed out how they expected to support themselves when their paychecks stopped.  It was a fun exercise and it forced me to get more specific about where my money will come from in different market conditions.

The latest chain is a new way to assess our efficiency at reaching financial independence.  The FIRE (Financial Independence/Retire Early) Prowess Score was developed by JW, the 30 something behind The Green Swan, it goes like this:

FIRE Prowess Score= Change in Net Worth / Total Gross Income

His goal was to develop a measurement that worked across all income levels so geeky bloggers (watch me raise my hand!) could compare themselves on an even playing field.  The typical measurement we’ve used is savings rates.

The downfall of savings rates is that it’s easier to save 75% of your income if you make $500,000 a year than if you make $50,000 a year.  The savings rate super heroes in this space are often doctors.

I love that this is called a prowess score.  Prowess means skill or expertise in a particular field.  Yep that makes sense.  But it also means bravery or courage–and I think it truly takes some courage to rock this FIRE Prowess Score.  You have to live differently than those around you.  You have to focus your limited resources on things that matter to you and ignore the things that don’t.  That takes some courage for sure.

OK so how does it work?  Let’s say you are calculating your FIRE Prowess Score for the last 5 years:

-Add your income for those five years–I got my historic income from SSA.gov
-Take your current net worth and subtract your net worth from 5 years ago
-Divide your change in net worth into your total income
=And you have your FIRE Prowess Score

Here’s an example:

5 year increase in net worth: $100,000
/ Income 5 years @ 75,000/year = $375,000
=FIRE Prowess score of .27

JW gave us descriptions for the different score levels so we can pat ourselves on the back or berate ourselves to do better:

If over the last 5 years your FIRE Prowess is:

  • Negative or 0.0x – Not even on the path toward retirement, let alone FIRE. If you aren’t saving and investing any money and your net worth isn’t growing then it is time to make some changes and develop positive financial habits. It may be a change to a frugal lifestyle or getting an advance degree to take the next step in your career.
  • 0.0x to 0.25x – You’re conscious of your retirement and know you should plan for it, but early retirement may not be on your radar at this point.
  • .25x to 0.50x – You’ve got the ball rolling and you’re certainly trying! Keep investing wisely, perhaps add a side-hustle or few lifestyle tweaks to lower expenses and FIRE can be within your grasp.
  • .50x to 0.75x – You’re working hard toward your retirement goals! Early retirement is definitely possible. Keep working hard and that investment snowball will be rolling (compounding) in no time!
  • .75x to 1.0x – FIRE is on your mind and you are performing in overdrive right now!
  • 1.0x and over – You are killing it! Don’t make any stupid mistakes and FIRE will be within your grasp in no time. In this scenario, your net worth is more than your lifetime earnings which Joe at Retire By 40 recently wrote about. This is certainly a tough milestone to reach, but maybe one day I can make this claim!

OK so drum roll please . . . here are my scores:

2016:  2.79 off the charts!
5 Years 2012-2016:  1.34  I’m killing it!
10 Years 2007-2016:  .89  not too shabby!
Post College:  .72  it took me some time to get this FIRE thing going.
Worst Year:  -1.34 in 2008 when my net worth shrunk 16%

How did I rock it so much in 2016 you may ask?  I quit my freaking job!  I had a full year of growth in net worth against a bit more than half a year of income.  We may need to come up with a different scoring system for those at the end of their accumulation phase (that’s just a nice way to say older folks).

As long as the stock market cooperates, I’m really going to rock it this year.  My net worth continues to grow and my income is almost non existent.  So far my FIRE Prowess Score is 20.97 for 2017.  Oh shucks, JW said this score doesn’t work for folks who aren’t working . . .

I think JW’s descriptions are spot on.  I would say over my lifetime I’ve been focused on saving for retirement but I didn’t put my savings into overdrive until my last 10 working years.  I also made some investing mistakes early on–thinking I was some sort of Warrenita Buffett rather than just shoveling money into a S&P 500 index fund.

Check out the other bloggers’ scores in the chain:

Calculate your FIRE Prowess Score whether you’re pursuing early retirement or not.

What can you do to improve it?  Save more of your income and invest it smarter–show your prowess!

Your Retirement Questions Answered

When people find out I write a financial independence/early retirement blog, they sometimes take a breath and start peppering me with questions.  I thought it may be helpful to y’all if I answer the questions I get asked most often.

How much should I contribute to my retirement?

If you want to retire at a typical age then 15% of your gross salary before taxes and benefits.  This 15% can include your company match.

At my last job, the company matched 25% of my contributions up to 6% of my salary so that worked out to a 1.5% total match.  If I wanted to retire around my full retirement age for Social Security, then I should have contributed 13.5% of my money.

If you want to retire early, you should be contributing 15% to your retirement and saving outside of your retirement accounts as well.  How much depends on your expenses and risk profile.  Run a few calculators, or build a spreadsheet and figure it out.  Here’s a calculator from Vanguard.

What if I started late or don’t have much saved now? Continue reading “Your Retirement Questions Answered”

How I’ll Fund My Retirement

Many of the financial bloggers I follow are pursuing financial independence.  Not many of them are already there.  So there isn’t much information about how to fund your life once you are retired.

My fellow blogger, Fritz, at RetirementManifesto decided to correct that by creating a chain of articles discussing drawdown strategies.

I decided to join in the fun and lay out my draw down strategy.

I don’t have a pension.  I am counting on Social Security though I’ve reduced my expected payments by 30% because something has to change with Social Security, right?  At 52, with a husband in his 60’s (sorry Mr. Ms. Liz!) I feel secure in counting on this.

Curious about how I got here?  Here’s my savings rate and net worth growth.

First, a couple snapshots on where I am now.  I’m following Fritz’s lead on format. Continue reading “How I’ll Fund My Retirement”

How Much Is Enough?

When you get to your 50’s and 60’s, thoughts turn to retirement.

Since we’re among the first of our friends to take the leap, we’re having a bunch of fun conversations.  Friends are trying to figure out when they can join us.

Mr. Ms. Liz tells them to do it sooner than later.

My friends think I’m crazy but one of the big reasons I retired early is that Mr. Ms. Liz’s Mom died at 64.  Mr. Ms. Liz just turned 61.

If he were to follow in his Mom’s footsteps, we have three more years.  There are a slew of reasons why this won’t happen (smoker, non-exerciser, poor eater etc.) but it was on my mind.  If we have three more years, I want them to be three years focused on FUN, not three years focused on work.  And we were ready–financially and emotionally.

You don’t know how many good years you have left.  We know few people who have a great quality of life after 75.  So we say make it happen sooner if you can. Continue reading “How Much Is Enough?”

Save To Retire Early Even If You Won’t

I listened to a good bit of the James Comey hearing last week.  I don’t follow politics closely but Mr. Ms. Liz does so it was on the TV while I was working.

I kept wondering–does he have F U money?

We haven’t talked about F U money before because I find it to be a bit vulgar and I know some of my readers are sensitive to such things.  But I haven’t found a better way to express this concept.

Jim Collins, one of my personal finance heroes, coined the term.  If you haven’t read his stock series yet, do it right after you finish this insightful post :).

Does James Comey have enough money to move on to something else without worrying about how he will keep his family afloat during the interim?  He’s 56, could he retire? Continue reading “Save To Retire Early Even If You Won’t”

Reflections On My First Year of Retirement

I’ve been retired a year–it’s crazy how fast it has gone!  It makes me better understand a line Gretchen Rubin often quotes “The days are long but the years are short”.

I hope you’re not disappointed but I’m not issuing a report card like I did for my first four months of retirement.

Mainly because my grade would go down and I’m a gold star junkie.

Not because I’m not loving this retirement thing but because retirement has turned into more of a vacation than something I can grade myself on.

I feel like this first year has been a detox.

I’ve allowed myself to be far less productive than I expected I would. Continue reading “Reflections On My First Year of Retirement”

What Could You Do With A Million Dollars?

On the Stacking Benjamins Podcast I was listening to today, Joe was talking about the responses he received when he asked his Twitter followers what they would do with a million dollars.

He got some interesting responses.  Some were altruistic–donating the money or helping family members.  Some were realistic–like paying off debt.  And some were funny–like calculating the time it would take to count the money at the bank–in twenties.

It got me thinking.  What could each of us do with a million dollars?

I’m overly rational so I got out the calculator.  $1,000,000 invested should provide $40,000 of retirement income forever.  With Social Security providing 40% of our needs (as it does for the average recipient), we should have a stream of income of about $67,000 in retirement.  I could live a pretty nice life on $67,000.

That $1,000,000 invested in rental real estate should provide even more income.  According to Paula at affordanything.com, we shouldn’t invest in a property unless it will rent for 12% of the purchase costs per year, 6% of that goes to costs and that leaves 6% return for us.  Our retiree now has an annual stream of income of $100,000 including Social Security.

Now we’re talkin’!  With that income, we could do some really cool altruistic stuff too! Continue reading “What Could You Do With A Million Dollars?”