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Calculate How Much Money You Need to Retire: How Safe is the 4% Withdrawal Rule

For years, my husband and I didn’t know how much money we would need to retire (you can read about our financial journey in an earlier article I wrote by clicking here). We had our guesses, with numbers anywhere between $3 million to $5 million dollars. Our logic was that by the time we’re ready to retire, our primary residence home would worth $1 million dollars (all in equity). We would also have $2 million or so dollars invested in the stock market and the dividends and interest yields from these investments would be enough to cover our annual expenses.

In that article, I also mentioned about having learned about the financial independence movement in the middle of 2016. Since then, my husband and I’ve decided that we would reach financial independence once our net worth meets 33X our annual expenses. However, in that article, I didn’t mention how we came up with the number, 33 or why we chose this particular number.

In this article, I’m sharing with you the 4% safe withdrawal rule (SWR) and what this number means for my family’s situation. In the past several months, I’ve read many written documents on the 4% SWR (some of them were more technical than others). It took me a while to understand the different strategies behind this financial planning tool. Feel free to ask me questions on the comment section below and I’ll try my best to respond and/or refer you to further readings.

The Origin of the 4% Safe Withdrawal Rule

After you’ve spent years saving toward retirement, how do you know how much money you can safely withdraw annually so that you will not outlive your money?

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Financial Independence, Financial Journey, Financial Planning, Lifestyle, Money Habits, Money Psychology, Purchase Decisions

Three Ways to Enjoy Today While Building and Maintaining a High Savings Rate

On the Path to Financial Independence

As you work toward your financial goals, does it sometimes seem like you’re sacrificing too much today just so you can have a better life tomorrow?

If that’s the case for you, you might be having mixed feelings. I know I’m too familiar with these feelings. A bunch of high days were mixed in with a bunch of low days. There were times when I wished my days away as I eagerly waited to taste the life of having reached millionaire status. During those periods of time, I was not living in or enjoying the present moment. I did not want to spend any money other than the absolute necessary. All I focused on was reaching the million-dollars goal. In that process, I neglected myself in many ways. I went through emotional struggles and have shed lots of tears.

high savings rate

The path to financial independence is not an easy one. There’s no shortcut. Even those who are very disciplined and hardcore (with high savings rates) still take anywhere from 7 to 20 years to get there.

For some of us, we’re okay taking our time. A 20-year horizon is not so bad. For some of us, even a two-year time frame is almost unbearable (and each of us have our own reasons). If you’re in the latter group, sometimes, it’s easy to get into the danger zone of depriving ourselves when we think we’re only being frugal (the gray area between being frugal and feeling self-deprived can be blurry).

When prolonged self-deprivation is left unnoticed, we could be putting our health and our financial plans in jeopardy. Not only is self-deprivation unhealthy, this behavior can lead to the resentment of oneself and others who are in the same team as you (such as your spouse and/or children).

Recently, I caught myself going down the self-deprivation slope. My emotions were strong. In this article, I’m sharing my story. I also recommend three ways for you to stay on course to reach your savings goal without going into self-deprivation mode.

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Financial Independence Thinking, Financial Journey, Financial Planning, Girlfriend to Girlfriend Money Chat, Lifestyle, Marriage and Money, Money Habits, Money Psychology, Retirement Planning

Connection Between Savings Rates and Years to Reaching Financial Independence

savings rate

In this post I discuss the connection between savings rates and years to achieving financial independence. I use my family’s financial situation as an example to illustrate this powerful connection. By the end of having read this post (and the previous one), I hope you’ll be inspired by our story and begin to adopt a similar mindset (a.k.a. financial independence thinking). This post is a follow up on a previous conversation, Create and Live by Your Own Financial Rules. If you haven’t read the post, I recommend reading it first to get a better idea of what I’m about to share here.

Update:

I shared few more financial numbers since I published this article. The first one is on applying the 4% withdrawal rule and the second one is on our estimated (updated) annual expenses.

Saving Aggressively Toward a Financial Goal without Having a Financial Plan

It wasn’t until the middle of 2016 that my husband and I became aware of the financial independence movement. Knowing what we know now, we both have been living our lives by that camp of thought; we just didn’t know.

Very early on in our marriage (we got married in 2010) we casually discussed about early retirement, but we didn’t have a concrete financial plan. We didn’t have a budget or track our expenses. However, we were tracking our net worth.

In some ways we were big spenders. We dined at $$ restaurants every weekend and took five to six weeks of vacations each year (including trips to Western Europe). We also spent a lot of money on groceries. We tried to eat organic food whenever possible (this has been a high priority in our household since year 2011).

In other ways, we were extremely frugal. We made our lunches during the week. We did price comparisons when we shopped. In 2009, I was driving a 1985 Honda Civic. My husband was driving the same model that was made in 1995. We didn’t care for having the latest gadgets. My husband didn’t have a phone data plan until year 2013! I got mine in December 2012.

On average, we saved 60 to 70 percent of our net income. Our financial goal has always been to retire early and travel around the world. However, we didn’t know how much money we would need. We also didn’t bother with doing the math. Somehow, we knew we would just get there, way before we turn 65. We knew about passive income but we weren’t maximizing our investment potentials. We felt like we had a lot of time allowing our net worth to grow organically (with some, but not much efforts).

From year 2008 to 2011, our combined income was under $110,000. While my graduate fellowship covered my tuition and other educational expenses and provided health insurance coverage, the stipend was just enough to pay for basic living expenses. It was only in 2012 that I started contributing to our retirement savings. That was also around the time when we moved to San Francisco. While our combined incomes jumped, our expenses also went up.

One day in year 2013, my husband and I resumed our early retirement talk. We projected we would be able to reach our financial independence number and retire from our day jobs in our early 50s. But, there was still no concrete plan. In year 2014, we changed our retirement target age to mid-40s. We realized that if we would to work until our early 50s we might not be dipping into our retirement savings at all. We would have worked for too long! With that realization, we said to each other, “Why not stop working earlier?” At the time we thought we would need about $3 to $4 million in net worth in order to retire early (living in San Francisco inflated our $ target). But really, that was just a random number we came up with. Forwarded to year 2015, we still didn’t have a concrete financial plan to reach our financial goal. We just continued to save aggressively and kept seeing our net worth go up.

We Found Our Roadmap to Early Retirement

Then, around middle of 2016 we learned about the financial independence online community and we became enlightened. For the first time we felt like we’ve found the roadmap to early retirement! Ever since then, we’ve spent hours calculating our numbers, reallocating and rebalancing our investment portfolio, optimizing our lifestyle and started talking in details about life during early retirement. I will talk more about this roadmap in a future post.

Our financial independence (FI) goal is to save 33X our annual expenses. Our current monthly expenses are about $5,000. About 35% of that goes to childcare. It’s a big splurge for us, but totally worth the money. We value being able to go the gym together every Sunday morning and going out for jogs few evenings throughout the week. We value not having to wake up in the early morning and having to get our daughter out the door to go to daycare. She’s usually still asleep when we leave for work. Nowadays, with the higher cost of living and raising a child, we’re saving about 50% of our net income.

Once we leave our 9-5 jobs, we will no longer be paying for child care. This would drastically drop our annual expenses down to $50,000 or less. Through the financial independence community, we learned that if we choose to live the lifestyle similar to many of the early retirees we will reach financial independence while in our early 30s (this is our average age; my husband is 5 years older than I am). If we want to continue living our current lifestyle into early retirement, then we’re looking at doing that while in our mid 30s (before year 2020). After some number crunches on the calculator, we should be able to reach our financial independence number by year 2018.

I encourage you to read Mr. MM’s article on the math behind early retirement. At our savings rate of 50 to 70% over the last 8 years, the math says that it would take us about 12 years (I took the average) to become financial independent. However, the number of years is less for us. My husband started saving and investing years before we met.

Some Final Thoughts

For years, my husband and I knew that early retirement is possible for us, but we didn’t know how to get there or when we would reach that point. And if we would to arrive, what it would take so that we can stay there? All these questions and more became clear to us once we started reading about some of the stories of early retirees.

It’s important to keep in mind that the financial independence community only provided my husband and I with the last piece of the roadmap helping us plan for early retirement. If we had not been saving aggressively in the past 8 years, we would be nowhere close to achieving FI.

Yes, adopting this community’s mindset toward living one’s life does give you an advantage as a starting point. At the same time, you need to do the homework and put in the effort, too. My husband and I have been doing this for the last eight years. I’m sure if you ask any early retirees who are self-made millionaires, they’d tell you that they did not reach FI by being average or using shortcuts.

As I stated in the previous post, if you are thinking about pursuing financial independence, you need to adopt radical ways of thinking, and live your life accordingly. Don’t just blindly follow the shortcuts just because they are easy. Always do your research, do your math and get into the habit asking yourself, “How can I do better?”. Come up with your own set of financial rules that work for your situation and make sure those rules align with your short- and long-term financial goals and values. Be open to revising the rules once you find them too comfortable. Be radical with your way of thinking (not just in money terms, but your values, too), your creativity and money strategies (e.g., How are you managing your money? How can you do a little better?). You don’t have to follow the conventional path if being average is not what you want.

Readers, prior to having read this post (and my previous one), were you aware of the connection between savings rates and years to reaching financial independence?

How do you approach your savings rate? Do you have to work hard at meeting that goal?

What do you think about Mr. MM’s math concepts behind early retirement? I would love to hear from you at the comment section below.

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Financial Empowerment, Financial Journey, Financial Planning, Girlfriend to Girlfriend Money Chat, Lifestyle, Marriage and Money, Money Habits, Money Psychology, Personal Finance, Women and Financial Literacy

A Woman’s Financial Responsibilities in Her Household: Part I

In Part I of A Woman’s Financial Responsibilities in Her Household, I discuss some gender generalizations regarding how money responsibilities are handled in a typical household and share with you some introspection regarding my situation during the earlier years of my marriage.

There are many aspects to personal finance and financial planning, ranging from budgeting, paying for a vacation, purchasing a home, purchasing insurances, retirement planning and estate planning. This is important to keep in mind as we discuss household financial responsibilities.

Women and Financial Responsibilities

Gender Generalizations

In most households, the typical stereotype type is that the wife is responsible for balancing the checkbook (e.g., managing the day-to-day budget) while the husband attends to bigger picture financial planning (e.g., purchasing insurances, tax planning and investing retirement funds).

Certainly, there are households where the wife doesn’t participate much in or any part of the family’s financial responsibilities. This was illustrated in a 2013 Fidelity Investments Couples Retirement Study, where two in ten women admitted to having only some or no input into the day-to-day financial decisions in their households. Then, there are households where the wife is the CFO. And in between, there are households where both the wife and husband participate equally in every aspect of the family’s financial situations.

In general, though, women still view managing and balancing the family’s checkbook and budget as a woman’s role. These women believe such responsibilities are traditionally deemed more feminine. Husbands, on the other hand, are more suited to attending to the bigger picture household financial planning, as they are being seen more technical savvy and/or have a higher risk tolerance personality.

This gender generalization around household money management is evident in the 2014-2015 Prudential study on Financial Experience & Behaviors Among Women. The study reported that women respondents ranked themselves highest on their knowledge of managing debt and managing money (about 30% gave themselves an “A”) and lowest on their knowledge about generating an income stream in retirement and investing (less than 10% gave themselves an “A” and many gave themselves “F”). Such findings certainly give some insights into what women in general value and do well at when it comes to financial responsibilities in the household.

Many of my married girlfriends recalled their mothers taking care of the family’s basic day-to-day budget. Once married, my girlfriends just automatically followed their mothers’ footstep when it came to managing finances in their own households. Yet, when it came to their household’s bigger picture financial planning, many of my girlfriends didn’t have much of a clue.

For instance, some didn’t know all the various liabilities they have, some didn’t know all the different retirement accounts their husbands have, some didn’t know if their husbands received stock options as part of the compensation package, some didn’t know how much their husbands were putting into their deferred tax accounts, some didn’t know what their car and/or home insurances covered (or would not cover), some didn’t know if their husbands had disability insurance, some didn’t know how many brokerage accounts they had, many didn’t know what universal liability insurance is, and the list went on and on. Their husbands were taking care of those responsibilities and didn’t always involve their wives in the process, either consciously or subconsciously.

Throughout those conversations and discoveries many of my girlfriends expressed a lack of time to spend on long-term financial planning. I could relate in many ways. Like my girlfriends, I was happy filling my day with work, childcare, household chores and exercises. I enjoyed spending time planning social events for myself and my family. I took pride in doing interior decorating, planning for holiday gatherings and shopping for the lowest bargains (extremely time consuming).

When would I have had the time to learn about investing in the stock market, keep track of my family’s investment portfolio performance, peruse through the IRS website to reduce family income tax, learn to calculate how much life and/or disability insurance my family needs, or work on estate planning with my husband?

I’m sure if my life situation forced me to I would have done all that and perhaps more, however, my husband was taking care of all those financial responsibilities so that I didn’t have to. We were each great and efficient at what we “owned”. That was the whole idea behind the concept, division of labor, right? At least I thought so.

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