Talking and thinking about money and personal finance is great, but every good journey or story needs a destination or purpose. The boring term is called creating goals. We’ve all heard of the old guy who worked hard his whole life and saved every penny with a tight fist who then dies alone without any heirs with millions of dollars in the bank. The old guy practiced great personal financial habits, but his money didn’t take him anywhere. He didn’t have a financial destination he was aiming towards in his life beyond hoarding heaps of money.
A similarly tragic yet unfortunately more common story are those who have poor financial habits AND no financial destination or purpose. The more common story is the couple who reaches 65 or 70 and realizes they can’t retire because they never had a clear financial goal. They have to continue working even if part-time just to afford living expenses due to financial blunders and poor financial purpose in their younger years. Most of us don’t want a similar story for our lives, so we create goals and strive towards a destination.
Retirement seems to be a theme at my work lately as several of my coworkers are retiring after a full 25-30 year healthcare career. As we were reflecting upon retirement, my coworkers were telling me about the former PACU charge RN who had retired a couple years ago. He had worked many extra shifts and poured a lot into his career in the PACU. After 30+ years in healthcare, he decided he could retire. A couple years later, he had a heart attack and passed away. This story is tragic but it further cements in my mind the imperative of striving to reach financial independence or retirement earlier than 65 years old.
Financial Goals Emerge from Life Purpose
Your own financial destination should start first with thinking about your own life purpose. You might not know what that is yet and that’s okay. Everyone ought to develop their own life purpose. This is what you want your life to be about until your last breath. I don’t think most of us want our life’s purpose to be about money, but money can be a tool to help reach whatever your purpose might be.
Maybe your goal is not financial independence, but just financial stability or developing good money habits. Thinking at least a little about your life’s purpose will help clarify what financial destination you want to reach. I find my own life’s purpose in my spiritual beliefs and community that I’m involved with. Also I highly value relationships especially with my family and also value the outdoors and travel. Your values and purpose might be something else and that’s okay. The point is to think about it.
From my values and life purpose, my financial goals emerged. My primary financial goal is to become financially independent/retire in 10-15 years. I don’t like the term retire because it conjures up images of sitting in a rocking chair or going on an endless string of cruises. Also I think of a retired person as someone who does not work or is not productive. I plan on staying productive even after I “retire” in 10-15 years. I like the term financial independence because it means I don’t HAVE to work, but rather I can CHOSE to focus my creativity and productivity elsewhere.
Rule of 25
10-15 years is a realistic time frame for us to achieve financial independence. It’s not difficult to figure out your own time frame if you are tracking your expenses.
First, you figure out how much money you need to consider yourself financially independent. In order to do that, you take your yearly expenses and multiply that by 25 also known as the “Rule of 25” as it is known in the financial independence retire early (FIRE) community.
The idea is that you need to save 25x your yearly expenses before you can reasonably quit your job and consider yourself financially independent. The reasoning roughly goes that you can safely use 4% or 1/25th of your invested savings every year without running out of money indefinitely IF your invested money grows by 4% or more each year. 4% growth of invested money is a conservative estimate as the average annual growth of invested money is 6-9% over several years depending on your source. In reality during some years, your investments might grow 25% and during other years your investments might grow only 1% or even shrink by 15%, but the average over several years is a growth of 6-9%.
For our financial situation, I figured we would need $60,000 per year for expenses. I had to go through a couple years of our tracked expenses to come up with this amount. $60k is a generous amount as we could probably do okay with far less. Nevertheless, $60k will give us a comfortable lifestyle that aligns with our life goals. We live in a high cost of living area meaning we pay more for most stuff especially housing.
We love the area we live in, and we have decided that financial independence will not restrict our choice of geography. When I did travel nursing, I got to live in several areas and concluded that location matters greatly to me. This choice had to be included in the $60k. $60,000 x 25 = $1,500,000. We need $1.5 million before we can consider ourselves financially independent. This seems like a tremendous amount.
Crunching the Numbers
Second, you have to figure out how long it will take to reasonably reach your financial destination. I recommend using the Networthify calculator. Enter your annual expenses and how much you make. It will assume the difference is being saved. Also enter 6-9% for the annual rate of return. Push the “Crunch the Numbers” button and you should get how long it will take before you are financially independent or can safely retire.
I estimate we will make approximately $140,000 between my spouse and I annually. This factors in her working part-time rather than full-time as she is currently doing. With 60k annual expenses this means we will save 80k per year. I estimated the annual average return on investments will be 6%. Since we already have over 100k in savings and investments, this puts us at financial independence in 11 years.
Unfortunately, our financial situation is a little more complex than the ideal scenario above. First, this does not include taxes. The government will probably take $20k of $140k, leaving us with $120k and a savings rate of 50% per year or $60k savings per year. Second, I also have almost $48,000 in student loans. I would like to pay off my $48k of student loans in the next year. Third, we would also like to buy a home in the next 5 years. I estimate we will need close to $100k for a 20% downpayment in the real estate market we live in. Fourth, we also are considering IVF treatments which would probably cost $20k-$40k.
Our gross income the 1st year would probably actually be closer to $180k since my wife will be working full-time for the foreseeable future. After taxes, this would leave us with $150k. Paying off the $48k of student loans would mean we would add $42,000 of savings to our initial $100k of investments in our 1st year. We would then set aside $24k per year for 4 years for a downpayment for a total of $96k.
With $120k after tax, we would be saving only $36k per year for 4 years. After 5 years, we would have saved a total of $286k towards the $1.5m for financial independence. After 5 years, our saving rate will probably be closer to the 60k or 50% per year which would allow us to retire in 11 years or in 16 years starting from 2019. This is assuming some very conservative estimates including an average annual return of 6%, a nice buffer built in our $60k of annual expenses, and a conservative estimate of our annual earnings. I think financial independence in 10-15 years is a very realistic and reasonable financial destination for us.
UPDATES: May 2020 FI Progress Update