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Personal Finance FAQ

Do Not Shortcut Your Retirement Planning Efforts

When it comes to success, there are no shortcuts.
–Bo Bennett

I recently read an article extolling how easy it was to get started on the journey to financial independence.

I’m sure the author is a good person and well meaning. He seems to be smart and motivated, having earned a CPA in 2018.

Some of the advice is good, such as answering the question why about your financial goals and looking to reduce your unnecessary spending to tighten your budget.

However, some of it was quite short-sighted.

The crux of the article was “take your current spending, multiply by 25, and voila! There’s your target!”

It’d be AWESOME if we could rely on rules of thumb to retire, but we can’t.

Why Do We Need to Dig Deeper When Planning for Financial Independence and Retirement?

If the world were a static place (which, as I’m writing this, it kind of is, due to coronavirus), then that advice might get you close, but, it isn’t, and that advice doesn’t.

Your Expenses Will Change Over Time

Unless you have a manic obsession on cost-cutting and cost management, chances are that, over time, you’re going to hop on the hedonic treadmill at some point in your life. You may have a kid. You may need to add more space.

Even if you do manage to control all of your spending, there’s one ineluctable expense that will go up as you age: healthcare. It could be health care when you’re younger. It could be long-term care when you’re older. It could be a health shock.

No matter how much you fight it, that balloon is going to keep expanding. If you simply assume that your current spending will hold on pace with inflation for the rest of your life, then you’re going to find your budget getting tighter and tighter as you age.

The 25x Rule is for 30 Years of Retirement

The author of this article talks about early retirement, so while the article was about financial independence, financial independence is the ability to not need to work for money for the rest of your life.

Therefore, if you’re going to retire early, then the 4% safe withdrawal rate rule (the inverse of 25x your expenses) is unsufficient for you to achieve FIRE. It is too high. If you try to have a 50 year retirement with a 4% safe withdrawal rate, using the same methodology of the Trinity study used to generate the 4% rule, you have a pretty high chance of running out of money before that 50 year time period ends.

How Does Social Security Play Into Your Plan?

The earlier you retire, the less Social Security that you’re going to have earned for later down the road.

That much is self-obvious.

However, do you know how Social Security will plan into your income planning strategy when you are retired, how much you will earn, when to claim it, and how to manage asset location to minimze the impact of Social Security payments on your taxes (because the marginal increase is currently big)?

Let me be clear. The aforementioned article is a great starter point. If you can get to a point somewhere down the road where you’ve saved up 25x times your current spending, you’re going to be better off than 80% of your peers, and you’ll be well on the road to retirement, whether it’s a traditional retirement in your 60s or FIRE – financial independence, retire early.

Also, financial planning is not rocket science. Most of the coursework for my CFP had to do with esoteric, advanced concepts. Most of you will never need to know or care about Crummey provisions, CLATs, or top hat compensation plans.

However, do yourself a favor and don’t engage in willful blindness and convince yourself that all you need is 4 simple rules on an index card, and you’re set forever and ever, amen.

These are decisions that affect the rest of your life. They deserve a little more attention from you than planning your next vacation.

By Jason Hull, CFP®

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

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