4 Reasons Why You Are the 4% Rule X-Factor (and how my plans have changed)
My blog is a part of this movement called Financial Independence / Retire Early also known as FIRE. The whole idea of this movement is to have some source of income coming in that can be sustained and support your spending and allow you to either stop working or at least stop working just because that job is a financial necessity.
Suze Orman is NOT a fan of the FIRE movement but she is also used to taking phone calls from people drowning in debt who are asking permission for a third boat. My guess is she hasn’t had much exposure to people with the FIRE discipline and falls into the trap of comparing us to the crowd.
Don’t fall into Suze’s trap
You are not the crowd
You are an X-factor
My Completely Non-Scientific Opinion..
To reach financial independence you need cash flowing from some source. This source is usually either a giant nest egg of investments, real estate, or a business that you’ve started. My completely non-scientific opinion is that 90% of FIRE conversations revolve around how much is enough.
The biggest cornerstone in that conversation is a study that was done in 1998 called the Trinity Study. This study is referenced often when discussing when enough is enough and you’re actually financially independent.
Oh the Pessimistic Internet
The Trinity study came to the conclusion that you were financially independent (FI) when 4% of your nest egg was equal to your expenses. The validity of the study and all of the math and economics behind this number is way too much to dig through in this post. There’s a lot of scrutiny about this post. Just try googling “Why the 4% rule is safe”.
You’ll be fine!
Spoiler Alert: people don’t actually think it’s safe. There are actually blogs that use 28 or so posts just to explain why it isn’t valid. Big Ern makes some very interesting points and if you’re super into the math behind retirement you’ll probably enjoy this series.
What I want to do instead is explain why you are the X-factor that makes the details and the flaws irrelevant. Why you are more than equipped to hit the eject button on corporate America when you hit your 4% number.
Reason 1: You Didn’t Accidentally Become FI
Becoming financially independent for most people takes real concentration and planning. While some very high income earners may stumble into this lifestyle, it generally takes a special breed of person to live so opposed to the general public.
You are resourceful. You are the type person who snuck tiny bottles of alcohol to the bar with you, signed up for an email list while checking out for a discount, and had no shame ordering off the dollar menu. You rode your bike to work, packed your lunch for work, and did so with ease.
This is important to keep in mind because you can’t control the markets, inflation, healthcare or education costs, but what you can control completely is your actions.
If faced with adversity in Early Retirement, you will find a source of income or optimize a little more. You worked this hard to get here so why would you all of a sudden stop working hard to stay here?
Reason 2: You Are Not A Robot
The 4% rule is based around the notion that you will always spend 4% of your initial nest egg. Not more and not less. So for $1M, this would be $40,000 per year. If I ever read a blog where someone showed me they were spending exactly $40,000 per year, I’d know they were lying. Just like the markets, your expenses will have ups and downs. This isn’t necessarily a bad thing though.
Instead of taking a blanket 4% approach, you can recalculate what you allow yourself to spend every year. Some of these flexible options might include:
Cap spending to 4% of your original nest egg or 4% of its current value whichever is lower
Lower your rate to 3% during recession years
Take up side hustles during downturns that outlast your cash cushion
What you don’t have to do is lock in 4% and watch everything crash and burn. If it turns out that you were too optimistic…Adapt!
Reason 3: You Understand The Value of Money
You probably didn’t achieve FI or stop pursing FI/RE because you wanted to be some rich and extravagant person. You simply knew that wealth was a necessary evil into providing for you and your family at a young age and allowing you to focus your energy on what was really important in life. You won’t be scared to move into a tiny home because you understand what actually makes a home.
Side note: I’ve been wanting to build one of these shipping container homes so bad, so if you want to try and build one let me know!
You know that the people in your life and the experiences you have together are all that really matters. Those come with very little cost when you cut out the noise, so you’re more than prepared to buckle down to 3% if you are required. It’ll just be your next challenge and you’ll actually find fulfillment out of it.
Reason 4: You Won’t Forget How to Make Money
This reason is so obvious but the most overlooked. Do you think that all of a sudden after 25-40 years of life on earth that you’ll suddenly forget how to make some money? I’m not saying you’ll find yourself needing to jump back in the cubicle but you’ve always found value and that won’t stop just because you quit the traditional workforce.
You’ll start writing about your journey and stumble into some money. You’ll sell firewood at the campground you’ve parked your RV in exchange for a free spot. You know how I mentioned you would probably lower your expenses before you watched your nest egg crash and burn? Well my guess is you could suck it up and walk some dogs or drive an Uber too.
Even those options are belittling the amazing skills you certainly possess if you’re even considering retiring early. Luckily for us, there are always people out there ready to spend money, so when the time comes, you’ll know how to get it from them. Writing about side hustles is literally a side hustle. INCEPTION!
Easy for Me to Say
If I feel so strongly about this, then what am I going to do about it? I’ve become more and more certain of the things on this list over the past couple months and I’ve decided to completely change my goals. For the longest time, I had my age set at 43 with a number that was overkill.
Now, I’m cutting that age back to 33 where I plan to hit my “lean” FIRE number. This basically means having enough coming in to live a fairly decent lifestyle but still requiring a hefty dose of frugality and not a lot of wiggle room. But I plan to couple that with work I can do remotely.
Over the next five years I plan to build skills that make me marketable in a career that I can telework to and that doesn’t require 40 hour per week time commitments. I plan on living even cheaper than I do now. Heck I plan on living in a van all over the country for a year. I’m realizing that 43 was a safe goal and not a dream.
Dreams give us drive and passion, that’s what 33 gives me
I also know that a dream is just a thought without action and a little math. When I couple the math with the reasons I’ve listed here, I’ve decided to be more aggressive and really push my limits on the way to FIRE. After all, we ourselves are the X in this financial equation, and that X has a lot of potential.