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Smart FI Sprint Podcast EP 003: Financial Independence Milestones & Intro to Stock Market Financial Independence

in Investing, Podcast, Stocks

Today we’re going to discuss how to gauge your progress towards reaching your financial independence. It’s actually a lot easier than it sounds! I’ve also decided to dive a little into the stock market and reaching financial freedom. Plus some neat tools to help you plan on how to get there, whether you’re there in five years or thirty.

  •  Update
    • A special episode from the house of That Learning Guy’s parents!
      • Got the mic, the boom arm, the box here for the show.
      •  Report
        • I’ve added a new place for expense reports, or how my budget is setup and how we are spending our money.
        •  Another step towards being transparent with the financial life and how I am progressing towards my financial independence
        • The Monthly Challenge!
          • Started up the monthly challenge to help us save up and clean house around here!
          • It is especially helpful in the case where we spend a little too much in a separate category. It’ll help keep us within our total spending budget, and who knows? Maybe it’ll create some new positive spending habits!
          • Got a raise!
            • I am now making $63.8k/year now, up from $62k, or a 2.9% increase – the highest they could give in the six month beginning period.
            • In addition to this, my quarterly bonuses and profit-sharing will go up since they are percentage based on my income
            • Not to brag, but my work was also acknowledged as being of superior quality
              • It’s always nice to have your hard work validated and recognized
            • I’ll have another review in December/January, so hopefully I can jack the income up a bit more at that point!
            • Again, increasing your income as quickly as possible is a huge aspect of hitting your financial independence as early as possible.
        • Earned my first ever advertisement revenue.
          • I don’t know if you saw or not, but I’ve added a couple of Google Adsense advertisements to the website for some extra income, and to experiment with how advertisements work on a website.
          • I’ve earned 5 cents so far (see picture). I know it isn’t very much, but it is the first passive income I’ve ever earned, so I would chalk it up as a big milestone for me!
          • Going to get new video recording and editing software at some point in the near future
            • This way I can begin creating tutorials and videos for various financial tools and instruments like the financial calculators I go into below
            • Hopefully this can take off sooner rather than later so I can get the videos out there to help as many people as possible!
            • I’ll also start putting videos out of my general podcasting sessions as well.
A few weeks of advertisement revenue. Not too shabby right?

A few weeks of advertisement revenue. Not too shabby right?

  •  Main Content
    • Today we are going to discuss Financial Independence Milestones, or how you know you can gauge your progress towards financial independence, in addition to going into a little more detail about the first and most used method of reaching financial independence, investing in the stock market!
    • As a refresher, I stated in episode one, financial independence is when you have sufficient personal wealth to live, without having to work actively for basic necessities, or where your income from your assets is greater than your expenses.
    • Financial Milestones/Gauging Progress
      • So, you need to try and gauge realistic spending in your early retirement/financial independence
        • This is where the budget comes in
        • Are you going to be spending the same amount as you do now for the rest of your life? What is a realistic expectation? Are you going to have kids? What are you going to do about college? Do you have your house paid off? What about when you do? Are you going to be earn any extra income in your financial independence?
          • If you haven’t realized, this is no small feat. There is a lot to consider when you think about the big picture
          • If you retire/reach financial independence really early, like 30 or 35, then will you be able to remain financially independent for the rest of your life? It all depends
        • You can look at it like this:
          • Let’s say you know you will spend a maximum of $200/year on clothes for the rest of your life, even with children
          • So, once your investments are returning/accruing over $200/year, your yearly clothing amount is covered for the rest of your life
          • See what happened there? If your dividends/increase in value is over $200/year, your clothing is paid for, no worries
          • You can do this for any item in your budget. Car maintenance. Power Bill. You name it. Once you’ve met your budget through your investments for that particular item that will put you one step closer to your financial independence!
          • You can look at these milestones and get some motivation out of them, that you are growing one step closer to your financial freedom!
        • Investing in the Stock Market for FI
          • This is the route a majority of people take to reach FI, and there are multiple reasons for that:
            • It is the most passive method of reaching/maintaining FIRE
              • Little work has to go in to it, a lot of the time, you can, and should, set it and be able to forget about it
              • Lumped in with the above, it is simple and straight forward
              • It is also the most well-known, and arguably the most well researched, which is the reason for the existence of the following calculators to help you figure out where you need to be!
            • So, since we’re talking about the stock market and FI, I need to bring up the religious text of financial independence here.
              • It is called the Trinity Study
                • It was an influential study/paper which came out in 1998 from Trinity University.
                • It is influential because it is one of the biggest papers to try and determine what a “safe” withdrawal rate is considered for retirement portfolios that contain stocks
                • The rate they state is 4%, which is 4% every year, adjusted for the consumer price index or CPI, to keep up with the cost of living
                  • So, let’s say you know you’re going to spend $35k/year, that would mean your nest egg, would need to be $875,000 to prevent from dipping into the contributions
                  • However, the rate they use is 4% regardless of the stock market performance, meaning you may lose out on contributions and the total value of the portfolio could shrink, like during a recession
                  • This is one reason why you don’t just want to blindly follow a 4% withdrawal rate, you may need to shrink that during bad economic times to 3, or maybe even 2%
                • The study assumes someone will withdraw for 30 years, and will need their portfolio to sustain them the whole time, and that even having a $1 left to your name is considered a success.
                  • I know this sounds risky and uncertain, but if you follow this with a large enough nest egg built up, you should be able to overcome most obstacles.
                  • Earning some extra/side income in financial independence can dramatically increase your chances of success though, as you will find out in a minute here.
                • However, if you’re planning on being financially independent from a younger age like I am, you need to be able to extrapolate your plan over a longer period of time. This is where the financial independence calculators come in! Let’s rap about those.
              • Financial Independence/Portfolio calculators
                • cfiresim.com
                  • It is one of the most comprehensive calculators out there. It contains fields for your portfolio value, how your assets are broken up, your spending, when your retirement begins and ends, extra income during your retirement, etc.
                • mustachecalc.com
                  • This is a calculator site in created by a mustachian in reference to Mr. Money Mustache – one of the great early retirement blogs out there, and one of the more extreme.
                  • Lots of great calculators, from trying to figure out your time until you are technically FI to showing you how much your vehicle costs you per mile.
                  • Probably the simplest to use and understand out of the three calculators
                • firecalc.com
                  • This calculator is great because it uses historical data of the stock market to display how your plans looks in the future based on different combinations of past scenarios
                    • The worst case would be having lots of financial meltdowns, high inflation, etc.
                    • Best case would be extremely long and frequent bull markets (positive stock growth) and no financial issues
                    • Obvious both of these cases are unrealistic, but it would show how your portfolio would perform with these two extremes and 103 more simulations in between
                  • This calculator can seem daunting, but it really isn’t all that bad. You start on the front page, entering in your current portfolio, your yearly spending amount, and how many years your portfolio will need to last you
                  • You can then check all of the other tabs to add additional information into your retirement, like your expected social security income, pension, types of investments, if you want to leave money for your family, etc.
                  • My favorite time now! Example time!
                  • Let’s say I have a portfolio of $650k This would give me a 4% withdrawal/spending rate of $26k/year, but let’s do a worst case and say I have to break that rule of thumb every year and spend $30k/year, which is a 4.6% withdrawal rate
                    • Entering a typical distribution of stocks and bonds of 75% to 25% respectively, rebalancing annually with a constant allocation.
                    • And I decide to retire early this year and remain retired until I croak at 80 years old, that puts me at 55 years of retirement.
                    • Let’s also assume I don’t earn any income the rest of my life, outside of my investments.
                    • There’s no pension or social security for me either.
                  • This would lead to my success rate to be a paltry 64.4% with 32 cycles failing out of the possible 90, and an average ending portfolio of $1,553,716 simoleons.
                  • Firecalc 64.4% Success Rate

                    64.4% Success Rate!

                  • Now, let’s say I have rental income every year until I die, and I make $7k/year.Earning that extra $7k/year jacks up the success rate to 86.7% with 12 cycles out of 90 failing, with an average ending portfolio worth $3,446,461 clams
                  • Finally, let’s say I follow that 4% withdrawal rate to a T, meaning my spending goes down to $26k/year and I earn that extra $7k/year with the rest of the same inputs.
                  • This leads to a 100.0% success rate with an average ending portfolio worth $4,862,187 bucks.
                  • 100% Success Rate! Booyah! Firecalc.com

                    100% Success Rate! Booyah!

                  • Earning some extra money during your retirement, even a minor amount, can contribute greatly to the success of your retirement by taking the pressure off of your portfolio to provide everything you need to live on.
                  • I believe FIRECalc is the most effective, accurate, and robust out of all three of these calculators
                  • I highly suggest using that calculator as your main tool for configuring and calculating your financial independence plans/success rates
                  • Which calculator do you like best? Which ones seems the most robust to you? Have any unique plans or find anything interesting when using them? Let’s talk about it in the comments!
                  • Thanks for listening everyone. Keep track of, and reach for those financial milestones, and plan seriously for your financial independence/early retirement by estimating/simulating with these calculators
                  • Until next time, my friends!

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