F&%$ you money: How much do you need?
One of the things I like about Quora is the questions I get often remind me that sometimes I need to go back to basics. In this case, a question asked “How much money do I need to quit working?” Essentially, they were asking about f&$% you money.
As this is a good time to talk about a Financial Independence, Retire Early basic. How much do you need to save to have f&%$ you money and quit working (or at least have work be optional, even if you decide to keep working)? I’ll give my take on the basics and what I might do differently than most.
F&%$ you money: The 4% rule
If you have poked around in this sphere for any length of time at all, you’ve probably come across the 4% rule. Mr. Money Mustache has a great post called the shockingly simple math behind early retirement, but here are the basics. (If you’re a FIRE person already, you might want to skip this section — it’s intended for newbies.)
Take your annual spending (not income, spending — and important distinction) and multiple it by 25. The total amount is your financial independence goal. If you save this amount, you are retired. You can quit your job if you want, assuming you keep your lifestyle the same.
Why this number? It’s the number that allows you to withdraw 4% of your portfolio per year and have a highly probably chance of your portfolio staying in tact for 30 years. That 4% equals the amount you are currently spending. The average gains should cover that 4% plus inflation and leave a little left over. This assumes you won’t earn another dime of course, which many FIRE adherents still maintain side hustles they enjoy that earn some money, etc.
So then FIRE works by two levers: One lever is increasing income, and the other (remember the name of this blog! haha) is to lower our spending. If you spend $40,000, you need $1 million. If you spend $20,000 per year, you need $500,000. Finding ways to be more frugal, such as adopting frugal male fashion, is a good start.
Does it work?
So far, so good. I have yet to read a story about how someone’s portfolio collapsed. I know at least three people who did some version of this concept, either intentionally or who just happened to have figure out the math.
Some people will find the number unnerving. It’s based on something called The Trinity Study, which looked at different withdrawal strategies. Smaller percentages such as 3.75% or 3.5%, or obviously the lower you go, the safer, but that also means you need to save more to hit your goal.
Some f&%$ you money pitfalls
You can just go back to work: This is one argument I have at least seen anecdotes against. Folks after being out of the workforce have reported finding it difficult to get hired. In my opinion if you retire young, it’s probably a good idea to maintain some level of income into retirement, preferably from an entrepreneurial enterprise that generates income. Even if you do get a job, saying you left the workforce to start a business will be a much better sell than saying I left to play video games all day (and who is to know that some days you did just that?).
Market downfalls: Withdrawing during a downfall will make anyone cringe. Locking in losses is no fun. To get around this, most FIRE-ees (I think I just coined a term) keep a higher than normal amount in cash, which allows for withdrawals during downfalls when the market is down. During good times you might want to add to it.
Sequence of returns risk: Way smarter people than me have done the math here, but the basics of it are that downfalls when you first retire will negatively impact your portfolio the hardest, because a big drop when you first start withdrawing mean you are starting from a lower number. But again, this is combated by factoring in cash to withdraw in a downturn. If that downturn starts right away, withdraw cash the first year instead.
But overall, the rules of F*^% you money is pretty basic. Keep it simple, and keep saving.
BC is the founder of www.frugalwheels.com, a website dedicated to financial independence on two wheels.
