I am so miffed at all the financial reports and advice that states how many millions-of-dollars a person needs to be comfortable, to retire, et. al. Giving actual dollar amounts is pretty dumb. Every life is different, every account has a different spend.
Instead, multiples matter more than millions. That is already the common factor when it comes to advice of emergency funds (1 month, 3 months, 6 months, 12). I would have you make it a common factor of your financial planning!
Using actual dollars makes the rule-of-thumb calculations much harder than they need to be too. The commonly touted safe withdrawal rate of 4% for retirement (a term I will interchangeably use with financial independence)? Well, that 4% is the spend of one (1) year of living. And to figure out the wealth to support that withdrawal, we are told to take what we aim to spend per year in retirement, and divide by .04 – ick!
Rather, consider this: 4% is also one-twenty-fifth (4/100 = 1/25) of the total amount of expenses expected to keep in net wealth; flip that around (100/4) and that means 25x a year of expenses today suffices the 4% Rule!
And don’t get me started on how actual dollar figures change and decay (i.e. inflate) over time. Subjective and average numbers are not consistent, are not applicable to you nor I! The thief of joy is any figure that is not yours; get your own figures and your own confidence of how you are doing by standards lived by your reality.
So let’s talk more on multiples. We saw the common financial independence “4% Rule” is 25x a year’s cost; 5% (discussed as a more reasonable withdrawal, especially if looking to die with $0) is 20x (100/5); 6% Fat FIRE (live like a rockstar after work) is ~17x; etc.
Example: A person has spent about $60,000 in the last few years – they have a stable lifestyle they are content with and find enjoyment in. Cool. They feel safe with a tad more risk or vacation allowance than the 4% Rule, so opt to start enjoying financial freedom early with a 5% instead. That means, they will need 20x their spending in net wealth to secure their financial freedom.
$60,000 x (100/5) = $60,000 x 20 = $1,200,000 needed after debt
Or maybe they want to wait to retire for 10 more years. With a stable lifestyle, they might expect a 3% inflation to catch up after 10 years, so:
($60,000 x 1.03^10years) x (100/5) = ($60,000 x ~1.3439) x 20 = $1,612,680 needed after debt in 10 years to retire as planned
An easy formula too for figuring out bare-minimum wealth needs and more-than-enough hoarded (e.g. 17x [might make it work] to 33x expenses [any more is wasteful]). So long as we know a year’s typical expenses by having lived an authentic lifestyle, the rest is cake.*
Multiples offer more consistency, apply to a person’s unique situation, and are simpler napkin math that applies to 99% of people out there (I am being hyperbolic).
* How do we figure out expenses? The nitty gritty is for another post. I would suggest here to go through bank and credit card statements from the last few years for the full year (since things like insurance or car maintenance can jack-up by-month expenses). Getting these numbers in hand, I myself throw out plain averages – outlier years (lots of one-time costs or a long hiatus in the no-money-mountains) skew these pretty badly. Instead, either median (most common costs) or my preference of weighted averages (more recent years get counted more)** gives a clearer picture of what life spending has been like.
** E.g. You have 5 years of data. 5 years ago multiplies by 1, 4 years by 2, … last year by 5. Add all the multiplied results up, then divide by adding all the multiples up.
($ResultYear5 + $ResultYear4 + …) / (1 + 2 + 3 + 4 + 5) = $Results / 15 = Weighted Average Spend
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A shorty and hopefully a goodie.
I started my financial literacy when asking the Q from Tim Ferriss, “which of these, if done, would make all the rest easier or irrelevant?” That answer was and has been and might forever be money. It adheres to the principle of Ockham’s Razor, taking the simpler sufficing path. We have taken today the simpler path that will suffice for most general lifestyle targeting and financial independence freedom.
You don’t need millions, you need multiples. I do not think this misses the mark, so comment now or forever hold your peace 😁
Cheers to your freedom ~
Jimmy Chattin 