Category: Questions

How do you determine your financial independence (FI) number?

The 4% Rule

If you’re interested in FIRE, one of the first things you’ll likely do is try to determine what your target FI number is. The short answer to this question is to follow the 4% rule. The 4% rule was created in the 90s by financial advisor William Bengen. He looked at historical market returns and determined that, if you withdraw just 4% per year, there was no historical case where this would last less than 33 years. The percentage you can safely withdraw each year is often called your safe withdrawal rate (SWR).

Following this approach, the way to get this number is to take your annual expenses (including taxes, of course) and multiply it by 25. So if you need $50,000 per year, your FI number would be $1.25 million.

Other Opinions

Within the FIRE community, you’ll see some debate around this. Some people think a 4% SWR is too high, believing that the stock market won’t do as well over the next several decades as it has historically. Other people think the 25x expenses target is too conservative, because it ignores the fact that many (if not most) early retirees will continue to earn at least some income during some of the years. It also ignores the fact that, for most people, following the 4% rule will mean ending up with more money than you started with. Sometimes you’ll see people argue that, because of your potential to both reduce spending and earn future income, you can safely “retire” when you hit a certain percentage (say 75%) of your FI number.

I don’t have a particularly strong opinion about any of this positions. Determining your FI number (much like your asset allocation) is a combination of art and science. The science part is basic math, but no one can claim to know exactly what that number should be. And the art part is your comfort with risk. If you’re comfortable with risk, and confident in your ability to either adjust your spending and / or earn more money, retiring with a higher SWR seems totally reasonable. If, on the other hand, you’re risk averse, you may be more comfortable targeting a lower rate.

If you have guaranteed income sources (like social security, CPP or OAS), you can subtract these from your expenses to lower your FI number. Personally, I don’t do this, though. Ignoring these future likely but not guaranteed sources of income is a way to build a bit of a safety net into my plan.

Another area where you’ll find some disagreement is around exactly what you’re taking 4% of. Some people, for example, include the equity in their house. Personally, I don’t do this. When I’m looking at my FI number (or even my net worth, honestly) I ignore home equity. Again, this adds a bit of a cushion to things if it turns out my expenses in retirement were higher than expected, or if market returns were lower than historical averages.

One final note — a 4% SWR is predicated on a certain asset allocation (typically 50% stocks, 50% bonds). If your asset allocation is more conservative (meaning more bonds) you’d have to adjust your withdrawal rate accordingly. Personally, I have always had an aggressive asset allocation (90% stocks / 10% bonds) and I plan to continue leaning in this direction in retirement.

Uncertainty

The important thing to bear in mind with the 4% rule (or whatever metric you use to determine your FI number) is that it is a rough estimate. This is not written in stone. There is a fundamental uncertainty that undergirds all planning, financial and otherwise. And that uncertainty grows the longer term the planning is. So if I’m trying to determine a dollar amount that is “enough” for several decades, it is impossible to avoid a significant amount of uncertainty. For this reason, I wouldn’t worry too much about getting your FI number exactly right. And, from my POV, the 4% rule seems like as good a way as any to get that initial estimate.

How do you buy clothes?

Full disclosure — I am a man who does not care about fashion. That being said, I’m not afraid to spend money buying practical clothes. Here are my favorite ways to get clothes, in order of priority.

In general, I think my attitude towards clothes is similar to my attitude towards other consumables — I don’t want to spend a lot of time thinking about that. I don’t want clothes to add to my cognitive load. Some people deal with this by wearing the same outfit every day. This has always seemed like more trouble than it’s worth to me. I find it very easy to just put on whatever shirt I grab from the closet with whatever pants are most appropriate for the weather. I tend to buy stuff that all matches (earth tones, jeans, etc.).

And my thinking is that I’ll make a series of posts like this, sharing how I approach various aspects of consumption.

Buy Nothing Group / Freecycle

My wife has been an avid user of local Buy Nothing Groups for years, both in the US and in Canada. Buy Nothing Groups are great because they are hyper local and encourage both frugality and environmental responsibility. They typically use Facebook to post items available. If you Google “Buy Nothing” and your town name, you’ll likely find one. In our small town in Nova Scotia (~10,000 people) I see that there was three posts in our Buy Nothing Group today, with 83 this month. There are 245 members. Even in a group this small, we’ve gotten some good stuff, and given away a bunch of stuff. In terms of clothing, my wife got me a garbage bag full of sweaters when we were in Florida, in preparation of our move to Canada. And here in Nova Scotia, she got me a great lined raincoat. Buy Nothing is often particularly good for kids clothes, as they outgrow stuff so often. And it’s also a great way to get rid of things you’re no longer wearing.

Thrift

We have lots of thrift stores here in Nova Scotia, and they are a great place to get shirts. For whatever reason, I have a hard time finding pants at thrift stores, with the exception of athletic shorts. I’m generally able to get all my shirts there, though. When working from home, I like linen shirts or cotton polos for warm days, and sweaters or cotton long-sleeved shirts on cooler days. All of these are readily available at thrift stores.

Gifts

What do you get for the man who wants nothing? I’m a terrible gift recipient. I don’t generally want anything, and if I do want something, I want a very specific version of that thing, which takes all the fun out of picking it out (or so I am told). Because of that, socks, underwear and t-shirts tend to be frequent gifts for me, which is great. For t-shirts, I tend to get solid color shirts that could be warm either as a shirt or as an undershirt, rather than dedicated white undershirts.

Shopping

Sometimes, I need something that I can’t readily get through one of the aforementioned methods.

  • Work Clothes – While in Florida, there was a store at the mall (K&G Superstore) that had a brand of work pants I liked for ~$30 a pair. I’d buy a couple a year. Now that I work from home, I’ve got about 6 pairs that will probably last me until I die since I’ll only use them for work trips. Similarly, there was a Dillard’s Clearance store at that same mall that had a brand of work shirts I liked that, if memory serves, cost less than $10 each. Now in Canada, I can get my shirts and sweaters at thrift stores, and wear more casual pants for work (since I work from home).
  • Shorts and Pants – For whatever reason, I have a hard time getting pants at thrift stores — I range between a 32 to a 34 waist, depending on the fit. Just like with my work clothes, I typically find a type I like and buy them in a few different colors / styles. In Canada, I buy Wrangler jeans and cargo shorts at Walmart, and I also really like their fleece-lined cargo pant for cold days. I have a couple of pairs of each, each probably costing $20-$30CAD, and I replace them as needed.
  • Winter Gear – Moving from Florida to Canada, this was something I needed to buy a bit of in my first year. My approach was to go slow, see what I really needed, and look for deals. In terms of boots, I got a good pair on sale at Canadian Tire. I had an OK winter coat when we moved, but I bought a better one at the end of our first winter, on clearance. In Nova Scotia, you don’t need crazy gear — it’s more about layering and staying dry. We did splurge on ice skates (again from Canadian Tire) but that has been really fun. We do a lot of hiking, but it’s family style hiking, so I don’t need a lot of high performance tactical gear.

Shoes

I’m giving shoes their own section. I spend money on shoes. I don’t spend money on shoes because I particularly like them or care about how they look. I spend money on them because I don’t want my feet to hurt. And, in the long run, I don’t feel that I actually spend THAT much money on them, because the shoes I buy tend to last a really long time.

I like to run, and about a decade ago I got plantar fasciitis. I was lucky, it wasn’t too bad. It was never debilitating, but it took a long time to recover (like 2 to 3 years). Since then, I kind of baby my feet. I also have extremely wide feet (4E) which has made me very loyal to the few brands who make shoes I can actually wear.

In terms of everyday shoes, I’m very much a Birkenstock man. I bought a pair of Birkenstock sandals that I wear as a house shoe. They probably cost $110, but I’ve had them for like 7 years. Similarly, I bought two pair of Birkenstock work shoes (Corvallis and something else, one black, one brown). They cost ~$120 each, but now that I work from home they will probably last me until I die. Oh, and when we moved to Nova Scotia I bought a pair of Birkenstock Chelsea boots that cost ~$300CAD and I expect to have for a decade or more. Everyone here has Blundstones for the muddy spring but they’re too narrow for me.

In terms of running shoes, I overpronate, and I’ve sworn by Brooks for years. I typically buy a pair a year, and they cost ~$120. I switched from Beast to Addiction a few years back, which made them a little cheaper (but certainly not cheap). They were a bit cheaper in America, but this is one area where I’m (mostly) OK not being so frugal in.

In terms hiking boots, I’ve had very good luck with Hi-Tec (an inexpensive brand) and I just got a brand new pair of waterproof Ravus boots for $39 CAD. If I were doing crazier hiking, though, I might need a fancier shoe. I’ve worn them on weeklong backpacking trips, though, and been totally fine.

What is FIRE?

FIRE, as you almost certainly know, stands for Financial Independence / Retire Early. However, I think that definition can be kind of misleading.

In the textbook FIRE model, someone would work, presumably full-time, perhaps also with one or more side-gigs, until they hit their FI number, at which point in time they would stop working forever.

Despite this being the textbook definition, I actually don’t think this is a very common approach to FIRE. Many of the FIRE’d folks that I’m aware of continue to earn money in one way or another. Some are landlords or bloggers. Others sell books or online courses. Still others have hobbies that they have monetized in some way. Please understand — I am not trying to be the retirement police here. I’m not criticizing the behavior, I’m highlighting what seems to me to be a shortcoming in the definition itself.

You may have heard people talk about CoastFIRE or BaristaFIRE. I’ve also seen it referred to as downshifting. Basically, this means working (again full-time, perhaps with side-gigs) until you hit a (lower) FI number. This FI number would be enough so that if you left these savings alone until your full retirement age, you would have enough money. Thus, for the remaining years until full retirement, you just need to coast — earning enough to break even — working a less stressful, less time consuming, or more stimulating job. Despite the fact that this is often treated as a sub-category of FIRE, the sense I get is that most people who “retire” in the FIRE community are actually doing something more like this.

I originally (like, starting in high school) thought my goal was to quit working completely as quickly as possible, but as we’ve reached our (admittedly somewhat arbitrary) FI number, both my wife and I have realized that we want to keep working part-time. We like the intellectual stimulation and the community. And, personally, I tend to do lousy with large swaths of unstructured free-time (even though the voice in my head still tells me that’s what I want). I tend to isolate and get depressed. So I want to ease into it, keeping the structure of work as I figure out other ways to support my mental health.

Plus, I don’t remotely hate my job. I read a lot of stories about people dreading Mondays or feeling stressed out or disrespected. I never feel that way. In fact, if I’m totally honest, I sometimes find myself looking forward to Mondays, because work is a context where I know how to handle most of what comes up and often feel useful. I also have a great boss and really like the people I work with. I also get paid decently (by my fairly modest standards) and am able to work from home.

So here’s how I’m thinking about things:

I’ve been working full-time for almost 15 years. We probably have enough invested now that I could just stop working, but I don’t really want to do that. Instead, I’m thinking about ways I could work differently in order to bring even more work / life balance into my life. At this point, I’m not sure what this looks like.

Possibility 1: Stay in the same (or similar position) but work less hours, either by having a day or two off per week, or alternating weeks on / off.

Possibility 2: Find a different job, perhaps even working full-time, doing something that I was more passionate about.

What it really comes down to is the freedom to choose. I’ve been focused for so long on simply hitting a particular number, that I hadn’t really thought about “what next”. Now that we’re there, I want to make sure I’m transitioning to something, not just away from something. And, again, my point here certainly isn’t to criticize what FIRE looks like for anyone, or to suggest that there is a right way and a wrong way. I don’t even know that for myself yet, let along for anyone else.

FI-losophy: Accepting Uncertainty

In Buddhism, there’s a concept called the eight worldly winds. The idea is that these “winds” blow through worldly life in a way that is unpredictable and, ultimately, unimportant. Because they are fundamentally uncontrollable, fixating on managing or avoiding these “winds” is a source of suffering. The eight worldly winds are typically expressed in four pairs, the first of which, gain and loss, is central to financial independence.

The idea of financial independence is, fundamentally, a false premise. There is no such thing as “enough” money in the sense that there is no amount that guarantees that you will never run out. Uncertainty is a fact of life, and it is important to keep this in mind to help moderate our fixation on guaranteeing successful outcomes. For me, this is part of why I always look at FI numbers as a soft target. Safe withdrawal rates (i.e. the 4% rule) are guidelines, not guarantees. We do not know how the wind will blow. We can prepare as well as we can using the information we have, but the future is ultimately unknown.

This uncertainty can be frightening, but it can also be freeing. If it is impossible for me to prepare for every possible negative outcome, then I don’t need to obsess over trying to do this. Years ago, I found myself starting to veer into “prepper” territory, imagining all the different ways things could go sideways. In addition to saving money, I started gardening and learning about off-grid living. While there is nothing wrong with these interests in and of themselves, this was definitely not a source of happiness for me. The more I prepared, the more potential gaps in my preparation I saw. I’ve found much more peace accepting the uncertainty, and just doing my best based on the information I currently have at hand.

True financial independence, to me, means not worrying about money. This has something to do with how much money you have but, in my experience, it has more to do with your orientation to money. I found that, even after hitting our FI number, I continued to worry about money. In some ways, I worried even more because we were finally there and I didn’t want to lose it.

Reflections

There are a number of ways in which I try to cultivate a more financially independent state of mind:

  1. Remember that uncertainty is a fundamental fact.
  2. Remember that my wife and I are both competent, resourceful people who have handled challenging situations in the past and will be able to handle them in the future.
  3. Intentionally keep my material standards low. In other words, avoid hedonistic adaptation.
  4. Reflect on the fact that material things don’t bring happiness.
  5. Intentionally bring more non-material pleasures into my life.

Luck

The truth of uncertainty has other implications as well. Because gain and loss are fundamentally out of our control, we want to be gentle with ourselves and others in terms of how we respond to them. Part of the reason that my family has financial independence is hard work and good choices, but part of it is also luck and privilege. And even the hard work and good choices are the results of countless influences throughout our lives, rather than innate qualities that I can take credit for. And, of course the same is true of folks that are struggling financially or making “bad” financial decisions. In other words, luck is an undeniable component of everyone’s financial situation. Remembering that helps me be less judgmental, both of myself and of others.

How do you save money? (the small stuff)

This is always kind of a tricky question for me to answer. Personally, I am frugal by nature (or nurture) so saving money comes pretty easily. That isn’t a helpful answer, though. The real question is what changes can someone make in their life to save more money? Here, I certainly have some suggestions.

Fundamentally, though, the big thing is mindset — you’ll never stick with it if it feels like deprivation. There are a few antidotes to this. For one thing, I’m always aware of the larger goal (i.e. financial independence) that I am saving towards. For another, I’m also very much aware that many of the “conveniences” that we spend our money on actually lower my quality of life. To put it another way, I find there is usually some synergy around saving money. For example, the more frugal choices are also often better for my health and / or better for the environment.

Take today, for example. I had the day off. We had our usual breakfast (oatmeal with peanut butter and fruit) and I noticed the drawer in the kitchen cabinet was tilted. I pulled it out and found that both rear brackets had broken so the rails were loose. I am not particularly handy, but this seemed pretty straightforward, so after taking my daughter to the bus stop, I took the bracket off and prepared to head to the hardware store.

(Already, there are a couple of little choices there — oatmeal with peanut butter and fruit is cheap, healthy, convenient and reasonably good for the environment. Deciding to fix the cabinet both saves money and gives me a chance to learn something new. Finally, having my daughter take the bus to school is both more frugal and better for the environmental. Plus, we get to share a daily walk to the bus stop, and conversation once we get there.)

As I was getting ready to leave, I remembered that the spring loaded tub plug upstairs was also not working. I brought it downstairs so I could take it with me as well to try to buy a replacement, but my wife suggested trying to lube it first. Again, I’m no DIY expert, but I know that WD-40 can be a good cleaner for these types of things, so I sprayed that in first, then I used a lube I had previously bought for my garage door, and it worked perfectly, so I just re-installed it into the tub.

(Obvious one — deciding to try cleaning and lubing this both saves money and prevented the current plug from ending up in the landfill.)

I brought a small backpack with me, and put in a bag of almonds and a reusable water bottle. I walked to the hardware store in about 15 minutes and found what I needed in about 2 minutes. A set of two shelf brackets cost $5 CAD. I also bought a vase and a rose bowl at the thrift store for a total of $4 CAD — we have a ton of flowers at our house, and our primary vase had recently blown over on the deck. And then I started walking home, and I got a call regarding a credit card application. I’d applied for a new card the day before, mostly in order to get free roadside assistance. I answered their questions on my way home, and then I installed the new brackets in about 15 minutes.

(OK, there are a lot of examples in this paragraph. First of all, I brought almonds and water with me so I’d be less tempted to buy a snack or a drink that would be more expensive, less healthy, and worse for the environment. Similarly, deciding to walk rather than drive was both better for my health and better for the environment. If I were in a hurry, I would have biked. And, of course, this choice was informed by the much earlier (and bigger) choice to buy a house where we could walk into town. Again, repairing the brackets ended up being much cheaper than hiring someone, plus I got to learn something and experience the satisfaction of taking care of something myself. And buying the vases secondhand was both cheaper and better for the environment. Finally, we’re using a no annual fee credit card to get free roadside assistance. I’ll do a future post about how we approach credit card rewards.)

Hopefully, by this description of a very ordinary day, you get a sense of the type of mindset behind the many small choices we make each day that enable us to save 30-40% of our income. I hope you can also see that, for us, being frugal does not mean deprivation. We take care of the things we need to take care of, and buy the things we need, we just try to do so in a way that doesn’t cost very much money. And by doing this, we find that we are often also adding benefits in terms of making healthier choices and / or choices that are better for the environment. Plus, we get to learn new things and experience the satisfaction of taking care of things ourselves. And, just to be clear, we absolutely hire professionals for bigger projects. At the same time, each experience of doing something ourselves raises the bar for “bigger” a little bit higher.

Finally, I want to emphasize the point that being on the path to early financial independence doesn’t necessarily look dramatically different. From the outside, there’s nothing particularly unusual about any of the choices I made in that day. To our neighbors, I think we appear more or less similar to everyone else. The accumulation of these choices, though, is what enables us to have the savings rate we do, which is one of the key elements of our journey to financial independence.

What about you? What are some of the little things that you do regularly to help save money?