Favorite Financial Independence Calculators | Military Money Manual Podcast Episode 23

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Calculators we talk about in this episode include:

Military Money Manual Podcast Episode 23 Links

Outline of Episode:

  • Why is financial independence (FI) the best goal worth pursuing?
  • Are there any other resources out there that are specific to FI in the military?
  • Overview of the 4% rule
  • How do you know you’ve achieved FI?
  • FI calculator recommendations 
  • Do I include all of my TSP, all my IRAs and non-retirement brokerage accounts?

Military Money Manual Podcast Episode 23 Transcript

[00:00:00] Spencer: Welcome to the Military Money Manual Podcast.

[00:00:09] Jamie: Hello, happy New Year again. This is Jamie with the founder of militarymoneymanual.com and the author of the book, The Military Money Manual. Spencer. 

Hello Spencer. We're back to our regularly scheduled podcast length. We'll see how long this one goes. I shouldn't promise. Yeah, cause usually we're just over an hour.

We'll see. But we're back to our normal routine and today we're going to be starting talking about financial independence and we'll have a couple of episodes digging into financial independence a little bit more. Today specifically, we're going to focus on an overview of financial independence, or FI, and some of the best tools available to calculate what it takes to be FI or Financially Independent. 

Before we get too far into today's episode, like we mentioned last week, we want to let you know that Spotify now allows you to review podcasts as well as Apple Podcasts which has before. So wherever you listen to the podcast, we'd really appreciate it. If you could leave us a good review, a five-star review on there.

We're currently at 4.7 stars on Apple Podcasts and we're pretty happy about that. We don't have enough yet on Spotify for it to show up, but hopefully, it will soon if you do have any feedback on it, remember you can reach out on Instagram @MilitaryMoneyManual DM, or info@militarymoneymanual.com.

[00:01:21] Spencer: So today we're going to be talking about financial independence and we're just going to go over some of the basics. Some of the key terms that you might hear in the financial independence space. A lot of people like to call it the financial independence movement, but I really hate that nomenclature

[00:01:40] Jamie: It’s almost as bad as calling it an ecosystem.

Like anytime someone says something is an ecosystem, I'm just like, what? What does that even mean? I don't understand.

[00:01:48] Spencer: Yeah. I've looped you into my ecosystem now. 

Let's get into it. So some of the things that we're talking about today, you might hear us say, FI or FI, and that stands for Financial Independence, or Financially Independent.

You might hear RE in the context of real estate or real estate Investing, but in the context that we'll probably be using it today would be Retire Early, although that's not too hard to say. So we usually, we'll just say that and then the whole concept.

You'll hear a lot about FIRE or FIRE, the FIRE movement. A FIRE movement, which again ugh I can't, I don't join movements. I'm sorry. But Financial Independence Retire Early and the whole concept about it behind the. The financial independence retired you? Yeah, I do. I do. . It's more of just, it's more of just an idea, right?

Concept. Yeah. In my book, The Military Money Manual, I talk about FI and that's really what the book is for, is it's to introduce the concept of FI to military service members and show them that, hey, you have a unique opportunity here that your civilian counterparts might not have, and you can achieve financial freedom again, we'll use financial freedom and FI kind of interchangeably.

You can obtain that in the military and you don't even have to wait until you get a military pension. Now the military pension is definitely a great hack. It's definitely a great cheat code, but you can if your savings rate is high enough, you can achieve FI even before you achieve your military pension.

And then you can just add the military pension on top of it and all of a sudden you've got the gravy train. So in my book, I talk about how FI occurs when your assets and or passive income can provide enough income to cover your lifestyle expenses. One of the cool things about FI is that it's completely flexible and the finish line is really defined by you.

So one of the concepts with FI is about flexibility and defining your own finish line, and you'll find this online within the FIRE movement, you can find people who want to be Lean FI. Which is essentially bare minimum expenses. The kind of quintessential Lean FI guy is Mr. Money Mustache. If you have never read any of Mr. Money Mustache stuff, I urge you to go read some of his stuff. He was really my first introduction to FI.

Jamie, do you remember what your introduction to FI was?

[00:04:42] Jamie: I think it was the same, to be honest. I don't really remember. I remember him being someone that I heard about and I was kinda like, that's weird. I don't know if I could ever do that. It's not, it's against the culture of what we do in America.

And I just watched a couple of videos or a friend told me about it and then moved on. But I think he was probably one of the main exposures for me as well.

[00:05:06] Spencer: Yeah. So he has this great article, which I think I read when I was in I was at Altus Air Force Base. I was in a long training pipeline in early 2012.

That's actually when I started the website too. I read some of his stuff and I was like, Hey, this would apply to the military. But he has this great, and you can Google this, the shockingly simple math of early retirement. He basically just walks you through the 4% rule, which we'll talk about in just a little bit.

But after reading that article, that was the first time I'd ever really had it laid out for me. So simply and completely. What is the number? What, yeah, what do you actually need to save in order to retire in order to never work again? And how long does it take to get to that number?

Like when I was growing up, I used to read Forbes and Money Magazine and all the things that nerd kids who are into investing used to read, but they would always just talk about it was always just so vague, one of the most commonly used guide guidelines is you need to have enough saved so you can replace 80% of your income in retirement.

Yeah. So if you're making a hundred thousand dollars a year, you need enough savings that you can live off of $80,000 a year. What if your expenses are $50,000 a year? What if your expenses are $40,000 a year? That just doesn't, that makes no sense. So it was every like retirement guideline I saw when I was growing up was always based off of what is your income?

They never like really focus on expenses. So Mr. Money mustache, I think really introduced to me the concept that FI is all about lifestyle. It's all about expenses. He leads a pretty frugal lifestyle, I think. I think $25,000, $26,000 a year is kind of his lifestyle there.

So definitely a very lean lifestyle. Yeah. Lean, lean, FI the O. Then the next level up from that would just be traditional financial independence or FI and that's like basically the average American household spending. So it might be anywhere between, I think the average American household spending is like $80,000 a year.

Or maybe the median. So that would be anywhere between let's say $60,000 to $100,000 a year. Then there's fat FIRE as opposed to lean FIRE that's anytime that you're talking about like a lifestyle that's six figures or more a year essentially.

Then the question becomes, okay, how much do you have to have saved and where do you have to have it invested in order to have that kind of lifestyle? And so I explore a lot of that in my book. But yeah, I think FI is really probably the ultimate goal of why we do all this stuff.

[00:08:18] Jamie: Right. Yeah. So I was going to pull a quote out of the book. You mentioned in the introduction “The best financial goal worth pursuing is financial independence”, and you wrote an entire chapter in the book about FI. So why is that statement true, and why is it that important for you?

Why is it the ultimate goal?

[00:08:37] Spencer: I think it's the ultimate goal because if you think about all the other sub-goals of personal finance. For me, right after I got married, I was living paycheck to paycheck and my wife came in and was like no, we're not doing this anymore.

We need to have enough savings. We need to have enough cash that we're not putting stuff on our credit cards then as soon as I get a paycheck, I'm paying off that credit card, but then our checking account is back down to zero and we can't go do the things that we want to do. So not living paycheck to paycheck was my first personal finance goal, and then it was, building an emergency fund, and getting out of debt. Saving, investing, for some people with kids it might be paying for their college, but, all of these goals, are little sub-goals of the ultimate financial goal, which I think is financial independence if you think about it, right? 

Why do you want to get out of debt? And it's okay because I want to be able to do what I want with my money. Why do you save and invest? And it's because I want that to grow so I can buy a house it's okay, why do you want to buy a house? Because I have to have someplace to live, right? It’s like the Six Sigma or one of those management things. It's like the five whys, right? Just keep asking why, and if you do that, eventually I think you get down to, well, I want to eventually not have to trade my time for money anymore. To have choices and to have options. Yeah, that's all financial independence is, right? You have enough savings or enough cash flow from your investments that you can just live off of that and you don't have to work a normal job anymore.

[00:10:35] Jamie: So you mentioned FI and how the military is a great opportunity to achieve financial independence even before achieving the 20-year pension if you're under the legacy of retirement. 

Before you and your research on this, are there any other resources out there that are specific to FI in the military?

[00:10:57] Spencer: Yeah, so one of the great ones is Doug Nordman. I have to give a shout-out to Doug because right when I first started my website, I reached out to him and he was super helpful he lives on Oahu in Hawaii.

He retired here after 20 years in the military. and I'm currently stationed out in Oahu as well. So we've met up a few times. Great guy. Much better surfer than I am. But, he wrote The Military Guide to Financial Independence and Retirement, which I think came out in 2011 or 2012.

It was a couple years after I got into the military I would really consider him the godfather of the military FI movement. If you go look on any of the Bogleheads forums or any of kind of the classic Financial Independence Community forums out there.

You'll find he's written tens of thousands, probably whole books worth of posts. Then his blog is the-military-guide.com with hyphens in between. Or you can just Google the military guide he's got some classic articles on there. He really, breaks down, how to achieve FI in the military.

One of his biggest contributions to the community is really exploring because a lot of guys will when they earn their military retirement, will then go right back to work. They get a GS job, they get a government job, or they go to work for a defense contractor or whatever.

And when he was getting close to his retirement, I think he retired in the late nineties, no, early two thousand. He was like, “I just want to surf, can I do that?” And it turns out he could, right? Because he didn't even realize it, but he had been on the path of financial independence his whole life because he'd been saving 10, 20, 30% of his income.

And so had his wife when they earned the military pension, they already had millions in the bank then the military pension was just gravy on top. Go look at his stuff. He's got some really good stuff out there. Doug Norman from the Military Guide, and a lot of good stuff if you want to deep dive into achieving financial independence in the military.

[00:13:25] Jamie: Yeah, good stuff. Good stuff. Okay, so some other basic FI terms and some of the other basics of FI, Spencer, does it always have to end with retiring early? If that gives someone a bad taste in their mouth does it have to mean you stop working when you're 29 and live in a van down by the river?

[00:13:44] Spencer: Absolutely not. I think that's one thing that a lot of people have come to realize especially in the FIRE movement or the FIRE community, as we've been jokingly saying, but a lot of them are achieving rapid financial independence in their twenties and their thirties and they'll take some time off, but they quickly realize that I have to do something with my time

And if you're the kind of person that can plan and execute, a 10 to 15-year plan of, okay, I'm going to save this much money. I'm going to invest it here and after just based on simple math, after compounding interest, I'm going to have a couple of million dollars in the bank in 10 to 15 years, and then you execute that plan.

Retiring to the beach to sip margaritas is probably not going to sit very well with you. Like you're probably going to do something else. But that's the beauty of FI, is that you can choose to do something else because you have this backstop of all these savings and all this income, and all these assets that are just throwing money at you every month through every quarter or every year.

Or if you need to, you can sell some of your assets and live off selling them. Then you can go, you can choose to do what you want with your time. Yeah, a lot of people are realizing that, once they become FI it's a lot easier to say no to your boss at work.

Maybe not in the military, but it's a lot easier to, go for the assignments that you want to go for, or do the jobs that you want to do because you know that, hey, what's the worst-case scenario? They fire me. Okay. I got all this, I got these, all these savings to fall back on.

And it actually can make you more efficient and more effective. Employee, which might actually result in more responsibility, more promotions, and more income. Yes. So it's the movie office space, right? But like as soon as the guy stopped caring they actually promoted, they're like, yeah, you got management written all over you.

[00:15:44] Jamie: But imagine being in a position where you're passionate about your work and you're enjoying it more and you're passionate about it and you're enjoying it more because you're passionate about it it's just like self-licking ice cream cone where you're better at your job because you like it more, and then you continue to get better at it because it's something you're passionate about.

So that's a great thing it doesn't have to mean that you get out of the military early. It can, it doesn't have to mean that you stop working when you're 29. It can, you have lots of flexibility with the FI concept for sure. Another one I just wanted to get out. You mentioned already the 4% rule.

Can you just give an overview of what that is? When people read about that or hear that, what does that mean and where does that come into the FIRE game plan? 

[00:16:38] Spencer: Sure. So the 4% rule started with a study known as the Trinity Study. It was conducted at Trinity University in Texas, I believe, back in the nineties.

Three professors just looked at all the stock and bond returns for the last whatever data they had, probably back to 1929 or 1920 or whatever they said, okay, for the last 70 years, if you had a pile of money, what would be the safe withdrawal rate to pull from that money and not end up with no dollars at the end of a 30 year period?

And so they looked at, okay, what if you had 80% stocks, 20% bonds? What if you had 20% stocks and 80% bonds? And they looked at all the different asset allocations, all the different mixtures,s and what they determined was with a reasonable stock bond allocation, I think theirs came out to be like 60/40 or maybe 80/20 stocks to bonds.

If you withdrew 4% inflation-adjusted too. They didn't account for any variability in the plan or any flexibility in the plan. But if you just withdrew 4% from that chunk of money, so if you had a million dollars, let's say in 1960 would it last until 1990? If you withdrew only 4% a year, inflation adjusted from that pile of money.

So for a million dollars, you withdrew $40,000 a year, and then you increased it for inflation every year. At the end of 30 years, you had more than $1. Now sometimes in their study, you barely had more than $1 sometimes they had less than a dollar I think so I think the failure rate or the success rate with the 4% rule was over 90%.

And so it's become a meme, if you will, in the FI community, but if you take the 4% rule, you can work out okay, if I had a million dollars invested, I can sustain a lifestyle of $40,000 a year you can take the inverse of the 4% rule, which is, back to high school math inverse of 4% is 25.

So you can take any dollar amount or any lifestyle. So let's say you want to live on $40,000 a year. You can multiply at times 25 and you can get the goal number that you need to have invested in a reasonable mix of stocks and bonds that will last you for about 30 years or so. 

[00:19:13] Jamie: I just want to mention there, you mentioned the 40,000, that's based off your expenses, right? Not an income of 40,000. It's how much you're spending in the year. So in that example, $40,000 of expenses per year.

[00:19:21] Spencer: Yeah, exactly then you can just, you can dial it up and dial it down. So you might consider $40,000 a year a lean FI existence if you do, then, maybe $50,000 a year is more of your flavor.

And so then you'd have to take 50,000, multiply times 25, and you get 1.25 million that becomes your goal right there or maybe $100,000 a year is the lifestyle that you want to live on. Again, just take $100,000, multiply times 25 and 2.5 million, and that becomes the goal.

And now if your lifestyle per year increases, all of a sudden the goal numbers can become really big, and that's why like Mr. Money mustache, when he's living on $20,000 a year, he's only going to save half a million dollars, which again, can be seen like a pretty insurmountable goal if you're starting from negative or if you're starting from nothing.

But if you start looking at the compound interest charts and realize that if you invest $6,000 into your Roth IRA, over 40 years at 7%, you're going to end up with 1.2 million. Yeah, that's at age 60. So all of a sudden it's what if you saved $10,000 a year? What if you saved $20,000 a year?

When you start doing those numbers and you start doing that math, you can realize that. Oh, I can achieve financial independence a lot faster than I thought. 

[00:20:58] Jamie:  About the 4% rule, Spencer, there's been some recent news like I just found this headline on Yahoo. I just googled the 4% rule retirement alert.

“The 4% rule is no longer feasible, how seniors should adjust to match inflation.” So in your book you talk about between 3% and 4% and use 25 to 33 times your annual expenses. So do we need to change the 4% rule? What do you think about that? And in the book you mentioned, start with the goal of 25x, and then you can always adjust it later.

[00:21:24] Spencer: Yeah. I think the biggest thing to understand is what is the 4% rule based off of? And one of the major factors is they did not adjust the withdrawal from the initial amount. So once they set the 4% withdrawal, they kept that every year and the inflation-adjusted it as well what a lot of retirees find, and you can Google this, but what a lot of retirees find is that when they retire, their expenses might increase a little bit in the first couple years. Because usually a lot of people take a lot of trips and do a lot of the things that they've been putting off. But then after a couple years, their expenses actually drop and they actually have a cheaper lifestyle because a lot of people realize pretty quickly that, just staying home and doing your thing is actually a little bit more enjoyable than traveling all the time.

So do we need to change The 4% rule to a 3.5% rule or a 3% rule? I don't really think so. I think the biggest thing for most people is, whatever lifestyle that you want to enjoy when you become financially independent, take that lifestyle, multiply times 25, and that's your initial goal number.

And I think you know what you'll find as you save and invest and you start working towards that number, I think, and you continue to educate yourself on, okay, like what is the 4% rule based off of? And you realize that there was no variability, there was no flexibility in the spending plan in the Trinity study.

So if you're a little bit flexible and you say, okay, I'm, I want to live on $40,000 a year, but, at the end of the day, I could probably live on $30,000 a year with my house paid off, right? If that's true, then all of a sudden you've introduced $10,000 of flexibility, flexible spending into your retirement plan and now you basically have a much better chance of having your money survive for 30, 40, 50, even 60 years.

[00:23:35] Jamie: Awesome. Yeah, great. Great stuff about FI for sure. Remember one of the key takeaways is that FI is all about choices and freedom as you move up the FI ladder, you can jump off at any point or get back on at any point and keep climbing. So it gives you that freedom. 

One of the other questions that comes up a lot, Spencer, is you talked about how do you know you’ve achieved FI?

So basically you take that, that 25 times your annual expenses, and once you have that number in the bank, then you're financially independent. In the book, on page 13 or 14 or so for those following along in their hymnals, you have a good chart that breaks it down by monthly expenses. So for example, if your current monthly expenses are $2,000, your five number then is between $600,792.

There's other levels. But to give another example, if your monthly expenses are $5,000, then your five number is between 1.5 and 2 million. So you can pretty easily determine what your ballpark saving goal is going to be. But how do you know that your five plan is going to hold up in the real world?

So what are some resources that we have that are out there? Your favorite calculators or websites that can help us evaluate our plan?

[00:25:13] Spencer: Yeah. My current favorite FI calculator is FICalc.app. Or if you just google FI calc app, it should pop right up. This is a really, this is the reason that this is my favorite app right now is it's really robust and you can change your withdrawal strategy really easily, and they allow you to use this variable percentage withdrawal VPW, which is a really cool strategy. It combines constant dollar percentage of portfolio and a couple other strategies into one. It was developed by the Bogleheads community and it basically lets you put in a number. Let's say right now I've got a million dollars in here and I can set, okay, my minimum withdrawal, let's say is $36,000 a year. I'll run it there and it gives me an 84% chance of success. So what does that mean? 

It actually has a little chart right here. If you retired in 1947, you'd be fine. But if you retired in 1956 and you can actually click on each year and you can see in the simulation what went wrong. Basically if you retired in 1956, your money would last until 1985. So it lasted 29 years, but it didn't last 30 years really the problem was that you were doing withdrawals in the sixties and the seventies and the stock market did not do very well in those decades.

Yeah. So yeah, FI calc really cool really powerful. You can adjust the length of retirement, you can adjust, all the other variables it lets you backtest the data against real-world data going back to 1871. So yeah. That's really cool. Yeah, that's a really good FICalc.app.

And yeah, I think the best part about this one is you can adjust the withdrawals and you can actually set minimum and maximum withdrawals. So you can say I need $36,000 a year just to eat and keep the lights on. So you can put that in there and then you can say there's no way I could ever spend more than $100,000 a year.

It's just not possible. You can set that in there as well then it lets you play with all the data there. 

[00:27:35] Jamie: Another good one is Networthify. That's the next one on our list of favorite ones. That's networthify.com. They have an early retirement calculator that allows you to play with your savings rate in your safe withdrawal rate and just manipulate the numbers and help you find the numbers from now until retirement with their savings rate calculator, which is neat.

And you also have a chart about that in the book That's very. For example, on Networthify, you can play with an annual, and this is net income on their chart of a hundred thousand dollars, for example, and an annual savings rate of 50%, which we talked about in the past. Seems crazy, but it is doable.

With $50,000 in annual savings, you can retire in less than 17 years with 1.3 million. So you can get some good information on how far you are from your goals.

[00:28:22] Spencer: Yeah. The one thing I really like about Networthify, and Mr. Money mustache talks about this in his shockingly simple math, but it breaks down how many years it's going to take you to reach FI based on your savings rate.

And so you can also play with the data and say, okay, what if I save an extra 5% or 10%? Yeah, you might see oh, an extra 10% savings that might shave two or three years off of working before you can reach FI and then that might cause you to go look at your budget and say, okay what am I not getting that much value out of?

And I can cut and increase my savings rate. Or it might make you say, all right, what can I do at my job? Or what can my spouse do at their job so that they make more money and we can reach financial independence that much faster it's, yeah, it's Networthify is definitely one of my, one of my favorite tools for thinking about financial independence and how long it's going to take. 

Another one that I really like is the Mad Fientist. Didn't know it was going to be a spelling bee today, but the mad scientist Brandon, he's got a great podcast. He's had a lot of really cool people on there.

I think he's actually stopped really updating his podcast, because he's, I've reached FI and I don't really have anything that much else to say, but he talks a lot about tax optimization on his website and then his podcast he has just some really interesting, I think Doug Norman actually was one of his first guests on there, so that's a really good military themed podcast there.

Or that specific episode. But he has the Mad FIentist Lab and it's free signup. You have to put your email address in, but then he gives you some really cool resources, like a FI tracker. So you can go and log in every month and put in your data and it'll show okay, you're on glide path or you're above or below to reach FI by your goal.

It has a countdown clock, like the time to get to fi talks about your savings rate, your safe withdrawal rates. You can dial that up and down based on variables in the stock market. Yep. So that's a really great website as well. 

Another one that kind of got me started on this whole thing is the original, the FIRE Calc.

So it looks like a website from the 1990s. They haven't changed it in 10 years. But it's how I always know them.

On the right website, they've got this hilarious picture that it might be Tom Cruise on the homepage at the wheel of a ship, or the, is that from a movie? It's like, everyone's idealized retirement dream sailing away, with their loved ones.

It's actually hard to see where does the calculator even start here, but it’s on the right-hand side. It says “start here”. You put in your spending, your portfolio, and the years, and then you just hit submit and then it spits out this crazy line chart thing. It’s hard to read it, but in the top part it gives you a little summary.

Yeah, in this I put in $30,000 a year on $750,000 over a 30-year period it looks at 121 possible 30-year periods it calculated that six of the cycles, so six of the periods failed. So you had a 95% success rate if you had $750,000 and you withdrew $30,000 a year from it. 

[00:32:26] Jamie: So this chart looks like a hurricane forecast model where it's like, it may hit Florida, it may hit Mexico.

We're not really sure. We're just going to, we're not sure. A bunch of lines on the map.

[00:32:29] Spencer: Yeah, exactly. So that's the a 4% rule right there. $30,000 out of $750,000. So you can see the 4% rule is pretty robust, a 95% success rate again, that's with no no variability in the spending then you can, I think there's a way you can adjust the input data on FIRE calc, but that's a good one.

FIRE calc.com, if you want to dig into it. The one thing that I've found from using FIRECalc is it's basically just the 4% rule. If you put in a number that's outside the 4% rule, it's going to fail more than 95% of the time. If you put in a number that's safer, so like a 3% rule, it's going to usually succeed a hundred percent of the time.

And then the last two I'll mention is Engaging Data. So it's engagingdata.com if you just search “engaging data FIRE calculator”. He has a pretty robust FIRE calc. Then the other one I'll recommend from engaging data is Rich, Dead, or Broke. This one is super interesting and I really liked it.

Pairing this calculator with the book Die With Zero because what it shows you is that if you do the 4% rule, so in 95% of the time you're going to be fine, right? You're going to make it to the end of a 30-year period, and you're still going to have money in the bank. But what it doesn't account for is 10%, 20%, or 30% of the time you might have 2x or 5x the amount of money that you started with.

And so that's the problem with having no variability in your spending. So I think, what a lot of people need to do is they need to recognize, hey, when times are good, it's time to reap, it's time  to take some of that and enjoy it.

Yeah, enjoy it. Enjoy the good times, then when times are bad, it might be time to tighten the belt a little bit and dial it back so that you're not withdrawing from your capital and you're leaving it in there. So when the times turn around again and, it's 2011 now and you're about to start the best bull run in history for the next 10, or 12 years.

You still have a lot of kindling, you still have a lot of fuel in the FIRE, if you will. 

Then finally I think I missed it in my notes here, but Portfolio Visualizer. So this one is really nitty gritty. But you can put all kinds of data in here and it's got data for every asset class you could ever imagine.

So you can, say, okay, what if I had added 10% gold? What if I had foreign bonds, added to my portfolio? What would happen? But, and not just that, but if I had it at 3% of my portfolio and I had US equities at 80% of my portfolio, and you can really get very detailed, on how your portfolio is broken down.

I think after you play with these calculators a little bit, you're going to realize that they pretty much all spit out the same answer. That's basically the 4% rule is pretty robust. It usually has over a 90% success rate as long as you have a good mix of stocks and bonds and, the last 120, 130 years or whatever, as long as you've been invested in US equities and in US bonds you've probably done pretty well.

Yep. Spencer, when I'm playing with these calculators and I put current assets or current investments does it matter if I am assuming only brokerage accounts and non-retirement accounts, or do I include all my TSP, all my IRAs and non-retirement brokerage accounts? Because if I’m talking about actually retiring and using some of that money, I might not be able to touch it for a couple of years.

Does that come into factor here in these calculators at all? 

[00:37:06] Spencer: On the more robust calculators, I think you can build that kind of stuff in. But I would just look at it holistically, right? Like you still have that money. You might not be able to touch it without penalty until 59 and a half, but there are a lot of ways to access retirement funds before age 59 and a half.

There are Roth IRA conversions, and then honestly, One thing that you can do is you can just pull the money out and pay a 10% tax on it if you Google, actually the Mad FIentist has a really good accessing retirement accounts early article. If you go look that up he breaks down the math of what is the optimal way if you need to access retirement accounts early.

Yeah. But hopefully, as you've been saving and investing for financial independence you've been maxing your retirement accounts then in addition, you've also been building your brokerage accounts, and that way your, or your taxable accounts then that way you have what I like to call a gap fund, right?

So that would, if you do stop working for any income, let's say at age 40, which has always been my goal, it'll cover me for 20 years until I can access my retirement funds at age 59 and a half. 

[00:38:11] Jamie: FI is relatively new. Or I guess it's gained a lot of popularity at least. And it goes against or doesn't quite align with traditional or mainstream financial advice. We mentioned earlier people may have a negative connotation of it because they don't want to live in a van for the next 40 years. 

Why do you think that is? And what are some misconceptions about FI that maybe we could clear up here?

[00:38:30] Spencer: A lot of people think it's only for the wealthy or for people who have a high income. But it really isn't. The only thing that FI is showing is just math. The only thing it's showing you is, hey, if you save and invest a certain percentage of your income, eventually through compounding interest, it's going to be able to cover itself. 

So I've got this chart in the book which is the Working Years to Financial Independence. if you follow traditional, mainstream financial advice, it's on page 35. It's in the principle 6, savings rate beats rate of return if you've got the ebook, but a 10% savings rate, you're going to be working for over 45 years before you can be financially independent. 

I assumed a 6% real return on investment for that one. But if you can crank that savings rate up to 20%, all of a sudden now you're less than 35 years of working until you've achieved financial independence. I know a lot of people in my parent’s generation, they're planning to work till they're 70. Yeah in this case, if you could be financially independent with 35 working years, if you start working at 20, 35 years later, you're retiring at 55. That's still an early retirement for a lot of people. Then if you can really crank up the savings, right?

Stuff that Jamie and I have talked about, like 40 and 50%. Now all of a sudden you're looking at 40%, you're looking at almost exactly 20 years, which is when you earn the military pension. So that kind of, I like how that kind of conveniently aligns right there. But yeah, it's not your traditional financial independence and the math of FI it's way outside or it seems to be way outside the mainstream.

And I think that's just because people don't know. They think that it's this kind of MLM or crazy Ponzi scheme, but it's not, it's just math and it's not a LuLaRoe Amazon video documentary coming. Yeah, no, I can't wait to see the Military Money Manual version of that.

[00:40:59] Jamie: But as you said in the book, people really just have to ask themselves if they really want to work forever I like really this quote. 

“Many people don't realize how unhappy they are with their current situation until they start asking themselves big questions”. One of the ones you listed was, “If I had 20 million and could quit working tomorrow, what would I do with my time?”

And when you start thinking about the why, it gives you. The motivation to start running these calculators and looking at the math and potentially increasing your savings rate. That would be our goal for you and our desire for you, is that you figure out a way to increase your savings rate that aligns with your why and helps you achieve freedom and choices in your life so you can do what you're passionate about and what brings you joy.

[00:41:44] Spencer: Yeah. One thing my wife mentioned the other day is, you know when people are like I don't even know what I would do if I was financially independent, like with my time. What do you do on the weekend? Do you go to work? If you go to work, then you're probably not a good candidate for retiring early, but you can still be a good candidate for financial independence. 

Whatever you do on the weekend. Just could you do that for the rest of the week or could you do that for a long weekend and then maybe dial back, to part-time a lot of guys, if they were in a better financial position, maybe at the end of their commitment, they go into the guard or reserve, because that's doesn't pay as well as active duty.

And a lot of guys get another job to supplement their income. But if you had financial independence, a guard reserve gig could be a lot of fun. Because you get to, you get to hang out with the bros and the broettes and work as little or as much as you want sometimes.

Or take a deployment here or, a tasking there.

[00:42:41] Jamie:  And see if Hawaii needs some more help. Yeah. I'll take some orders for that. 

[00:42:50] Spencer: Exactly. I think FI just makes so much sense, and my brain, I'm definitely on the logical spectrum, not the emotional spectrum, but even on the emotional side too, I think there's a huge argument to be made for just having the freedom, the flexibility and the choices to do what you want with your time and to just have the money there.

And if you want to drive for Uber, you drive for Uber. But if you decide oh, this actually sucks, and I would rather spend more time with my kids. The other thing too is if you've got two spouses working if one of them loves their job and the other one doesn't, achieving FI could be a great way to have that one person who doesn't like their job so much stop working. By two spouses do

[00:43:48] Jamie: By two spouses do you mean one person with two spouses?

[00:43:50] Spencer: I don't know. I really believe that just about anybody coming from any financial situation could achieve FI within 10 to 20 years of starting your journey.

And I lay it all out in The Military Money Manual, just, we got into the weeds a little bit with a lot of the topics today, but it really is a simple math-based problem and you can solve for X and you can realize oh, I need this much money and it's going to take me this long get it. And here we go.

Lazu says the journey of a thousand miles literally begins with one step. That step, for you might be opening up a Roth IRA as we talked about last week, or it might be cranking up your TSP contributions this year. So I think as we wrap up this episode, there are a lot of actionable things you can do that will set you on the path of financial independence without even declaring to the world, “I'm on the path to financial independence!” 

All you need to do is if you don't know what your TSP is doing, log into MyPay. If it’s at 5%, crank it up to 10%. If you've never opened up a Roth IRA, go to Vanguard.com, and open up a Roth IRA.

And then, if you just take that initial step and then throw some money in, setting up your budget so that you're paying yourself first just doing that, that might take colossal effort, but all of a sudden in five years you turn around and you say, oh my gosh I've got $30,000 in your Roth IRA $40,000 in your Roth IRA and that's a dollar amount that can be hard to imagine when, especially if you're new to the military and you're not making that much money. Or if you've been in the military for a while and you've been spending all your money. It can be hard to fathom a five-figure dollar amount like that, but it's achievable much quicker than you think.

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