How to Create Your Comprehensive Financial Independence Timeline
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Happy wealth planner launched week to all who celebrate the one time a year where I cos play a tech entrepreneur and I throw my whole being into product design. I guess technically, it's more active to say that, that kind of happens throughout the year, but then this is the week work at all comes to a beautiful commination point. In honor of the annual revamping of our most technical and OK only product, we decided that a tactical episode was in order.

So we're going to talk today about how to think about a truly comprehensive financial independence, timely and to put ourselves on the back just a little bit because I think we built one as a primary for those were unaware of this product, are unfamiliar with this specific feature. The wealth planner is the money with kt flagship product, the core of which was first created back in. So it's intended to be a one stop shop for your personal finances and particularly won with the ability to translate your current choices and your current finances into what they mean for the future.

When I was starting my personal finances journey, I was constantly trying to make sense of the long term implications of the decisions that I was making. And the first financial independence spread SHE I made for myself was extremely different mentally. But IT served the purpose, which was telling me how my spending, my income, my investing, all of these things that I was doing today would likely play out if I just stayed the course.

What would happen next over the next several years if I just kept marching down that path? And the most valuable element of that original radioman tary spreadsheet was the ability to just quickly model out changes like whether that was understanding how spending more on rents or earning less money did or honestly, sometimes didn't really materially impact my financial future. So back in twenty twenty three, I added the first version of that feature to the wealth planner.

Before that, I was like a separate thing entirely, and IT remained, I would say, mostly unchanged. In twenty twenty four, we sort of started beating IT out for like accommodating a pension or extra income later in life. But this year we really, really tracked IT out.

Welcome back to the money with Katie show. I'm kd. Get to san. And today, I hope you hear this. And you think that what we have built sounds so valuable that you want IT for yourself at money with Kitty dot coms large well planer.

But regardless if you are just looking to Better understand the factors that impact financial independence so that you can build your own model, today, I am going to share a lot of detail about how ours works and how we're thinking about the best way to project this type of information into the future. So for people who are listening to this, who have used the twenty, twenty three or twenty twenty four versions, our intent this year was to make IT a lot more accurate by creating room for way more inputs depending on the situation. Some of the improvements we've made will make some people's timeout ines, look closer than they did before, and it's possible that other future journal, ancel, will probably make IT look farther away.

But either way, the result should be more accurate than ever before. And the beauty of having this feature within the wealth planner itself, in case it's not obvious, is that IT takes your actual data. So anything that you're putting in for your income or your spending or your investing, it's automatically factory that stuff in.

okay. So let's start with a quick definition of what financial independence is and how I personally like to think about IT. So on the most technical level, financial independence is the point at which your investments are safely producing enough income to support your expenses.

Sometimes this is called the cross over point, but the basis of the calculation is a general guideline that they call the four percent all. So obviously, we acknowledge and we support people tweak, they're safe, withdrawn as desired. You do you but that is to say you now no longer need to work for income if you don't want to because your next deg is enough.

IT is producing the income that you need. All of this hinges on your spending, not your income. So you might be earning a hundred thousand dollars per year, but only spending sixty thousand dollars per year.

You are at financial independence when your investments can produce that sixty thousand dollars per year figure. And I think that, that might be on some level. But what attracts me to financial independence ideology as a financial world of view? Because IT does do what I find so much of money.

Advice sometimes struggles to do or struggles to help with, which is defining enough. The concept of enough in capitalism is a little bit antithetical. Like if you feel contented with what you have, or you know that you have what you need, and then you stop pursuing more actively, that is in some ways, a little bit radical.

I don't know. I just kind of love that we can have a responsible personal finance guideline that helps us ensure our futures but also acknowledges that like after a certain point, you shouldn't keep running yourself into the ground because you have an okay, we'll get to the math of all of that right after a quick way. Paid on line of Better ment use may not be representative, see more reviews of the APP store in google place store, learn more about this relationship at W W W dot batman comm slashed money with kd investing involves risk performance is not to between work, family, hobbies and everything else lives drawing at you.

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So when we were thinking through all of the different inputs needed to calculate a timeline from here to there, even mi accurately, this is what we came up with. I'm going to take you through all the factors. So the first is your current long term invested assets.

So that is to say the money that you have earmarked and invested for the long term, which excludes money that is set aside for other things like a five to nine plan, for example. So this year, for the first time, when you fill out your dashboard tab, you're gona tag your accounts with an associated time lies. So whether that's a sinking fund or money, you are colon code spending soon or a long term account for a financial freedom or anything in between.

And then only the accounts that are tagged as long term financial freedom are going to count told that financial independence calculation. This is one of those tweet that i'll probably make existing users timelines look longer if a substantial portion of your assets are currently earmarked for something other than the long term. So in the past, we really didn't have any way of knowing.

So we just we basically looked at all the money that you had invested and we said, okay, if all of that grows unobstructed at the assumed rate of return, it'll be enough to safely support their spending in x number of years this year were being more specific about what we're considering. The next thing that you need to know is your current growth income that wants pretty simple, and then you need to know your current monthly spending. So relatives in the past, we use your spending in two ways.

First, we use is to determine what your fine number needed to be. So like we looked at your monthly spending, what you set your life cost on a monthly basis, we just multiplied by twelve annualize IT. And then again by twenty five, to figure out how large or five number would have to be such that four percent of that number would produce your annual spending.

And obviously, we adjusted for inflation. And what have you? So for example, if you spend five, eight months, that is sixty thousand dollars a year and multiply by twenty five is one point five million.

So today, in twenty twenty four dollars, your fine number is one point five million dollars. But the other way that we use to use your spending number was to basically back into how much you were saving because we knew your income, we know your spending, we could go, okay. The difference then is what they are saving for financial independence is their savor.

But this year, rather than just assuming that any money not being spent was being invested for financial independence, we're actually looking specifically at contributions that are made to accounts that are attached for the long term. This was a quick that we made because of situations in which someone is saving a lot, which makes you look as there like cruising towards fy. But a substantial amount of those savings are there in cash for you know what upcoming vacation or trip or maybe they are being reserved for something like a house.

So we just wanted a Better way to delate between progress toward long term financial freedom and progress toward your other financial goals. okay. Moving on to the next thing that we need to know is your estimated effective tax rate. So we have a sense for what percentage of your growth income you are going to keep, and we can tell you more about your tax liability. So technically, we are looking at an even more personalized number here because we're looking at your net income after other paychex deductions too.

In past years, folks who are paying for family health coverage, for example, would tell us that, like, hey, I put IT in, but my income looks a little but high in this financial independence calculation because my effectives tax rate is not capturing the other stuff that is getting deducted for my paycheck that does not go toward investments, but is going toward things like union use or health insurance. So we made sure that, that stuff would be accounted for this year. And so taxes are an interesting element in the financial independence timeline calculation.

We basically hold your effective tax rate and deductions steady throughout your working years. But I will note that the gross annual safe withdrawal amount to like the amount that we will tell you, hey, this year, you're safe withdrawal is x. We do not apply your effective tax rate to that because your effective taxi and retirement is going to depend on what types of accounts are withdrawing from.

So for example, if you are someone who primarily uses long term capital gains and rough accounts, your tax rate and retirement is probably going to be far lower than IT is now. You are not really going to be paying much of anything in the way of taxes. Whereas if you are someone who is fully and completely withdrawing from pretax accounts, your effective tax rate might be relatively similar.

And so I know that this is something that we've gotten questions on in the past. Like does the safe withdraw account for taxes? IT does not.

The number that we produce for the safe withdraw is pretax. So just keep that in mind. okay. In the next. And this part is totally new this year.

We thought that I would be interesting to include a way that you could factor in temporary major expenses that you might have. So this was inspired by our listeners who have written in about their astronomical child care expenses, who foresee them dropping off completely in a couple of years. We wanted to be able to factor that into the calculation, whether those expenses are happening now or they're about to start.

But in any case, they are only contained to a specific and like defined period of time that does not have to continue in perpetuity. So for example, maybe right now, you are spending three thousand dollars a month on childcare, so you have an additional thirty six thousand dollars of annual expenses that are basically going to expire in a couple of years when you're no longer paying for daycare in order to support that amount of spending forever, you would need an additional nine hundred thousand dollars in investments. Obviously, that is gonna give you a financial independence number and IT is gonna keep a financial independence timeline.

But this has been pretty tRicky to deal with the past in the way that the planner used to function and the calculations used to work because you do want them to factor into your spending now, right, like that is three thousand dollars a month that you are not saving for the future. All that to say, we wanted to build in a feature that would allow you to feature them into your spending for a designated amount of time, but then pull them out of the expenses. It'll need to be supported later.

So you're not artificially inflated the amount that you need. I would say that another way that I could see the applying for people is folks who wanted be able to estimate the way increased health care expenses and early retirement might not be factored in to their expenses right now but will be for a gap between retirement and at the time that you get on medicaid. So if you have temporary expenses that are going to apply in the future and you want to see how that would affect a certain period of years, they can also be used for that.

okay. In a similar vein, we need to know about your debt. So think about a payoff period for something like student loans.

Maybe you've got eight years left and maybe the payment is five hundred dollars a month. A five hundred dollars of your monthly spending is a student loan payment. Your investments do not need to support that in purpuric either.

So this is another factor that might lower your five number from what you're calculating just from like quick back of the apin math. And so this year, we added a debt payoff calculator that effectively responds to different payment amounts and interest rates in the dashboard tab. And so we're using the payoff ff data to inform how and when your expenses will be lower in the future based on the debt being paid off.

IT also factors in mortgage debt. So if you have fifteen years left on a mortgage at some point, fifteen years in the future on that timeline, you'll see your expenses lower by the mortgage falling off. But another reason i'm excited about the depth of calculator, if I can digress for just a moment, is that I think what it's gonna be really helpful for is helping people to understand and visualize opportunity cost so you can put in, okay, I have, you know, this consumer loan that i'm still paying off and the interest rates eight percent.

And my payments right now are two hundred and fifty dollars a month. And it's gona tell you, okay, if those are the numbers that you are paying and those are the terms of the loan, it's gonna take x number of years to pay off. And like this is the amount of interest are going to pay.

So you can just toy around with your payment amount, see how that shifts things and then make informed decisions like, okay, well, maybe I do want to pay that off more. Th, be clear, you what maybe I don't maybe i'm not actually that stressed about IT. Okay, we're getting back on track.

Similarly to temporary expenses that you want to support for now, but i'll remove later. You probably want a factor and income from other source is that you might have in the future. So for most people, this is gonna ther take the form of pension payments, social security benefits, maybe even just gig work, like I think there are a lot of people who take end up taking part time jobs when they are retired.

And you might just want to see, okay, how would a little bit of additional income at some point in the future adjust this timely? So in our input section, we now have room for two sources of future income from two people. So for sources of income total with and without cost of living adjustments.

And this, I think, by the way, is a popular question more broadly, which is just how does my pension effect or not affect my financial independence number? How should I think about that? So the easiest way to quickly determine how much a pension payment or social security income will change your financial independent school is to figure out what you would need in investments to produce that income.

So we're basically doing the calculation, but in reverse, you just multiply your annual net income from that source by twenty five, and that's the number that you can subtract from your five number. So for example, maybe you have twenty five thousand dollars year from a pension that you're expecting. That is like an investment account that is worth six hundred and twenty five thousand dollars.

So if you have twenty five k and that income from a pension, you can just attract six hundred and twenty five thousand from your five number. And the planner will do all this for you. You just put in the net income and it'll factor IT in.

But if you're just kind of doing IT back of the napkin, that's how. And I would say that for some of the excessively motivated listeners of this show, where users of this product they will reach you will reach financial independence long before social security has a chance to lower your fine number. So you might find that entering your future income doesn't actually really shorten your timeline.

As we discussed in the social security episode of this can be like a little bit more complex because having that income later does technically mean that you'll probably end up with more than you need. Will link that deep dive in the shown notes of this episode. But we're still just trying to figure out how to account for that accurately without undershooting what you will need.

And I think, in general, our philosophy is to air on the side of conservative estimates versus aggressive ones. And the last thing to think about for income from other sources is our rental property investors. So if you own rental properties or you plan to someday, you'll also want to consider your net rental income and the expected increase over time. So we have a new section for that in the fight tap this year that will take some assumptions about rental property net income into consideration and sort of factor that into the overall picture we list of that marinate. We will continue after a quick break.

What does the future hold for business? Honestly, that's a pretty big question, which is why you'll probably only get brought answers like rates will rise or fall to put IT in more jargoning terms. It's a buller bear market until someone finally invents a Crystal ball.

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terms warm r plus okay, we're almost done. We have two more big factors. We've got major expenses and major cash fusions in the future.

So rather than like a temporary ongoing expense like childcare, this is more along the lines of, okay, you are using two hundred and fifty grand of long term investments to like buy a house. Obviously, that is going to impact your financial independence timely. So in our case, in our product, we wanted the ability to account for that up front.

So if you already have that money earmarked after the side and it's not tagged as money for the long term right now, IT wouldn't have been factored in any way. But if you know that at some point, ten years down the road, five years down the road, you're probably gonna want want to use a big chunk of your long term investments for something, or you just want to be able to pencil out what would happen if you do. You can factor that in.

Same goes for the opposite scenario, like you are expecting or you wanna see the impact of a big inheritance or some other windfall like the sale of a business and how that might affect the time line you can factor that stuff into. I think the major reason that I like this feature is because IT allows you to see if the timing of purchases or you know cash infusions like this actually makes a real difference. Like maybe you'll find that just waiting for a couple more years of compounding will materially change the outcome.

I was playing around with this during testing, and I was actually surprised to the extent to which, if you allow your investments to compound to a certain point, you can actually take out quite a bit all at once and use IT for something like a dog payment. And IT doesn't really, you know, materially change the timeline that you're on, whether doing IT earlier really does. So I think that that's just something to be aware of and something that we wanted people to be able to see for themselves and see with their own numbers.

okay. Last one, you basically just need to know what you're comfortable as summing about the future. And this is in some ways the simplest part of like product development in building.

But the most important of the assumptions that we're making, first and foremost, s you have to know what you are assumed safe withdraw rate is. We usually recommend four percent just as that average. But if you are choosing to retire early or you are someone who is more recovers, you can see OK.

If I put in three and a half percent, how is that going to affect the future plan? How can I plan more conservatively? Another thing that you want to know is how your income will change.

So the defauts assumption is three percent increases each year. But sometimes when i'm doing my own planning, I will actually assume a negative change over time, as in like I am going to assume that i'm going to work less and earn less over time. And I want to see how that is gonna influence, things like a slow burn out of employment.

You'll also need to know what type of investment return you expect to get before inflation in your investments. So we usually say somewhere between seven percent in nine percent as you're before inflation assumed average rated return for long term investments. But if you are investing completely differently, then I don't know, total stock market funds, maybe you have a lot of bonds or maybe you really are in like a much more conservative fixed income portfolio and you want to see like four percent, five percent, you can plan as conservatively as you want based on how you actually invest.

And I would say this element is extremely critical to understand so that you know what you can expect from your long term asset growth over time, something you'll notice if you play around with that return average in the planner, is that the difference between assuming a seven percent return and a ten percent return is like astronomical IT will change the entire outlook. So you want to make sure that you are comfortable with the returns you are expecting to get and that IT matches up with the way that you are investing. And so IT might be worth saying explicitly, if you are someone who is like hopping in and out of the market trying to tie the market, you're probably not almost certainly not going to get the average return.

Getting the average rate of return requires dollar cost averaging and not trying to time the market. okay. And then related dly, what type of inflation do you expect to see? So it's not just like overall inflation, obviously, we don't know.

I think it's around two point six percent right now. But you wanna kinda a sense for what type of inflation you expect in your own lifestyle, in your own spending. So the default that we put in there is three percent per year.

But the thing is certain expenses are going to impact your personal inflation, right? More so if a large portion of your spending, your personal spending is a mortgage payment, that means there's a pretty big chunk of your budget that is mostly protected from inflation. At the same time, when I look back at my own life, my spending does go up every year. It's not necessarily because for inflation, it's because I am just spending more. So if you wanted know, okay, what is this gonna look like if I am actually spending more each year is just like a general trend.

How is that going to impact things? And then the last input is the year that you want to quit working, otherwise known as the year that you want this timeline to project your income going to zero so that you can actually see how your invested baLance will change once your expenses began being drawn down from them and so you can see how they will continue growing as opposed to getting more income added to them. So you just have to make sure that you're selecting a quit year that's after you are projected to reach fy, otherwise, it'll kind of glitch out and you will look like you're never gonna there.

And instead le of running of money, which does not good. No, why? No, we don't like that, but I am excited that we built in this drawdown feature this year. In the past, we had like a work around formula that you could input, but this year, you can basically be like, i'm going to quit working at this point, you show me, wealth planner, what is gonna happen to my investments based on all my assumptions, if I start withdrawing my expenses from those investments and I stop adding money to them.

So obviously, there are a few shortcomings here, both about our model and just in general when you're trying to project five time lines because ultimately, this is an exercise in financial fortune telling. And the primary shortcomings that I would point you with our tool or two fold, the first is a little bit existent, al, so trying to accurately predict to the future is impossible because we cannot plan for things like job loss or illness or in a historical prolonged bear market or other huge circumstantial shifts. And there is just really no perfect way to plan for shocks like that.

So the goal is to give ourselves a sense of direction accuracy. And I generally on track with where I thought I was headed or does something need to change? The second issue I would point out is more technical.

And it's the fact that we can tell you when you're growth annual safe withdraw amount surpasses your spending and signals that you are at five. But we cannot provide an accurate post tax estimate without knowing more about the breakdown of the tax status of those funds. And that got me thinking a little bit more about maximum optimal outcomes.

I hate myself, but that was really where my brain went next, just like art. Well, if we're discussing tax free with raw strategies and we now know our twenty twenty five tax up or limits, let's just briefly revisit, while we're on the topic of financial dependent schools, what that would look like. So if you're unfamiliar with like the general premise of tax and penalty free early retirement strategies and like the methodology that goes along with that, we will link our episode in the shows.

I think IT first came out in twenty twenty two. It's also almost an entire chapter in my forthcoming book, rich gral nation, that will be out on june tenth of twenty twenty five. But even if you're not trying to contain the most optimal round strategy, I still think this is illustrative for understanding how your income is text in retirement and the fact that you can exercise more control over your tax liability than you can in your working years, depending on how you are setting yourself up.

That episode also goes into the early part of early retirement planning. So if like the penalty free thing peak to your attention and you haven't heard that episode, you should check that out. But in twenty twenty five, the standard deduction is gonna be fifteen k for singles and thirty k for married filing jointly, which means you are effectively guaranteed a tax free withdraw on at least that much pretax income, whether via rough conversion or direct withdrawal depending on your age.

And this is, of course, assuming you have no other income, right? We're talking about early retirement or traditional retirement where all your income is coming from your investments and you are controlling how much you are taking and from where. And then the top of the zero percent long term cap gains tax bracket in twenty twenty five is forty eight thousand three fifty for singles, in ninety six thousand seven hundred for married filing jointly.

So if we put these two numbers together, this means retired singles create up to sixty three thousand three hundred and fifty dollars of tax free income from their pretax and taxi withdraws each, and buried five jointly couples can create up to one hundred and twenty six thousand seven hundred of tax free income from pretax and taxi ble withdraws. So that means there go the optimal tax free fine number, at least in so far as pretax and taxable accounts are concerned, is one point five eight million for singles and three point one six million for married couples in twenty twenty five dollars. So those are the fine numbers where a four percent withdraw would be totally tax free.

Assuming you are just talking about pretax and taxi ble money, obviously, you could swap out or supplement the taxable money with and then you would have unlimited tax free withdrawal. But given the caps on the contributions that you can make rough accounts, it's more likely that you would get there with taxable. And so the split, by the way, would be about three hundred and seventy five k in pretax funds for singles and then seven hundred and fifty k for couples.

And then the majority like the rest in taxi ble or rough. So obviously, I just want to call this out. This is intention with my more general assertion, that contributing the maximum allowed the pretext dollars to account like four one case.

And then investing your tax savings and rather or taxable funds is optimal after a certain point. And I guess that point is once you have three hundred and seventy five thousand dollars in pretax funds if you're a single person or seven hundred and fifty thousand if you are a couple. So you basically have to decide for yourself whether or not you care more about saving on your taxes in your working years or saving on them in your retirement years.

And this will likely come down to how much you earn. My income tax bracket is in the thirty percent range. So I have made the decision that IT is still more important for to prioritize pretax contributions.

Now even if that ultimately means I have more in A K plan, then I can access tax free later. That's fine with me. I guess a few final thoughts. My fascination with financial independence as a concept and the fact that I understand IT is like a sort of bedrock for all other financial planning, kind alive my origin story and personal finance as a fire d vote.

And even though i've left a lot of my other fire beliefs behind, this is a fundamental tenet of planning that I have held onto because IT remains, as I see IT, the core of the rest of the money decisions that you're going to be forced to make. IT answers the biggest personal financial responsibility question of all, which is, watch the point of saving money. And why would I save money instead of just spending everything? Now how do I define what is enough and understand what my path to getting there looks like? And I think that that's really, really powerful.

So my hope is that after listening to this episode, you will have a Better understanding for which factors really need to be considered in long term financial planning, whether you end up using the twenty twenty five wealth planner or not. But if you word like the blender, IT launches on this friday, november twenty second, and we will link the sign up list in the shower note so you can join everyone on the list. Gets twenty five percent off at launch.

And if you're hearing this at some point in the future, you miss the launch, but you have still made IT this far. You can use code M W K show for ten percent off OK that is offer for this week. I am very thankful for all of you, very thankful that you listen to the money with Kitty show.

And thank you for spending your time with me and your attention. I know these things are very valuable, and I am touch that you want to spend them with me. So happy early thinkers giving. We will see you in two weeks, same time, same place.

Our show is a production of morning blue and is produced by hand novels and me kd gi toss in with our audio engineering and sound design from nicois. Devan mi is our chief content officer and additional fact incomes from Scott Wilson.