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The Trinity study has come to the conclusion that the safe withdrawal rate is 4%. That means for however much money you have invested, you can take 4% of the starting amount of money every year and adjust that amount of money for inflation every year and never go broke.
Welcome to the Stay Wealthy Podcast with Taylor Schulte. As you may still be noticing, this is not Taylor Schulte. My name is Jeremy Schneider, filling in for Taylor for the month of July. This is my fourth of five episodes that I'm guest hosting for. Taylor will be back in August. You can see notes and any articles I mentioned in this show at youstaywealthy.com slash 78.
Today, I want to talk about the FIRE movement. FIRE, you might have heard of this. If you see it written down, it's written as F-I-R-E. It stands for Financial Independence Retire Early. This is a new popular movement gaining steam, basically questioning the common wisdom around retirement ages and what it means to retire and how you retire.
I have a little bit of personal experience with this because I am 39 years old. I turned 40 this year and I haven't had a job since I was 36. I kind of hesitate to use the word retire partially because it sounds a little bit pretentious as a 39-year-old and because I don't want to stop working. I just want to do the things that I want to do. I guess that's what everyone really wants. And so I really like to focus on the financial independence part. And I think a lot of people are kind of moving towards that, even calling it the FI movement, sometimes FI.
As Taylor says, he calls it work optional. It's kind of the same idea. Work optional doesn't mean you work hard for 30 years, then you just stop on a dime and watch Netflix until you die. I think it's more about controlling your finances so that you can direct how you live your life, whether it's starting another business or whether it's volunteering more or doing something that doesn't require you to chase a paycheck just to make those payments to make your life go on.
My story of how I got to being 36 without a job is when I was 22 years old, I started an internet company as I was graduating college. It was a terrible company. It took many years for me to figure it out. After 12 years of persistence and growing the company at the age of 34, I sold it for just over $5 million. Then I worked for the company. I bought my company for two years. At the age of 36, I quit my job. I haven't needed to have a job. I
That's a little bit different than the typical fighter story, which usually goes like someone investing 50% of their income for 15 years and then just living very frugally the rest of their life. But baked into my story is the same principles, which is the entire time I was growing my company, I was choosing to live extremely frugally. The most I ever paid myself...
my take-home salary was $36,000 per year. I was the lowest paid employee at my company. Most of my developers were making six figures a year, over $100,000 per year. And then after I had my windfall, I owned 70% of the company after taxes and my partners and my employees all got their piece. I had about $2 million, which is a lot of money, don't get me wrong. But at the age of 34, it doesn't necessarily mean you can just spend indiscriminately for the next four
40 plus years of my life, hopefully. And so I still had the concepts of living frugally and investing baked into my behaviors and thoughts and decisions I was making every day. And so then after two more years of working hard, and now I was making six figures on my new job, continually to invest, I had about $3 million when I decided that I could make it without a regular paycheck going forward.
So that's kind of what the FIRE movement is about, is kind of recognizing what retirement means to each individual person.
And those thoughts have definitely shifted over the years. Back in the day, like my dad's generation, they would work for the same company for 40 years. And those companies almost always provided a pension. So my dad worked for IBM for 40 years or something like that. And IBM agreed when they hired him back a long time ago now to basically pay him a pension at retirement. That is very uncommon now.
I don't know of any public companies that pay a pension. There are some government companies and there are some educational jobs that have pensions. But in general...
workers today are responsible for their own retirement. There's also Social Security, which is another, it's not old fashioned, but it's shifting the way we're thinking about retirement because I think people more and more are realizing, A, Social Security doesn't pay that much. I don't want to have to live on that small amount of money. And B, who knows what the future holds? It seems like it's kind of up for political debate that maybe it's going to be reduced or maybe it's going to go broke. And so
These days, I think it's so important to have your own retirement handled for yourself. You want to have enough money in the bank, have enough money invested so that you can retire happily and healthily and financially securely without worrying about or needing a pension or social security. So let's look at the math on traditional retirement and how the FIRE movement has kind of turned that on its head. If you invest 10% of your salary per year and those investments get a 7% return,
That would mean after 41 years, you would have enough to retire. And so that 10% investment rate assumes a 90% spending rate. And when you do the math and you put it in the calculators, that's what you get. And that's not crazy. 41 years is kind of a typical career if you start making real money at 25.
and you invest 7% of that, that would mean at the age of 66, 41 years later, you can retire and continue your standard of living and have enough to cover your costs of living. And that is fine. And I think that you've earned that. You've worked a nice long career. You've dutifully and consistently invested 10% off the top of your income every year for 41 years, and you've earned a retirement. But let's change that a little bit. What about 15%? Kind of another traditional, typical savings or investing rate for retirement.
If you invest 15% of your income instead of 10% of your income, instead of taking 41 years to get to retirement, it takes 35 years. If you're at the beginning of your career, those both sound like big numbers, but that's six years different. You know, if you get a week of PTO and you get to go on vacation, that's amazing. This is six years of PTO just for that 5% increase. Because when you increase it by 5%, you're doing two things that have kind of this multiplicative effect.
One, you're obviously putting more money in, but two is you're also reducing your cost of living. And so when you do both those things at once, it has this like cumulative or combinational effect that brings retirement date even closer more quickly. So the firing movement says, okay, that's cool. 35 years is good. You'd retire then at the age of 60 instead of 66, which is still nice, but no one's jaw is really dropping if you retire at 60.
But why 10% or 15%? Some people make double what another person makes. Why does that person need to spend double? And so they said, hey, what if we save and invest 50%? Not 10%, not 15%. What if half of every dollar that we make goes right into investing for long-term retirement?
Well, it turns out that takes length until you have enough money for retirement from 41 years, if you're investing 10%, all the way down to 15 years. Starting from zero, if you invest half of your income, after 15 years, you'll basically have enough to maintain that same cost of living indefinitely.
That's kind of the typical fire story, which is like a young person who puts half their income away and then they can retire super young. 15 years plus 25, by the way, is 40. That's about my age. It's pretty young for a traditional retirement for sure. I think the real message here isn't that you should go crazy when you're 25 and not work anymore from 40, but it's more to question why 65? Why is the retirement age 65? I would propose that the retirement age isn't 65. In fact, there is no retirement age. There is a retirement number.
There's a retirement amount of money, basically how much money you need to not need a job for the remainder of your days here on earth. And so what is that retirement number? Well, in the FIRE community, there's the oft-quoted study, which is called the Trinity Study, which basically looked at the historical volatility of the stock market and investments and at historical inflation. And they're trying to answer the question, how much money can you take out of an invested portfolio every year such that you will never go broke?
And we know that the stock market over the last 100 years has gone up about 10% per year on average, which is great, but it doesn't go up 10% every year. So you can't take out 10% every single year because if you take out 10% every year and then the market has a bad few years, then you basically go broke. But you can probably take out more than 1%, right? 1%, even with the bad up and down years, only a 1% rate of withdrawal will be so much less than the 10% growth on average that you'll be fine. So it turns out,
When taking into account inflation and the historical volatility of the market, the Trinity study has come to the conclusion that the safe withdrawal rate is 4%. That means for however much money you have invested, you can take 4% of the starting amount of money every year and adjust that amount of money for inflation every year and never go broke. And so that's important. So if you have a million dollars at retirement,
your safe withdrawal amount now is $40,000. And you can continue to increase that with inflation, even as your portfolio fluctuates. So let's say you retire in the first year, the market's down 20%, and your portfolio drops from a million to 800,000. The next year, you still take out your same 40,000. But historically speaking, you're still going to be fine. You're not going to lose your nest egg. Your portfolio will have time to recover it based on the historical volatility of the market.
Hey everyone. I hope you're enjoying your time with Jeremy. I just wanted to pop in really quick and let you know that my firm is currently offering a free retirement checkup, which includes a 2019 tax return analysis.
As a reminder, we specialize in retirement planning for people over age 50 who have accumulated investments of $750,000 or more. If you're on the hunt for a retirement and tax planning expert and you want to learn more about our free checkup, just head over to definefinancial.com and click on the big purple button that says free assessment. Again, that's definefinancial.com.
So the back of the napkin math basically says you need to take how much money you spend per year and multiply it by 25. That's kind of the inverse of 4%. And so if you spend $100,000 a year to live your life on all of your costs of living, you multiply $100,000 by 25, that equals 2.5 million. And that is your retirement number. Once you get to that number, then you can basically take your 100,000 a year forever and you will never go broke.
So this is a very approximate science, right? You know, there are other factors at play here. For example, there are things like pensions and social security. There are factors like debt and real estate and if you rent or if you own, but broad strokes, it's pretty accurate. So if you only have two times your annual spending, for example, you're in trouble because that would mean you would need to take 50% out every single year. And there's no investment on the planet that's going to give you a consistent 50% return.
And on the flip side, if you have 100 times your annual spending, then you're fine because you could take your 100 times your annual spending, put it in a checking account, spend 1% of a year for 100 years. And I don't think anyone listening to this podcast is going to be alive more than 100 years. Unless, I guess, you're a small baby listening to this podcast, which in that case, good for you. You have really taken your financial future by the horns. And that's a great exemplification of the FIRE movement starting extremely young as a baby listening to financial podcasts.
podcasts. Good for you. So two times is obviously way too low. 100 times is more than enough. And it turns out 25 is about the right amount. I think it's really helpful to put your specific numbers into a retirement calculator or sometimes even called a fire calculator. Now, it's basically how much money you currently have invested, how much money you're contributing every year and what you're spending per year. And you can see in combination with the expected rate of return of your investments,
And then you can see basically where you're going to be over the next 5, 10, 20, 40 years. To me, it seems really secondary to do that. But I think to a lot of people who haven't done that before, it's really eye-opening because they said, oh, wow, if I increase my contribution by another $100, that might buy me a couple of years of my life back when I need to retire. And so I'm going to link to some good retirement calculators in the show notes here at youstaywealthy.com slash 78, including one that I made on my website. And you can check them out and try the numbers for yourself.
So that is my rant on the FIRE movement. See if you can retire early or at least become financially independent, work optional. That brings us to the Q&A segment of today's show. We only have one question today. And today's question is from Dustin. Hi, Jeremy. This is Dustin from Mississippi. I was wondering if I wanted to retire in 10 years through investing in broad-based index funds, what is the most important discipline I should add to my life?
Hey, it's a fire question on the fire episode. How convenient. So Dustin's asking about retiring in 10 years. First of all, I don't know, Dustin, because I don't know how much money you have. And like I just mentioned, if you already have 20 times your annual spending invested, then you will retire in 10 years easily.
even if you never contribute another dollar because the growth of those investments will easily reach 25 times your annual spending within 10 years. But I assume you mean starting from zero. And so I really have two answers for you. One is I think you need to realign your expectations. 10 years is a very small number, even for FIRE. By the strict math, the 7% return, how much you need to invest of your take home, that number is actually 60%. Actually, it's over 60%, which means
If you make $40,000 a year, you have to invest more than $20,000 a year and then live on less than $20,000 a year. And that's not even including taxes, right? So it's pretty ugly math if you're trying to just start from zero and retire in 10 years.
15 years gets a little bit more reasonable. 20 starts to be realistic if you're going at it very hard. But I would say if that is really your goal and you want to go that path, I'd say the number one thing you can do is just frugality. You just have to spend way less because that's going to allow you to ramp up that savings rate and it's going to allow you to continue living at a low cost of living when you do retire.
That said, I think you should realign your expectations because probably 15, 20 years is more in the realistic realm. And the second answer I have to you is the real answer, which is how you could actually do it. And I often say if you want to be a millionaire, you should live below your means and invest early and often in index funds for the course of your career. And it's almost a guaranteed way to become a millionaire. If you want to become a billionaire, you have to start a company.
That's the long and short of it. If you look at a list of the billionaires in the world, basically all of them have either started companies or been very, very early employees in companies or co-founders, or they've inherited companies from someone who started a company. And if inheriting a company is not in the cards for you, which unfortunately it wasn't for me either, then you have to start one.
But on that note, one of my favorite things about business is that overnight successes take about a decade. And so when you see someone who hits it big in business, whether they sell a company or whether they have the hot new app or they're really successful restaurant or whatever it is, almost always there's a decade of grinding that precedes that.
The idea that you can think of an idea for an app and throw it in the app store and become a millionaire overnight is almost never true. And if it is true, that person usually was grinding and creating crappy apps the last 10 years to figure out what works. And so if you really do want to retire in 10 years and you want to be aggressive about it, you can start a company and just plan to grind for a long time and figure out what works and be persistent. That's why they kind of got me there in about 10 years myself, I guess from 22 to 36 was 14 years, but you know, close enough.
And so those are your answers. Reline your expectations because 10 years is not very realistic. Be frugal and start a business. That is all I have for you for today's show. This is my second to last show. My last show will be next week. Taylor is coming back after that in August. If you're enjoying the show, I would love to hear positive feedback only. Please, I can't stress that enough on my Instagram at personalfinanceclub.
And if you're not, please direct all complaints to taylorschulte at youstaywealthy.com. I'm just kidding. You can complain to me too. And none of this is Taylor's fault. He has not approved any of these words. He's given me almost total free reign, which is probably a dangerous thing, but hopefully it's working out and hopefully you're enjoying it. That's all I have. And I will see you next time.
This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services. ♪