Did 2020 Destroy the FIRE Movement?! (Financially Independent, Retire Early)

did 2020 destroy the fire movement no seriously is fire even possible it's brian preston the money guy yeah brian i'm really excited about this one because we're gonna do something we've never actually done on the money guy show before we're going to take you the listener you our audience on the journey kind of of what it would be like to be a financial planning client trying to determine is fire is early retirement actually possible and so what you mean to kind of set the stage here is we're going to do a normal show the first part of it but you have a case study that's right where we're actually going to pull our stress test monte carlo analysing absolutely retirement software and actually put it against some fire scenarios that are pretty common out there in the movement that's exactly right so first for those that are not familiar fire what does that even stand for financial independence retire early it really means and i think i mean this is a pretty noble desire and goal is the fact that fire is actually looking to the dream is that we all know you want to do you want to build money up so you can do what you want when you want and really kind of how you want that's really what the fire movement is so you can leave the workforce early that's right you know we they say hey the whole paradigm of life is incorrect normally we work for 65 years and then maybe we get to retire for 25 or 30. we want to flip that what if we only worked for 20 years and we got to enjoy retirement for a lot longer and i think that's the general idea around why the fire movement is so motivated to exit the workforce early so we've done other shows on this but man oh man 2020 has been tough for everybody it's been a unique one i mean it is a year just like you hear the saying a virus is going to virus 2020 is going to 2020. exactly because it is just one of those years that it's it's pretty wild and it feels like it escalated very quickly yeah if you look at just a chart of the s p 500 this is from the beginning of 2020 all the way through october of 2020 you can see it's been a wild ride there were stay-at-home orders in the middle of the global pandemic there were huge job losses all across the market had fits and starts it's just been a really really interesting year so far so think about this if you're one of these people that jumped out of the workforce when you're 35 40 years of age a year like this happens and you're like holy cow you know your dynamic spending plan really gets a get a workout because you know if you come into the year thinking you're gonna pull out five percent of your of your your savings and then you hit up march yeah where you're at asset holdings because we realize a lot of fire people who go in the chat rooms do the research you're likely in a pretty aggressive portfolio i'm talking about 70 or greater of equities so when you hit a market like march it probably was reasonable to think you might have lost over 30 of your assets yeah and if you are someone who has sort of that dynamic spending plan where essentially you calculate your monthly expenditures based on your portfolio value when we see these wild undulations what's available to pay for your expenses may be a lot less than what your actual expenses were so that's problematic no doubt and i think here's here's a big thing to take into account we know the typical retirement is 30 years sure yep i mean and you hear about i mean you don't have to look very far to see that the withdrawal rate the safe withdrawal rate that people talk about considering sequence of return risk and other things is four percent and that is based off of 30 years and here's the thing when you have a 30-year retirement you can handle a few bumps and bruises and even market volatility absolutely but man does it look different when it's a 50-year plus retirement i think that's so interesting on a 30-year time frame bumps and bruises are just that on a 50-year time horizon a bump or a bruise could mean like having to cut off a limb it can be that severe over that long of a time well it's not even just market gyrations because let's face it when you retire when you're 60 plus you probably have already bought your final house you probably know what you want out of life you've had all your children you got them out of the nest most likely a lot of life has already occurred sure when you retire in your 30s 40s and even 50s there's a lot of life it's not just the volatility of the marketplace it's also the life that you have to that you're building for yourself as you're making it through the journey there was actually someone out there in the financial world who we're familiar with uh pretty popular out there in the fire movement and he had an article that came out i think it was in december of last year is that right and this is what it said it said as a 42 year old millionaire i tried to retire early at 34 but failed here's what went wrong so i think i think this is pretty i love it when people are self-reflective and kind of look at this is financial samurai a lot of you guys have if you're in the fire movement you've followed sam for years he writes good content um and you can see he's now it's so interesting because he's out there on the west coast and i think when he started out he had a portfolio of over three million dollars in assets and he and originally when he was 34 years of age this seemed like it was going to be enough but sam has come out and been very transparent that he might have missed a few things when he actually left at 34 to the point that he's now back in the workforce at 42 what are those big learning experiences he has yeah so obviously you can go read the article but we kind of pulled out here are some of the things he said that really affected his fire plan number one he had a child i can't in my mind fathom thinking about being in retirement off the workforce completely relying on my portfolio before kids even entered in the equation because when you have a kid things just change financially and otherwise life is very different at least in my perspective post-child than it was pre-child it reminds me of the the famous mike tyson quote that everybody has a plan until they get punched in the middle that's right it's kind of the same way everybody has a plan until you have a kiddo yep and then you realize man these things cause a lot of chaos so just be prepared children change things the second thing that sam noted is that he underestimated how low interest rates would go yeah this is something that we as financial advisors have to be very very careful of because we tell clients right now they're thinking hey should i refinance or what's going to happen to my savings account or where should i put my cash and we say look we know that historically rates are really really low right now but no one has a crystal ball certainly sam did not have his crystal ball pre-retirement nor do we have ours now so the financial markets can do some things that we might not expect yeah and this is a big thing and i know why sam put this on there is because for retirees you're counting on yield this is how you're supposed to get safe returns is from you know having bonds and and your savings accounts generate some yield on the interest that they're paying you you don't have to take a lot of risk and you can build some income coming in every year the problem also here's the second bad side of this is when people cannot get yield out of their safe investments what do they do they tiptoe further out on the wrist spectrum absolutely and that you know that's great when you're getting returned it's very scary when you have the volatility of a down market i think covid uh brought a lot of that to life for folks because yeah i think you said it so beautifully they tiptoe no one ever plans oh i'm going to go further out of the risk spectrum further out but you have three four five years of really solid market performance and you're not rebalancing appropriately you might not even realize how much more aggressive your portfolio is than it should be so that's a huge thing you have to be aware of the third thing that sam noted was rising health insurance premiums he had sort of budgeted hey this is how much i think health care would cost in retirement and it changed yeah and that's definitely i mean this is something we've noticed look i'm going to tell you this is a true concern for anybody who's retiring early i'm talking about somebody's in their 50s 55 60 even 62 years of age because you do not qualify for medicare until you reach 65 and that's what a lot of people i mean you can be a great saver a great accumulator of wealth but if you don't have your health insurance it gets a little scary now look we know when um the affordable care act was passed it actually seemed like it was going to be a lifeline for early retirees well the cost is expensive the exchanges like i know here in tennessee we ran into a lot of problems where just a lot of the insurance providers opted out of even offering coverage on the exchange in tennessee it hasn't been everything we had hoped but i do i have optimism i'm always a glass half full i'm hopeful that health insurance becomes something that you can get in the future without necessarily working for an employer now all three of these in my mind were sort of quantitative right they were you know you can there were dollars and cents this fourth reason sam said he had to unretire the bliss of early retirement didn't last as long as he thought it would we all have these visions especially we're in our 20s and 30s i'm thinking man i'm just so ready to not have to show up to work and not have to work up early and not have to deal with that boss and well a lot of times it's like the dog that chases the car once you catch the car you got to figure out all right what do i do with this now i think it's interesting now look i'm going to tell you guys i have a bias for you and you probably saw me looking over my shoulder we actually have a book over here called tap dancing to work it's about warren buffett you know and he he loves what he does for a living i am in that same camp as i know that i am doing what i was put on this earth to do sure so i do have a bias in that but i do think that a lot of us we've seen this in our happiness studies when we've done shows on what creates happiness and where's the intersection between your financial life and your happy life the purpose of your work meaning that if you are getting fulfillment if you feel like in your own small way you're making the world a better place by waking up and going to work it does give you that fulfilled purpose-filled life and it's one of those things that i think people underestimate so be careful and make sure even if you are part of the fire movement while you're working make sure it's work that you enjoy and don't don't mishear us there are a lot of folks who say i do want to check out of the workforce i want to travel the world and do all those things and that's great nothing wrong with that what we would encourage you to think about we tell retirees this all the time is don't just think about what you are retiring from know exactly what it is you are retiring to whether that be laying on the beach or volunteering or a second career that is especially true of fire movement folks because you have a lot longer to retire to someone than a traditional retiree i think that's a great point we have some clients that have actually fire participants retired in their 40s and the ones that have done it the best already kind of have the backup plan figured out i mean we have if you ever come to an office tour you're gonna see some crazy pictures i mean we have um we have a client who is my age but he makes me feel bad about myself when i look at his pictures because he's he's actually lifeguarding playing dev david hasselhoff exactly right um is his you know backup very successful executive career and now he's a lifeguard good for him doing that so we thought these were for uh poignant points that sam put in his article but we thought you know just from our experience there are some other honorable mentions worth noting uh the first one you know sam has said hey i had a kid and it changed things i'd argue for a lot of retirees it's not just the front end of having a kid it's the entire time a kid is living in your house because we have cars and colleges and after-school activities and all the things if you're trying to check out early there is some wild variability in what your kids have going on until they're truly out of the nest when i read this i was like sam you haven't seen nothing yet because he was complaining about the two thousand dollar a month daycare and preschool type expenses it's like oh just wait sam it gets even more um from there so kiddos are definitely something you got to take into account the next one i thought that was interesting is housing now this is something uh i think back to 25 year old bohansen if 25 year old bohansen was going to name early retirement and what that would look like it would have looked very different than what in his mid-30s bohansen actually knows it would need because housing was different what made sense for me and my wife was like a sleeper sofa and a kitchen and a bathroom what makes sense now for our family four is very different than that so you have to recognize as life changes so too do your preferences on what you can accept for housing and that sort of thing yeah i think it's a it's a very notable difference if you're retiring for 50 plus years there's gonna be a lot of life that will evolve it's not just the kiddos it's just that you're tasting your desires and what actually brings you fulfillment might evolve as well that's right and the other honorable mention that i thought was so interesting i wonder if we were to interview sam and say hey sam when you were doing your early retirement planning did you account for the fact that in the year 2020 there was going to be a global viral outbreak that was going to have a huge pandemic and the world economy was going to shut down and people weren't going to be able to leave their homes and people were going to lose their jobs was that built into your plan and i just have a feeling he's going to say no well nobody has i mean here's the thing over the next decade there will be two three maybe even four events nobody will foresee exactly i mean you can make a plan but plans are never going to be a hundred percent because you just don't know all the variables you don't know what inflation is going to be you don't know what market returns are going to be so you have to just kind of craft a plan and this is actually a great setup as we get into case studies is you try to take into all the data you do know that even accounts for all the unforeseen circumstances of the past so we can try to figure out what gives me the highest probability of making it through no matter what this crazy world throws at me that's right so that leads to let's kind of talk about case studies probability of success matters when we're talking about financial independence when you're retiring early with fire um and here's i was surprised as we started doing prep on with the case studies i have never seen retirement scenarios that had a zero percent chance of success i mean all of my retirement meetings i've been in in my i mean i'm in my third decade of doing financial planning i've never seen zero potential of success yeah so when we started running some of these hey i want to exit at 35 and i need this level of living expense it wasn't like oh well you need the best market ever to make this work it was no there is a zero percent chance this money will last you so the end of your life uh if you're entertaining a scenario that even has that sort of opportunity it should cause you to pause and think for a second man what what am i actually looking at here yeah so that's why it's important we do this for all of our clients you gotta stress test the plan you gotta what do what are you not accounting for and how do i get it in there and then also here's something i want to warn you guys because i i have enough clients and i've looked in enough forums that i worry a little bit about fire participants of fire and the fact that you get you in your own little echo chamber okay meaning that you go out there and you go to this forum you go to this blog they get you all hyped up and excited about the movement that you joined that it can kind of be nudging you in a direction and creating some blind spots of things you might not have even accounted for yeah i think one of the things you said is as you think about early retirement exiting the workforce a lot of folks don't realize that depending on your vocation your career that path may just be one way yeah so it's um so here's what i also this is the last thing and this is take this because we're all shaped by the life we grew up in i grew up a lot of anybody's been watching a show long enough you know that my father lost his job in his early 40s i think he was 42 43 years of age he had a middle level management job they got out of that market and basically just did an apple cart turnover of all their employees it is hard as a mid 40 year old to go out there and get back into the workforce so to for you to voluntarily leave choose that you're going to leave your job to retire make sure you measure twice cut once because here's what i'm worried about you're leaving the party if we think about the visualization of your cycle of earning potential over your life expectancy and the years that you're in the workforce if if we're thinking about this in terms of an analogy of a good party you've essentially gotten to the party it took a few years for you know the good songs to keep the good the cool kids to show up the dj to start playing your favorite songs and you know it's starting to heat up a little bit right as it heats up right as the party is starting to kind of gel like well guys i'm out this is great but i think i've had enough i'm out of here and you leave and what i mean by that is that this is the the years of your working career that you make peak maximum money you build the size of your shovel for building assets you're actually tapping out so if you retire at 35 you haven't even climbed the mount all the way if you're leaving at 45 still not there you know it's because you a lot of peak earning years are 50 to 55 years of age what i think is beautiful about this illustration that daniel put together is this shows the median income in this country and then it shows kind of where the if you're in the lower income brackets if you're in the 25 of income or if you're in the 75 percent of income you're in a higher income bracket which ages it kind of peaks i thought it was interesting all of them tend to peak in that 40 to 60 year range if you're someone who's exiting early there is a lot of opportunity cost that's going to be left on the table that's one of the things we'll kind of talk through in our case studies so it is worth repeating measure twice cut once because it might be harder it might be a one-way street so just make sure if you are leaving the workforce you don't assume it's going to be so easy to come right back into it so what we're going to do is we're actually going to do a case study and we're going to look at a couple who's thinking about financial independence retire early they want to kind of go on this path so we want to walk you through the mindset that this couple might have and then some of the feedback that we as financial advisors would provide to them as we work through that so yeah yeah there we go i'm getting my hype getting lost my hype man position ready here so the very first thing that we need to talk through was sort of the facts and assumptions associated with this couple so what we're going to do is we're going to assume that we have john and jane fire now i should tell you this is actual software that we use for our financial planning clients we actually build this up to be completely custom to their unique situation so we had some of our advisory personnel here build a pseudo case for us and now this is john and jane fire and this is what we know they're both 25 years of age and under a normal circumstance they want to retire at age 65 so that is like your traditional retirement and we're going to assume a life expectancy for both of them of age 95 they're same age they're going to expire at the same time well we said we know that if they both make fifty thousand dollars a year we can estimate that their present living expenses are about sixty thousand dollars and we wanted to assume from an income standpoint that their income just kind of grows with inflation and we have inflation built into this planet about two and a half percent and we also want to assume that their living expenses kind of grow with inflation so what that means is in their working years they're going to spend about 60 000 a year in today's dollars and when they retire we'd like to replace about 60 000 of today's income so we're gonna have this flat lifestyle all through retirement whether they retire 35 45 55 or 65 that's the level they'd like they'd like to live at make sense exactly this is perfect so we know that from an income standpoint they're both gonna start at fifty thousand dollars per year no bonuses no pay raises just inflation adjustments through time and if we have so them both paying into the social security system we know that in today's dollars when they both reach full retirement age at age 67 they'll both have a social security benefit of about 23 000 now that will adjust if they exit the workforce early they will have paid less into the system so that means that their social security benefit will decrease from a savings standpoint we know that john and jane are huge money guy fans they listen to every show and they know that we always encourage that they should be saving 25 of their gross income well because after deductions and everything else they fall into a lower tax bracket they're both going to take advantage of their roth portions of their 401k so they're each going to put 13 of their salaries into the roth portions of their 401k their employers are going to do a 3 match into the pre-tax portions of their 401ks get that free money and then we're gonna assume that both of them max out their roth iras at six thousand dollars this year index for inflation through their retirement so they're just going to stick to 25 savings they're basically doing all the things that they hear us a spouse on the money guy show for how to live a financially responsible life makes sense we're going to assume that they are somewhat conservative investors we're going to assume that they can make about six and a half percent on average over the life of their investing portfolio perhaps that's low but remember whenever it comes to financial planning whenever it comes to like building long-term iterations you always want to err on the conservative side because you would rather things turn out better than you thought instead of be aggressive and have to eat like cat food hamburger patties for dinner every night well i also think it's worth dropping in we're gonna put a very conservative six percent growth on the linear growth but when we run the monte carlo simulations we're including every type of outcome that possibly could with a basic it's a little more aggressive what is it like a 70 30 i think it's a 70 30 to 60 40 type portfolio so don't let the six percent let you feel you when you see we get to the stress test this thing's got all options built into it so if john and jane were sitting down with us and we want to show them just a straight line picture of their financial life this is kind of what it would look like now they're starting out at zero and they will begin by the way if you're out there listening in i heart radio itunes stitcher spotify this would be a great time to just pause and go to youtube because we're gonna have a lot of visuals on this show as we walk you through the software but we'll do our best to kind of describe this so you get the idea so as john and jane are working they're gonna begin building their portfolio all the way up until they get to age 65 where they actually will have built a portfolio of just under 2.7 million dollars in today's dollars now remember they're only going to pull off about 60 000 in living expenses well you can do the math and realize that 60 000 of living expenses on a 2.7 million dollar portfolio means that they have a very low withdrawal rate so what actually happens is in retirement their portfolio actually keeps growing so they when they leave this earth at the end of their plan if we just assume a simple straight line six and a half percent rate of return would leave this earth with about 4.7 million dollars left behind for john jr and jane jr the second i'll dig you out of this hole that you put yourself in is the fact that that is in present value so that's 4.7 million is the same as what 4.7 million dollars would feel like today we have actually brought this back for inflation so for all my inflation hounds out there who are always picking on us is that don't talk about a million because 30 years from now a million won't feel the same we've actually we could show you that this is could be inflated up but we've actually inflated it back down to present value now we know that the market doesn't deliver us nice even six and a half percent percent chunks of return every year so we run this through what's called a monte carlo simulation where we have a thousand different iterations of different market environments so it might have 2008 followed by 1999 followed by 1973 followed by 2004. and what this system calculates is out of those 1000 iterations what percentage of them got all the way to the end of the plan without running out of money well you can see under base case scenario if john and jane just do what the money guys tell them to do and save 25 of their gross income all the way until retirement they have a 99 probability of success of a retirement at age 65. so here's a moment of celebration before you start breaking it is that if you just come to us as a 25 year old you don't even have to make a great income you have to make a 50 000 a year income um if you get it find a spouse that also makes around the same amount of money we're talking about 100 000 as a household and you do exactly what we tell you to do meaning that you defer gratification take a little bit of today for that great big beautiful tomorrow 20-25 by the time you get to 65 maybe even a little before that you pretty much have a 99 chance of success that's a celebration moment absolutely now i'm going to let you break it with fire but that's still pretty cool for the typical person who wants to go on the journey love what they do and they're working all the way to 60 to 65. so john and jane then say to us guys this looks awesome thank you thank you thank you thank you uh but you know what we don't care about leaving this earth with five million dollars left behind for our kids and we really want to be part of this fire movement so what happens if we retire at age 35 keep all of our other assumptions the same just instead of working and saving until 65 we just cut out of the workforce at age 35. that's 30 years earlier it's only 30 years 10 years so not only does it take out tons of income and tons of savings but it also requires them to count in the portfolio for tons of income to bridge that gap and what you can see is in this very simple illustration they run out of money by 39 not exactly uh fantastic remarkable retirement so obviously 35 doesn't work if we operate under those same assumptions so then they say okay well we're reasonable right that we're reasonable what happens if we decide to work until age 45 so we're going to do everything we're going to go to 45 and then we're going to check out does the plan work well it gets a little bit better this time it takes us actually out to age 61 but still it's not even in straight line math getting us to the end of the plan so then they say okay well what about 55 if we just want to keep everything the same everything's static can we retire at age 55 well what you can see is that actually changes the circumstance now when you look at the straight line illustration you can see that instead of leaving this earth with about 4.7 million dollars in today's terms they leave the earth of about 2.7 million so yeah that 10-year early retirement did cost them about 2 million dollars but perhaps that's ok again we won't know for sure until we actually run this through our monte carlo simulation so we select the age 55 retirement we let the system recalculate a probability of success and you can see that okay it's not 99 but even retiring at 55 they have a 90 probability success assuming they make no behavioral change throughout the course of their retirement so think about this we have somebody starting at 25 instead of working to 65 which is 40 years you're telling me 30 years still gives them a 90 chance of probability guys that's incredible think about that you give us 30 years of saving 20-25 like we talk about 90 chance of success i still would argue leaving the workforce at 55 is still part of the financial independence retire early movement that's pretty powerful absolutely so okay so we have our base case room so now for john and jane we've cut off 10 years we said okay if you just do this you can make it until age 55 and then you can retire all right well but they say you know what i really we want to exit at 35. what would make that possible so we said okay well we've already shown that we can't live at your pre-retirement living expenses we can't live at 60 000 a year so let's see if we retired at 35 what level could we live at so we had full-time equivalent daniel kind of give us some ideas on all right let's think about base case and this as we said we know that the poverty line in this country exists right around 18 000 of annual income so if you wanted to be someone in the fire movement that really subscribed to like minimalism and you're thinking about like really living on as little as possible is it possible to live at the poverty line about fifteen hundred dollars per month and retiring at age 35. so again we're going to retire at 35 and we're going to live off of 1 500. all right well it gets us a little bit further than 60 000 but even doing that only gets us out to age 62 before we start running out of our resources so 35 if all we're going to do is save 25 of our income for that 15 years or 10 years of work and then try to live off of as little as possible doesn't work yeah and who wants to live at the poverty level so i think that you have to i mean we got to kick this up a little bit further so that somebody actually can enjoy the stage of life that they're in i completely agree but again we want to answer all of john and jane's question so they say okay if it doesn't work at 35 could we do poverty line at 45 does that work so again we say okay we're going to work till 45 could we live off 18 000 okay well it does change it and it does provide some money at the end of retirement and again to kind of do our due diligence we have to run this through a monte carlo to see where we fall out to see if we have a probability of success that actually works at age 45 and you can see that our probability of success living at the poverty line at 45 takes us to 99 but i agree with you it doesn't seem to make a whole lot of sense to work really hard for about 20 years only to live on as little as possible for the next 45 to 95 for the next 50 years we know there's there's a basic equation with any financial decision you can either spend less money or you can make more money that's right that's really those are your two if you're looking at the fork and the road moments well if you're at the poverty level you can't cut it anymore that's exactly right yep so is there an opportunity if you don't want to live at poverty level where you can go make some money so here's what we said okay what would be required all right if 45 at the poverty level works but poverty level seems unrealistic what if we doubled that instead of living off of fifteen hundred dollars a month we said let's live off of three thousand dollars a month now 36 000 a year seems better pretty reasonable so if we increase our expenses to 36 000 a year we still get to the end of the plan now there is a sliver instead of you know remember if we did the full thing we'd leave this earth with almost 4.7 million dollars but now we're only gonna leave with about four hundred thousand but we got to the end of the plan via straight line yeah but when you stress test that that's gonna be scary that's exactly right we have to go back to our monte carlo simulation to see all right what's our probability of success if we're going to live off of 36 thousand dollars it's 77 i wouldn't feel comfortable so you may be asking okay well guys what percentage would make you feel comfortable i kind of like i think mid 80s is kind of where i'm at and i'm back to the thought that even at 3 000 a year i mean 3 000 a month there's got to be a better way to kind of consider this and so maybe that's is that going back to work is that you there has to be a better way so there's this other part of the fire movement that's called barista fire these are the folks that want to stop doing their like normal day job but they're not unwilling to work so what we said is okay let's take john and jane and let's assume that when they retire they're willing to go work at starbucks because that's kind of the thing that's here i get to go be a barista or a gig economy or a gig economist uber driver lyft driver uh so let's assume that they can make ten dollars an hour working part-time so they both work 20 hours a week 10 dollars an hour what happens if at 45 when they retire they can start uh doing some barista side hustles looks better well now it looks a lot better if we check the monte carlo to see does that improve our probability of success you can see that our probability excess success actually goes from 77 up to 98 yeah so that makes a pretty big difference right but they say okay well i was willing to work that sounds great uh but what if i actually want to have the additional living expenses what if i i don't want to live off of 36 000 a year what if i want to still live off of 60 000 a year would working at starbucks allow me to do that would having the barista income let me do that if i chose to start doing that at 45 well unfortunately the answer is no the assets do take you out to age 82 which is much better than some of our previous iterations but it still doesn't get you all the way to the end of the plan so if your goal is to live off of the living expenses you had pre-retirement and you're willing to get a side gig and start working at age 45 it's still not quite gonna cut it so you made an interesting observation brian you said when it comes to making financial decisions you really have two options you can make more or you can spend less i'd argue there's a third one sometimes yeah sometimes if you have big goals and you've already exercised making more and you've already kind of cut the expenses as lean as possible the other option you can have as it relates to fire is you can be a really aggressive saver yeah so we talk about hey we want john and jane to save 25 of their gross income well john and jane may say you know what in order to make this fire thing possible rather than only saving 25 of our income during our working years we're willing to really beef that up and what i mean by really beef that up is not only are we just going to do 13 percent to our 401ks we're going to go ahead and max them out at the full 19 500 each so that takes our total annual savings to about 51 000 a year or about 50 percent of our annual income so if i'm willing to work until age 45 and i'm willing to save 50 of my income from zero until 45 and when i get to 45 i'm willing to go get a part-time job working at starbucks does the plan work well you can see now we in the plan with about 1.2 million dollars left over pretty healthy margin if we run it back through our monte carlo simulation again this is running through a thousand different iterations assuming additional savings assuming getting a side gig we actually have an 89 percent probability success but that has you working is that think about it because think about this this is essentially like a fat fire type person where they're going to really hyper save while they are working but then when they get to retirement they're not going to fully retire they're going to continue to work does that does the fat fire or somebody who's willing to really put the pedal to the metal on savings is there a way they can do that at 45 without working so without working okay so let's say we take off our barista income we actually do exit we're still uh going to be living at double the poverty line this is the 36 000. can we do that or if that's 76. it's close so you maybe need to save a touch more we either need to save a touch more or think about spending a touch less and remember we're still not at that point where we're actually living off of our 60 000 a year goal but but you were saving 50 of your income so odds are you're not actually needing 60 000 so maybe that is a realistic scenario but john and jane are super ambitious and they say okay we got an idea for you guys we thought this through mom and dad have said that we can go live with them mom and dad said that we can make our hundred thousand dollars but they're gonna let us live with them for the first 15 years right uh they're not gonna charge us any rent and they're gonna cover our groceries uh and then uncle sam said you know what john and jane we really want you to be so financially independent we're not going to charge you any taxes so you're going to find a way to save a hundred thousand dollars a year 100 of your income well what i think is a better because government doesn't let you out of taxes the the better suggestion is you have a relative that's going because that's usually when cnbc runs an article somebody okay 300 000 of debt in two years sure what they fail to tell you is typically there's some family economic support where they're giving you 20 30 000 a year in gifts so here's the big question if they can generate whether it be through gifts or whatever else a hundred thousand dollars of saving from age 25 to 35 and their goal is to live off of 60 000 per year does it work no the answer is no it only gets them out to about 58 years old yeah if they said okay well what if i wanted to live off of less what if we did that could we live off of 36 000 a year okay maybe that gets you there i think what we're seeing here though and this is what we would try to explain to john and jane hey based on where you guys are wanting to be parts of the fire movement i don't know that the 30s is going to be your key i don't know that being able to live the way you want when you want how you want is going to be something that's attainable before 45 years of age that's very similar to what sam financial samurai found out as well 30 doing firing your 30s is going to be tough unless you've really invented something i'm talking about coding or literally made something up you came up with the the sponge that sold on shark tank and it set you up for life yeah i think so as we were kind of going through this okay what are some some tangible takeaways from this illustration what are the things that we want our folks to know that we want our folks to recognize is that fire is possible but you have to be realistic about that now what we did here was very very simplified when we actually do this with clients we don't just say okay well what are your living expenses we ask questions like okay well how often are you going to replace your cars how are you going to pay for health insurance what's your travel budget going to look like what are the weddings or colleges or other things you have to fund this was a very very simple illustration but what it showed me is that unrealistic expectations lead to not very high probability success outcomes well i think it's it's it's back to my measure twice cut once because think about if you could customize this where maybe you work 10 years and then the other option is is what happens if you change what happens at age 85 maybe yes you're still planning on limited mean 95 but your living expenses go down significantly at 85. that's what i love about doing these type of stress test analysis especially when you can customize it because it lets you put in every scenario and nothing lights up a client's eyes bigger when we can build something completely custom and let them walk through what their life is going to look like i did have a few more takeaways okay go ahead fire is more of a 45 to 60 dream and i think that like i said i i think that financial samurai sam kind of alluded to that he realizes that because you need a lot you need a few more things it's kind of like putting a post in concrete you know if you if you if you try to to to put weight or pressure on that fence uh that post before the concrete is set it's it's going to fail and that's the way it so if you do this think about a 35 year old they're trying to accelerate they're trying to do it too early and then they find out it's just it's not they didn't give enough time for their life to set the concrete of life and i'm talking about the kids i'm talking about the career i'm talking about the houses i'm talking about just making sure you know a lot of the variables there's still going to be a lot of life that you're is going to be uncertain you're not going to be able to plan for but at least your life will be set in a lot of the different ways the second thing i found out is you better like your day job um you know it actually will make it easier you know if you know you have to work to be 45 or you have to work to 50 or even 55 because remember a 55 year old who retires early you're still part of the fire movement you're still leaving early but you need to have work that gives you purpose so that you don't feel like you're just stuck just droning on every day in a job you don't like i don't spend a lot of time in the fire forums but i feel like that's one that gets missed a lot because i'll see these young folks who say you know what i'm gonna go out to the west coast i'm gonna go out to northeast and i'm gonna work 90 hours a week and i'm gonna make 300 400 500 000 but man i'm gonna hate my life for the first 10 or 15 years you really ought to measure is it worth it or would you rather do something you enjoy more perhaps make less plan on working longer but have a better quality of life don't you feel like you see a lot of folks who do that well i've often told you know because the financial industry is very similar in the fact that you can be a rock star or you can be a builder and what i mean by that is is that a lot of people in our industry come in and they you can make a gazillion dollars if you're willing to go sell and you know and go out there and knock on doors and it's not always the best way i don't think it's healthy whereas we're kind of the slow we're the bridge builders where we build relationships over time and i think that's what you're alluding to is that yes you can go out there and work in a high-paying job you can code you can go do other things and work 70 hours a week but you can only do that so long or take that's the west coast if you want to go east coast you could go work as a trader or an analyst or somebody who's still going to work 70 hours a week make great money but you're only going to be able to do that for so long whereas maybe like go like we're financial planners you don't make great money to start off but if you can start building that bridge before you know it you have the potential and this is actually a great segue into my next point the bigger your shovel the better now that look it's easy to get a big shovel meaning a big income going and doing some of these glamorous jobs with technology with you know biotech trading you know in wall street but man if you can't stick to it long enough to build it you know where your purpose is or build up the nest egg you might find that you're just miserable and you you put yourself in an unhealthy position where it's just it doesn't work out yeah a big shovel helps a ton when it comes to retiring early but you better be able to hold that shovel up and if it's so big that you can't stand the weight of it meaning the stress of whatever that thing is you're doing you might not be setting yourself up for a very enjoyable back half of your journey i didn't ask you to put it up and we're kind of past the point of pulling it up on the screen but i noticed i couldn't help but notice when you just showed the straight line of just six percent a year growth you know we know that's not the way life works but it was amazing just the the the sheer power of compounding interest absolutely is that that six percent by the time you get into years 30s 31 you know it's huge what that six percent is per year meaning that if you leave early there's a huge opportunity cost so don't underestimate the power of time because that's the thing i think a lot of people it's all back to if you leave the workforce at 45 you're taking out at least 10 if not 20 you know 25 years that your money cannot only with what you're earning and saving and putting to work in the markets is building those army of dollar bills but also what you've already saved and invested is building in the background don't underestimate the power of letting your money work for you the reason that 88 times over works and the reason we give away the koozies is because it's the time that allows that to happen it's the 45 years that makes the 88 happen not the dollars and so you have to keep that in mind when it comes to building towards financial independence so bo we're kind of closing out i'll be curious to see how far absorbs this show because this was one of those because i love the coaching the motivation and i love getting people excited and yes there was a little bit of that here but this one got into the week sure i mean this is this is kind of an experiment on our part is that we wanted to flex the power of some of the planning software but also give you guys who are considering your if you're part of this movement give you a taste of the analytics that go into what we're doing also because i really hope that you guys can absorb or you appreciate we try to give you some some illustrations here that you can internalize this and compare and contrast to what you're doing in your own you know retiring early journey if you saw this you're like man that's really interesting i i wish i knew more about that i'd like to think about the planning or i've been on this financial independence retire early journey and i'm i'm getting close and i want someone to help me spot check that i want to make sure that i'm doing all the things i'm supposed to be doing feel free to reach out to us that's the idea of the abundant cycle we want to load you guys up so that you can grow and grow and grow when it does become time for you to take it to the next level you'll remember the team that kind of helped you plant those seeds so if you haven't had a chance go to aboundwealth.com you can check out all of our advisory personnel here go to moneyguide.com you can see all of our free resources available out there for you guys to help you grow we want to make sure that whatever your financial dreams are we can help you get there guys that's the abundance cycle he just described by the way you come learn apply grow start off just absorb all the free advice we give but when you reach a level of success and complication we'll be here waiting for you absolutely the only thing i also would ask you see this ticker we are so close to a hundred thousand please go subscribe go tell some friends family we have a goal of a hundred thousand by year and that's not going to happen automatically we need your help so go subscribe on youtube so we can reach a hundred thousand continue to grow this incredible thing that we've been blessed to have started in 2006 so thank you thank you appreciate you going on this journey with us i'm your host brian preston mr bohansen money guy team out

Channel: The Money Guy Show

Views: 64,661

Keywords: money guy show, debt, budget, cash, real estate, insurance, how to make money, save, credit card, compound interest, buying house, buy stock, success, personal finance, Did 2020 Destroy the FIRE Movement?!

Id: ie3EFJ3e_sg

Length: 48min 15sec (2895 seconds)

Published: Fri Nov 13 2020