Have Enough to Retire (Early)? 10 Steps to Make Sure

hey eric here with two sides of five just checking in to set up this episode if you've done any kind of reading around in the fire community online you've surely run across the retirement manifesto written by fritz gilbert who retired when he was 55 jason and i have actually taken a lot of inspiration and guidance from his writings and his work on his blog specifically the bucket drawdown strategy so if you haven't read that be sure to check that out he recently wrote a post called the 10 steps to make sure you have enough money to retire that really resonated with both of us and we wanted to use it as a jumping off point for a discussion why don't we just kick it off and go right into number one which is put on your game face and what he means by that is you need to take this kind of prep seriously right there's a bunch of work to do and and eric someone who's started approaching this just a couple of years ago on your path to fire what does this mean to you what does it make you think about yeah when i see this one it's it's kind of of all the 10 it's kind of like the most sort of fluffy but obviously you gotta start somewhere um and one of the you know my sort of first exposure to fritz's blog was via you sharing like multiple things from it and i one of the things i realized in reading each one of his posts and they're just they're packed full of so much information and this post in particular that we're talking about is super meaty as he calls it um but one of the things i realized is there's just so many layers to this and he's he goes into a level of detail which exposes all of those layers and so when you were first sharing that with me i found it actually kind of overwhelming but now that i've been at this for a while and really starting to dig into the topics his blog and approach to this whole thing the real methodical approach really does suggest that you know prior planning is helpful and even even if it all doesn't come at once um it's definitely necessary and you have sort of proven that out right you are a big planner by nature what what do you think yeah i am a big planner by nature and the one thing that this process has taught me and i'd be shocked if i don't say it again in our conversation or starting earlier is really good because constant revision is going to happen you're just going to learn new things we certainly realized several times there were costs we hadn't accounted for so the earlier you start working through that right and be serious about it start with you know maybe rough numbers but refine them as you go man that work pays off yeah so game face i mean i think we can move on from that one to number two which is designing your dream retirement and we've actually talked been talking about this throughout this whole podcast and video series um so for you how long ago did that start wow i i mean i think pretty early on you know at the concept level jeez 10 to 15 years ago but it was so vague to be totally honest with you it was just like we don't want to be doing it this way anymore maybe we'll live somewhere much lower cost and we'll just you know not do these kinds of careers we're in we'll do something more low-key and it started to get refined over time you know as my career advanced and we started to really come to the realization that we could save and and you know invest in a way that would allow us to retire earlier and maintain a similar lifestyle to what we wanted now so i think the kind of dreaming and starting to refine it you know happened you know in more detail in kind of the five years before i retired mostly and then getting down to brass tacks some you know things will cover farther down really the last couple years was nailing down those details so it was definitely was a sequential thing but it's really this was finding i mean this was really more of like uh tim ferriss calls this like dream lines um you know like testing out mini retirements um for me this was like actually one of the most enjoyable parts of the process and it's kind of ongoing and my wife and i use notion to kind of catalog all of these phi sort of components so there's a i mean notion it's great you and i use it to collaborate on this but we kind of have this little almost like a bucket list um but it doesn't just include things like travel destinations it also includes you know things that we're interested in doing like a photography workshop that i want to take or you know it's a class that laura wants to take or you know things like that so it's a catalog of all these opportunities and engagements that maybe we don't have time to do right now or maybe the budget to do right now but they're all things that are kind of fitting in this kind of bottle slash bucket list that we can that really helps us kind of look forward to it a little bit more and i don't know do you maintain something like that it wasn't so specific about you know things that we had wanted to get to and hope we would do i'd say we started a little bit higher level maybe just with priorities okay like what does retiring mean in terms of how often do we think we want to travel and what kind of travel do we want to do and you know what style of living can we see ourselves doing you know when no pure nomadic versus home base and you know several longer trips a year we started with that and really tried to think about what are the priorities of different things because i think that ordering exercise is pretty useful because i'm sure as you're finding you come back to it when you start thinking about numbers right budget the spending but starting with those concepts and those things like to your point that you have wanted to get to or would like to look into that you've never even touched this is a good exercise for that but also i wonder for you when you first got into retirement and i know fritz speaks about this too that pull to consult and continue working and continue earning i wonder if this designing your dream retirement as this kind of you know guiding principle this kind of map for what you actually want isn't something that you could also refer back to and say well how does like me taking this consulting job fit into the retirement that i was designing for myself like this intentional plan i just like that that can act act as kind of this overall ordering system that keeps you from committing to things that maybe aren't aren't going to make you the happiest i don't know yeah i think that's a a fantastic idea i mean not not to go put on old corporate hat again but it feels like you could actually formulate uh a vision statement right in this phase and just and literally have that written and when those polls come and they will right for for many of you um you can go back and look at that and say how does this fit in there am i going to update my vision of what post-fire life looks like or does this not fit and i shouldn't even consider it that's a great idea and i also think about when i think about this uh i also see it as this living document that it's gonna change over time like yeah what i'm envisioning for my ideal retirement the day i get there you know it's probably gonna it's probably gonna change and it'll change over time you know and obviously the older you are maybe the less travel you do and so you have different activities and interests and it'll be interesting for me to see how yours changes um or your vision of what retirement was versus reality and you know how you square those because i've seen in the past year now that you've been retired things have changed right totally yeah yeah and i freely admit that this i'm still when what i feel like is a very chaotic stage right that first year i mean it feels like it it's i'm just getting on a path now i'm not on it i'm exploring it's so you're right i think coming back to it is going to be pretty interesting yeah cool okay so number three is track your current spending now obviously this one resonates with me and we've talked about that before but you know just documenting your current spending your expenses etc is a tremendously important starting point eric when you see this one knowing your fear of budgeting or you're just like a budgeting how does this one strike you this is my wife's job this is i i have like zero interest in doing this and i can just do the broad brush and feel comfortable and okay with it but like i it is one of those things that i recognize as being important but if i have to pick a point of departure from this post here it's like how much do you need to track it so i i went and downloaded his his tracking sheet which is like it's immense it's like overwhelming it's important i'm sure but that is not something i'm probably ever going to fill out and i can only imagine yours probably has even more lines in it than his does did you use his to i didn't use his use why not i like his framework yes i used ynab i used you need a budget which is a program yeah um yeah i mean so wait does that can you just tell me remind me does that actually pull in expenses because we use our credit card for everything so it does okay so it would automatically kind of put those things in categories and and i could see what that looks like yeah yes you can do it completely manually or you can do it completely automated or somewhere in between by accounts etc and people have different preferences i do everything automatically and just check the categorization it's it's similar but more powerful than say what a piece of software like mint does yeah so if people are familiar with that concept it's just like that with a lot more capability and true budgeting not just tracking this gave you a degree of certainty and freedom and just comfort with your plan is that right completely uh if you if you dial the clock back you know more than three years for me we had the pay yourself first strategy we didn't do budgeting we did our investments we made our commitments and then the money that remained was the things just much more discretionary when we started to really get serious about planning the numbers for post phi using software like ynab we tracked over a series of months what our true spending practices were understood how to categorize them so that we could just capture what our actual expenses were on our base are you still doing that i am uh i am and that will kind of come back to the next item all right let me ask you a question because as i was digging through this and looking through the information on this post it came i mean i don't know why this was a blind spot for me but when we're talking about setting an annual spend number is that after tax mine is my true actual spending full stop what what ex what money goes out paying bills right the mortgage um discretionary dining out just true what as you said credit card expenses almost entirely and you know some withdrawals from my bank accounts directly right to make payments okay social spending okay so actual spending means you need to earn more than that by whatever your you know your effective tax rate is right so like am i just missing something and setting my number here that if i'm using an actual spend number and multiplying that by 25 um because the you know as you start digging into some of these other calculators that he has you know your retirement cash flow calculator for example like obviously to net a certain you know annual spending figure you need to you know add tax on top of that am i just like being completely stupid about this no and honestly i don't do my projections in that way you know i based on the portfolio makeup we have which is something that sort of comes up later in this discussion uh at a certain size and allocation you expect a you know in a in a normal year you know the market is in its normal happy place which it is you know 80 of the time it you on you can predict that your returns will cover right your plan if you're withdrawing in the way with the safe withdrawal rate that we've discussed before and we're going to talk about it again here later good because i feel actually look at the effect of taxation okay on those earnings specifically i mean even though it does impact that i mean it does this is one of the things that when i start to get into some of these details i think wow i crack open this door and all of a sudden i haven't been thinking about these 10 variables and that could change the plan significantly right i think so i think for me it's more like any time we think about these multipliers you know like 25 times your income four percent rule there's lots of other things baked in in there already that you know yes they're not exposed on the surface there are assumptions built in there and you know under standard circumstances it's not they're not characterizing them doesn't have a negative net impact on the accuracy i guess is what i'm saying okay i'm not saying they're unimportant they're they're vital but you know the finer tuning of income and tax brackets there are strategies in there they're important for health insurance right uh yeah it's just interesting to me because like if i wanted to net 50 grand a year for example a hypothetical 50 grand you know tax wise i'm gonna have to withdraw more than that you know and if i'm cashing out stocks for example that's like you know that's a bigger cell there um and why i did not think about that until i saw it written out like this was i don't know why i didn't fully perceive that but i don't know so we're up to number four here forecast your retirement spending it's one of those sort of uh preliminary steps that you take right when you're trying to figure out how much you actually need to save what does it i mean this is one that i dug into and and downloaded his retirement cash flow model and this was a big revelation for me in in actually seeing all the years mapped out from you know whatever year you're going to retire to let's say 95 or in your case 100 right i like having the spreadsheet that actually he provided because i can just plug into that and and it's and yes then start working and adjusting things and he actually has it set up so there's four different tabs so you know you can do four different scenarios if i you know social security looks like this and you know other things look like that and you can model it like that um it is still a little bit kind of broad brush in a sense um in terms of you know it's not like nuanced in terms of how you might pull on these investments which could have a big effect on how much tax you pay for example but like do you use a retirement cash flow model or have you used one or is yours just kind of more rudimentary yeah much more the latter i have looked at what fritz has just as you mentioned you are doing i'm really interested in it and and having a look at how my specific portfolio and the things i'm thinking about play out using some different scenarios i mean i'll be candid this is one of the reasons this topic is one of the reasons i have continued so far to work with financial advisors yeah okay to be able to throw different scenarios out get feedback on them so they run the numbers modeling they do numbers for you like yeah okay so they would model this and i'm i have to presume that they would do it in much more granular detail yeah and they'll do it from using different approaches and talk about the merits of each and again that's sort of that you know thinking about the cfo mentality right you know you're running a company you you want to know different ways things could go with certain market conditions and you know it's also an independent third party that's not to say that that is the only way to do it or it is the most secure way to do it but something that has given me comfort but as i dig in more and more right what do i have time to do now sit with the numbers even more so did i do a deep analysis in this area pre-fire i actually didn't and i would recommend that people do because you know just from my work already with a tool like this i see the value and the comfort you get from you know being able to model in different ways so yes i thought this is an important one to me and just the overall concept of tracking you know forecasting retirement spending period because it's really a combination of a couple of the ideas we talked about already and it is what are the things that are prioritized for you what you're spending now and how do you see that spending coming together in retirement is it different from how you spend today working in your career where you live pre-retirement if you're going to move well those expenses might change what are you and laura doing what stage are you in this i mean we are starting to fill in the line items and it like i said it is kind of her job and she i think that she wants to do by the way she wants to do it right and because she likes the numbers she's data driven it gives her a level of comfort like you that the plan we can execute a certain kind of plan one thing that i found really interesting reading through this that i hadn't fully captured in our projections was this idea of lumpy spending and i think you do a similar thing you're projecting out okay i know my roof has a 25-year you know life expectancy so i know i'm going to take the cost of replacing that roof and amortize it over the life time of that roof same thing with computers and like we were just talking today washer and dryer like okay our washer and dryer is 15 years old that's like that's pretty old so and um it just brings up all these discussions like new cars so we were saying okay um what is the next car like a 30 000 purchase is it a fifteen thousand dollar purchase is it forty five and or do we actually need two cars and so it i think one of the things for us right now in in our early stage of this and as we near our phi date it opens those conversations and we clearly said yeah we want two cars and you know maybe one of them's just kind of an around-the-town kind of thing maybe one's a truck you know feeds back into that okay designing your retirement what does that actually look like so lumpy spending i feel like even if you didn't characterize it that way i think you have sinking funds for that right yeah i approach this a couple different ways but don't let that make you think that i feel like i have this nailed and it's not something i do think about because i absolutely do but there are some things that you know you know as a homeowner and someone who's run a household for a while you know you and your wife you know the computers are going to break the car needs to be replaced there's going to be auto maintenance the roof you mentioned all that stuff is is fairly predictable that it's going to need to be addressed not maybe when it's going to happen so specific large ticket items i do tend to have syncing funds for where i just kind of allocate potential spending every month and then it's not spent great it just keeps building and then all of a sudden i need it where does that sit by the way because i don't think we've talked about that checking account or money marketing past we used to say high yield savings all right but there is no high yield savings right now so i have that stuff that i might need to pay out in a within a couple of week timeline you know for example getting billed in savings so i keep that locally yeah um as opposed to maybe like dry powder type funding i would keep you know with my uh money market account with fidelity for example so it could be deployed easily sure but for these types of expenses i either have some items in my um in wine app that i track this stuff against like you know replacement computer for example but then i might have a big bucket for home maintenance that could be a variety of things the third way is i keep i i always keep an emergency fund oh you still i keep about six months of potential expenses in an emergency fund if it you know and on a percentage basis of the portfolio right that's small so that's not like a opportunity cost type calculation it's just if we needed something unexpected came up we would have that why not why not use credit for that you can but you're still going to have to free up cash to to to pay that right so you know under the guide the guideline that i kind of use is if you have a planned or reasonable possibility expense in the next 12 to 18 months you should have that that cash available and that's kind of how i think about it okay yeah it'll be a little conservative but it's not unusual yeah so number five is pretty straightforward i think and that's calculate your net worth and this is just a great opportunity to look at what are my assets what are my liabilities and what is my actual net worth at the present time um eric this is something you have definitely been doing for a while you've already referenced one of our exchanges on new year's day about it how do you think about net worth calculation and the importance of it so for me it's what gets measured gets managed and i think you know just the fact that you're checking in with it regularly and actually i check in with it sort of more than once a year but that's just because i'm at a different phase of this whole thing than you are and for me it's just kind of a little goal post that i can look at and you know less valuable now that i own my home you know there's there's a lot of things on on the good side of the balance sheet so you know i don't have a lot of liabilities out there and so it's just i i don't know that it's that effective a tool so um i do think it's nice to to have it and look at it but you know for example i've never included like you you know the kids college accounts um of course never include anything that's not that i don't consider to be liquid uh or convertible asset to you know contribute to supporting me in retirement just like you don't right i mean you're not including your house in this you're not including college savings plans or things like that i'm not you know including i mean the vehicles are on it but quite honestly it's i just don't even count them yeah and to your point i think about this i think the way that fritz articulates it in the article all of that is included in your net worth however you're going to have to call those things out and subtract them later when you start thinking about what is my actual assets that i can use to model do i have enough money to retire it's like liquid net worth right i mean when i think of i don't know if that's the technical definition but it's how i think of it it's like okay what are the assets that are going to contribute to my number and that's right it doesn't include my house or you know any of these kind of hard assets that i know i would never unload i mean and that's the way to think about it i think it's yes my car's value is a part of my net worth but am i going to sell my car to pay my monthly expenses well no of course not unless it was urgent so right yeah no but but if you're not already doing this this is just a great reminder that it's an essential element of projecting do i have enough you know projecting the answer to that question do i have enough money to retire what are my current assets i mean honestly i have a spreadsheet that laura and i use for our monthly financial meetings and that basically includes all the things you know on the balance sheet that are in the plus for our retirement number like okay and we just use that to say all right are we on track for our goals are we meeting our savings goals and i think in some ways when you're on the hyper-saving path it's just a lot you know it's just kind of a tracking device more than anything and for you i guess you know on the flip side of that is maybe it's the canary right well and yeah and i want to respond to that because you know when you said and correctly you said i've been looking at it annually that's true i did move to annually after years and years of doing it quarterly but now you know i'm thinking a lot more about the numbers and i'm realizing that i'm already looking at you know account values and things on a regular basis you know generally monthly so that's a good opportunity to just update the net worth statement you know maybe monthly perhaps at least quarterly because canary to your point right as market conditions change if we need to make any adjustments in strategy you know certainly a severe downturn might we even change our spending approach that's a very realistic thing particularly people who are considering a lean fire lifestyle you would want to do that yeah cool number six is determining your safe withdrawal rate and you are an expert at this by now you have been executing the plan and this is something that i'm looking forward and projecting to you've given me a lot of advice on this actually because when you first start doing that basic calculation the 25 times your annual spend right the big broad brush kind of rule actually requires more nuance and more thought and care and that's where this with safe withdrawal rate comes in so you've done i'm sure a number of projections tell me about how this has impacted your number yeah no i have done a lot of work in this it was absolutely the thing i worried about the most in the year leading up to pulling the trigger on leaving my job it's the thing that more frequently i would categorize as led to some concern but you know i've i think i've largely gotten past that now um why though well let's talk about that so so first of all you know sequence of sequence of return risk is something that i think about a lot you know if there are negative market conditions big downturns etc in the first few years many people say you know five years after you know as you start withdrawing in the first five years of starting to withdraw those can have you know major implications on your portfolio's viability i.e will it last will it last your projected lifetime so choosing a withdrawal rate is vital because you don't want to go too big too early because if you have an event a major market downturn in those early years that's the worst time to be you know you don't want to be withdrawing from your portfolio from your corpus right from the main uh assets your equities for example in your portfolio and this becomes a real big issue for people who are retiring much earlier than we are it's it's an issue for us we're you know nearing 50 right we're late 40s um we are almost there people who retire in their 30s or their 20s i mean this is uh this is something you really need to pay attention to and um you know so some of those rules that were designed for people taking maybe an early retirement um don't really apply in the same way yeah and eric this is this we should acknowledge it's a bit of a contentious topic many people feel very strongly about the four percent rule and there's some great literature on it there's an updated study since the original study do just do your homework i think it's a very reasonable thing to start your back of the envelope calculations with a four percent withdrawal rate but understand what that means what the assumptions are because as fritz says you know he thinks about a world where at his age bracket you know three percent is you know more conservative and four percent is more aggressive right presently i'm below three percent and that's you know below where i thought i would be and some of that is just where the market is performing these days and that's a big but is that because you spent less or uh i have kept my spending to my budget okay so it's not it's because of market performance you said it's because of market conditions yes um but you you do need this is the point that we were just talking about in the previous uh item in his blog this is where you absolutely have to exclude your assets that you're not willing to liquidate so when you talk about a four percent withdrawal rate it's four percent of your assets that are you know you said that or liquid right you know whether you're using the bucket strategy that we'll talk about or something else you need to be accounting for that in that sort of set of assets so yeah to answer your question this really is a risk tolerance line item right how confident are you how bold are you and i think when i'm i'm thinking about my path i assume at least a 50-year more lifespan which is above certainly the average for people born when we were born and at our current age you're an optimist yeah i'm gonna assume the worst case which means those funds have to last 50 years and so i am naturally drawn to a lower withdrawal rate and the reason i've been feeling better about sequence of return risk is i've because of the market my withdrawal rate is below three percent and i don't think we've been struggling to keep to our budget so i know that there's guard rails built in there and if we had to back off we could so it's not keeping me up at night do i think about it and do i think i'll have a little party when i hit five years post retire early yes i thought it was 10 years man i thought you were going 10. that's my ultra conservative number but i think that's a little it's a nobody agrees with me on that well for your side of phi it is paying attention to you know your your post fi so you're paying attention to what conditions how conditions are changing what the portfolio looks like real time course correcting adapting and changing from my side of phi that's the thing that's setting my actual number right my like when am i going to hit the number and that's based on the withdrawal rate that i'm projecting so yeah and how has that gone since the time we started talking about it to where you are now a couple of years later yeah i mean i started off with the four percent rule thinking oh good and then you and i had a conversation at one point and you're like well you're not using four percent right i said i did well yeah um and i think this was one of those opportunities where you sent me this post or another post where you know he had written like well you might want to think a little more conservatively and of course when you do that and you dial it back to three and a half percent or three percent the number changes in a real big way and i don't think of myself as a risk-averse person but uh you can't ignore some of the numbers there and i'm always happy to dial it up a little bit um if things go well but also i want to have a plan that works like out of the gate even given some worst case scenarios here so i'm like i'm definitely more to you know obviously it's changed the number up and i've changed the number up a couple of different times and that has been based on not only withdrawal rate but also our spending and so it's like kind of a amalgamation of all of these different topics that have influenced changing that number so for my scifi you better pay attention to this and and don't assume four percent is going to work for you especially if you're younger great starting point understand why that is or isn't the right answer for you and go from there i mean there's some people like financial samurai have you ever have you ever listened to his podcast i'm aware of his position those are some big numbers there you know i mean he's talking about withdrawal rates like way i mean i actually can't remember what his is it's like a fractional percentage it's a fraction of it right yeah it's less than one percent it's like what okay so eric number seven is estimate your retirement income figure out what kind of money you can plan for coming in from all sources your investments social security if you're in the u.s other things how do you think about this item given your stage of pre-phi it's hard this is a hard one for me because the business is going to continue to exist and earn money into the future and so i think it's probably similar to you know people who have side hustles or you know other income streams that maybe it fluctuates a little bit um and so for for this one i've taken a conservative approach to modeling this so we talked earlier about the retirement cash flow model this is a spot where it gives you you know places to input this income but i i have honestly just started getting into this and one of the interesting things i was trying to project out because i noticed it was a sort of row in his spreadsheet was social security income and so laura and i were talking about that and just i know you've said in the past that you don't really account for that and you treat that almost like it's it's a little bit of a buffer or a contingency and as i started looking into it you know if you go to the social security uh the government website here in the u.s they'll give you a projection based on you know yes they're going to fill in the blank between however whatever age you are now and your full retirement age and um that's that presumes you'll never make less than what you're making right now but the full social security calculation your benefit is calculated on the highest 35 years that you're contributing to the system um and so there is some calculus to be made there especially if you're nearing that 35-year mark because you could substantially change the benefit how much income you're receiving that's right just by working another year for example you know because you may knock off one of the sort of low end years of earning and that could change the benefit that you get so i wish i had a better answer on this um other than just to say we're building our assets and drawdown strategy in a way that you know we're gonna be we'll talk about this in the next point but um you know we would be drawing on the savings that we've been uh compiling and yes assuming no additional income any income is gravy um but it does get complicated when if you're buying health care on you know subsidized healthcare like not being able to project what the income for the business is um like if it continues on what it is right now and 90 percent of what i'm earning is from passive income right that changes the health care equation pretty substantially and so i i wish i had a better way of modeling this like i just don't feel like i've done a very good job of that although if it keeps earning at this level then it's it just makes the retirement plan that much better like if i don't actually have to draw down anything it's like well i shouldn't even worry about it then but i think for most people you do need to think about all these different income sources how about you are you really discounting social security uh i would say that i i don't assume it exists in its present form so i know that maybe the projections i'm seeing from the the website and others that use the same data from social security um may not be accurate so it's it's probably too far to say that i consider it 100 upside if i get anything but i absolutely model my portfolio without any social security yeah and i also do model it with it coming in you know as expected and being able to claim it at whatever age i want to model so are you using like 70 70 yeah yeah okay yeah so tools like new retirement and you know personal capital and you know fritz's spreadsheet all do similar things that they let you look at the impact of different income streams that become available to you at certain ages so i do do that and i think that is a valuable exercise and like i say if you're already looking at this article the the spreadsheet that's linked in there is a good tool and if you can make it work with you know nothing as a side hustle i mean i don't know that's kind of uh that gives me a little more confidence but also people who are looking to uh do a kind of glide path strategy um where they're looking to fill in with side hustles that's a great tool to use to say okay well what does it actually have to be like where do i you know where do i cross over the path where i don't actually have to do anything anymore it's like super that's a great point i like that um so when it comes to estimating retirement income you're someone who's done i don't know if it's cons you'd consider consulting a side hustle or what but you know you have you're working at this winery you have some you know potential for earning with the drone or making some video stuff what do you do with your side hustle income i mean is you can count it do you are you modeling it or you just treating it like spending money yeah it's the latter so for both laurie and i we consider all that as upside money we don't model it we don't assume for it some of it we may spend you know discretionary um you know travel or something you know not part of our vacation budget uh some of it we just keep and uh have for you know rainy day fund or something like that um so we don't it's not can so consistent for either of us that it's something that i would feel comfortable modeling but uh yeah and it's not you know versus our versus our spending it's not a huge percentage anyhow so it's uh yeah it's just kind of intermittent funding that we largely bank or spend for just fun stuff i i think the intention is that by outlining all your sources of income because sometimes it is complex right there there could be annuities there could be pensions sometimes social security um a side hustle you plan for x a number of years but then you plan on it going away and you reach a certain age so it's a tool that allows you to you know numerically demonstrate that that plan will your plan will continue to work for its duration with its different streams of income so it is a useful exercise and it goes a level beyond the more kind of finger to the wind well if i have so much half percent withdrawal my investments will cover it yeah and it's it's a good idea and certainly it's a it gives comfort to model your retirement income and there are a lot of tools to help you with it did remind me that we have a laura has a 457 that she's going to have to take in equal distribution she can take as a lump sum when she leaves or 10 equal distributions and i was thinking okay that this is a good place for that to fall into definitely so number eight and number nine i feel like we should just talk about these together because they're so interrelated so you're gonna with develop a drawdown strategy and then also your retirement paycheck now i feel like you are the expert in this category so obviously you have a means of you know withdrawing and there are several different like kind of drawdown strategies um so why don't you talk about what you chose and why did you choose to do it that way hearkening back to my earlier answer this topic is a perfect example of why presently i've still chosen to get outside assistance with the strategy that doesn't mean i'm not an active participant in planning for it and i may well take it over but to date i've gotten some support i basically use a variant of the bucket strategy that fritz writes a lot about in this article and elsewhere and he's got a really good three-part series on how to implement and manage the bucket strategy where you have basically cash and bucket one uh you know bonds and other you know more sort of secure income generating assets in bucket two and bucket three is the equities you know the stock the engine that drives your portfolio long-term growth right long-term growth yeah and so what i don't understand the middle bucket though as much yeah so i mean you well so you're spending two buckets well you're so you're spending your cash so there's a lot of hedge involved you're spending your cash and then you need to refill that cash bucket and how do you refill it well if stocks are up and bonds are not while that third bucket is there to help you do that right if the market's way up you can take some gains from that um but what if you're a jail collins guy you got stocks and that's it well i guess you're going to have to sell stocks you know all right right the other path the other path eric i should at least say some people use dividends for that purpose yeah um they don't automatically reinvest dividends they use that dividend income as part of their cash flow yep so that is another strategy i do not i reinvest my dividends so that could be like that that's like kind of the second bucket then yeah and i was going to say if bonds are up then you would necessarily sell bonds right if there's a major stock market downturn you are not going to refill bucket one with selling stock because that's of course the worst time to sell your stock is in a down market yeah yeah so the but the way that that's set up is very dependent upon your particular situation your asset location right how much of your assets are in an after-tax brokerage account versus retirement accounts because you and i if you were retired today and you will be in a few years we can't touch those retirement assets without paying penalty and that makes no sense in a fire context so after tax accounts for example are where we need to withdraw from now and so the way my buckets are allocated in that after-tax bucket versus my retirement assets you know roth or traditional is going to be different so it's a very individual individualized question i think lumping these two together for this discussion is a really great idea it's also something that warrants its own discussion outside of you know kind of review of this article but it's super important because you don't want to be thinking about this after the fact well and this kind of a thing this is one of those things that you brought to me and you're like hey have you thought about you know this this bucket strategy and you know how to because i think i asked you that kind of rudimentary questions like how do you get paid in retirement like how do you execute the plan and you told me about the bucket strategy and i thought okay well that cash bucket then as i read this post is up to three years of spending like three years of spending is a fair bit of cash to put in an account right yeah and so it's not some it's this isn't a plan you can actually execute in a short period of time if you're of any normal means i think you know it's going to take you time to build up that cash bucket before you move into you know fire right correct yeah you're spot on and that's one of the things fritz talks about right he started putting money into bucket one in his last few years of work and i'm remembering correctly he even was one of the people that did the so-called one more year right before he pulled the trigger so he could uh you know capture certain expenses he wanted to that were part of his planned retirement right uh getting a fifth wheel uh and a truck right to do the travel he wanted to do was part of that but you know you've got to make sure as part of that run-up period you're filling bucket one because you're not just going to come up with those funds to your point overnight right and that is certainly one of the things we did and we strive to to refill that bucket one with um 12 to 18 months of cash i was going to ask in addition we have six months of dry powder uh expenses so it's really about two years that we maintain in cash presently okay wow when that bucket's completely full right but obviously we've been drawing down presently because stock stocks are up so you're yeah you're selling stocks right yep current right not presently right it's not like he does it i believe he said three or four times a year yeah he goes through and does refills we've been on more like a one or two times but it's only our first year so i can't really give you long-term data okay that's just where we are so far but i mean that is the strategy right if market is doing well you're gonna sell sell your you know the things that are up right precisely yeah okay you know one of the things i was i was thinking about eric when i was answering your early question is how important asset location is yeah because there is this concept of retirement poor that you have to be very mindful of you know you can if you get to contributing the max to your roth and then you move on to your traditional 401ks and then like you're not you're not accounting for uh after tax uh accounts brokerage accounts and you're retiring before 59 and a half you won't have money to spend i had so this was a total blind spot for me until you mentioned talk to me about that yeah see imagine how completely stupid and uninformed i would be had i not had these chats with you so i'm totally appreciative of it but yeah i mean if you if you're not saving in that after tax like brokerage account like you better have a pretty good plan for unlocking the other assets and that's that again takes at least five years worth of planning right if you're if you're doing conversions and i mean it's it's a lot of work um or um if you have the ability to do so you know saving in an after-tax brokerage account actually provides a ton of flexibility and that's right you know you have to build fewer sort of ladders to retirement i mean i'm going to retire potentially when i'm 51 so you know if we reach phi at our projected schedule so you know my window between 51 and 59 and a half is is a lot shorter probably than other people who are considering a fire path but you know that's if if you're talking 20 years till you get there you better have a pretty good strategy that that doesn't rely on all the assets that you've locked away you know uh pre-tax so that's right it's great to pay attention to it now yeah and the answer to this i will say as well because we do have people watching this from from around the world your answer will depend on how your country your municipality handles taxation of retirement funds there's a variety of different approaches that are out there we are personally most familiar with the us approach but i know that some of these concepts are similar in other countries as well so just be aware and the earlier you can be informed if you're watching this in your 20s and thinking about you know a fire path for yourself just sooner than later it's worth looking into what the structure is how the taxation is handled early withdrawals all of those things are just vitally important to this concept of retirement drawdown in your retirement paycheck this becomes that much more difficult for someone who's younger because there's a conflict between putting money away pre-tax where it has the chance to grow all those years unimpeded by taxation right and loading up uh an after-tax or what we call a taxable brokerage account so you really do want to think about those or that financial order of operations right you really it's two-year benefit to get those dollars working for you pre-tax if you can um yeah so yeah and yeah totally i don't i mean there's not an easy answer there right there's not but i mean we should absolutely plug uh the money guy shows financial order of operations yeah that is the most concise way i've seen and i'd love to see if others have other resources that we can link in the comments it's one of the best resources just concisely show that kind of what is that financial order operations how should you be allocating your savings and investing at different ages and stages of income for example so highly recommend it we'll we'll link it in the show notes it's funny mike um i was having this conversation with my youngest son the other day we're coming back from a job site together he's working for me this summer so he has the opportunity to contribute to a roth and you know we're just talking about saving and spending and what his habits were and things like that and um he mentioned wanting to open open a brokerage account so he could buy some stocks and i said well you know i mean really the thing you want to do given your income because he's he earns less than twelve thousand dollars a year so subject to no paying no tax basically that's right is like dump that money in a roth you know and totally and so it is very situational in terms of your age and what your income is and where you are on your path to fire but it's definitely worth putting all these things sort of in a pot and looking at them together i mean that's the great thing about this post is you can run through these steps so that you're going to ensure that you have you know enough money to retire on but it also brings up all of these issues it brings up all the relevant issues that you need to pay attention to which is great if you're someone like me who has a ton of blind spots so three years of cash is what fritz keeps in his cash bucket you have two that just seems like a lot of money to have on the sidelines am i being crazy about this well i mean it's very easy to look at anything as opportunity cost and it is in a sense but which opportunity would you rather trade having to sell stocks in a down market because you don't have enough cash sooner right you're buying yourself security and comfort and potentially buying yourself um you're lowering your risk i get a financial decision you don't want to be forced to make the three years was based on the um the kind of worst case scenario of s p 500 recovering to a prior level after a bear market right yeah so let me tell you how i handle it well how often does that happen i have but it doesn't matter if it happens to you right those people that retired in the you know early 2000s i get it but that's scary so here so my approach is and you know fritz has a pretty big bucket too as well in my brokerage account which is you know my major tool to use for still another 11 years at this point right as we record this i'm 48 like you so i have an outsized brokerage account as a result proportionally speaking i my bucket won we talked about cash right i have two years but i have easily three years and potentially more um in sort of bucket two in my brokerage account oh yeah so i've got i got way more than ever i've got air cover in my bucket too yeah should the market take a three-year downturn to your point you know you don't want to have to sell those stocks yeah yeah so and in addition i have some dry powder so i could always buy more stocks when the market is down but it's the same point you're trying to make right you don't want to sideline too much cash and be a market try to be a market timer no because it is time in the market not timing the market that's totally how i look at it so so maybe i'm on the two-year spectrum i think even that seems like a lot i know it seems like a lot to have out of the out of the game but uh yeah i think i think because i mean i think i understand the way that you're wired enough to know that when you suddenly have a lot less income and that may be a glide path thing between you and laura and you know however those income sources ramp down your side hustles you're going to feel a whole lot less anxious knowing that you've got coverage that's true from those assets good and that's how i think about it yeah okay and fritz admittedly and he writes about this often takes a more conservative view on a lot of these questions and that suits him and his wife's approach and their their makeup best and that's great that's a personal decision as long as you've done the legwork and clearly he has to show with these assumptions and these assets this is what it's going to look like over time we're going to be fine i mean he's even got like a 75 25 stock bond allocation or something like that and if i look at the you know the the risk of that portfolio is is almost like a 50 50. this it's almost the same as a 50 50 portfolio if you look at it like 50 50 stocks and bonds like stocks and bonds yeah i don't know there's lots of ways to cut it man it doesn't necessarily mean that's more conservative but he he also may be dealing with like a different magnitude of of money which i i presume right yeah that's right and to be clear there's so many layers that can go into this level of planning there's lots of things you can do to hedge risk market neutral funds other alternatives real estate this is not meant to be an all-encompassing discussion and fritz doesn't try to do that either yeah there's lots of different ways you can manage risk in your portfolio and and handle you know having a diverse portfolio outside of just pure stocks bonds cash right and many of us do i certainly do have other hedges and elements of my portfolio that are meant to try to do risk mitigation now back to your jl collins idea does that mean in a 10-year bear market i'm going to necessarily do as well as a 100 stop portfolio of course not but for me it's about managing those bad years and being comfortable that our portfolio was going to succeed in the long term 10-year bull market you meant that's what i meant 10-year bumped i say bear market i hope there's not a 10-year bear market oh geez well it hasn't happened to date and let's hope it doesn't happen because there's going to be a lot bigger problems than asset location then rounding up the article is number 10 implement an annual financial review now in concept this is already something that's probably very familiar to people on the fire path yourself included although a little different angle right you already do regular financial reviews and here we're just talking about extending that practice to managing your retirement portfolio right your asset allocation your withdrawal strategy refilling those buckets etc and making sure that you're managing that how do you react to this point no-brainer anything to add i mean you know i do it monthly now but it's not the same way that um i think fritz talks about doing like it takes him two hours basically and it's it also has to do with rebalancing and out asset allocation and checking in with the spend and so yeah i think harvesting yeah it's totally sensible to me um i don't know hopefully i do it and implement all those steps he's got a pretty nice little checklist and yeah is that something do you follow his or you have your own or what what do you do you know i realized i i didn't you know as much as i was like an sop standing operating procedure driven person just like i know you are right we use them for the show i didn't actually lay out those kinds of checklists for myself i mean yes i'm only in year one but i am as a result of this article starting to be a little more formal and laying that stuff out in my ever-present spreadsheets and i think that's going to help make sure that nothing gets left behind and honestly that you know regular review with lori is going to be important aspect of feeling better that should something happen to me things are set up in a way that's clear understandable and she could execute on um you know an absent me right and that's important for all of us to think about that's why we're doing this series so she can go back and listen to it right that's right then she'll have to watch the show right have you told laura that no i haven't no it's probably a good idea yeah you should probably think about that so i mean i mean for me on net this article captures an awful lot of meaty points as as he said and you did but it's so sensible and it's so important and it may look overwhelming to somebody who's just found the fire concept and is like okay how do i get started and they find this video and they see this article like well hold on now uh i saw four percent rule and i'm good and now you're telling me ten big you know tranches of activity i have to do how would you kind of guide somebody who's new to it and maybe a little overwhelmed by this as a thinking about it as a process i mean i like that you can kind of step through each one of these and i could see myself in each part of this kind of fire path that we're on there and you know i think i talked about this earlier but you get certain steps and you're probably not ready to think about the bucket strategy maybe on day one but when you get to day you know 100 and you're really kind of getting into this and researching it like you realize that you do actually need to think about those things that may be far in the future early on if if for no other reason then that you set out a plan like okay in two years before retirement or three years before retirement i really need to think about starting to set up this cash bucket or maybe you have another strategy but it does it does bear thinking about and that's what i like about each one of these steps and i can see that there are some places that i need to still work on even as i'm nearing this goal and some things some blanks that i need to fill in so yeah i really like it and i like the the spreadsheets that he i think if anyone digs into anything on his site it'd probably be the bucket strategy and all the things about you know drawing a paycheck in retirement and i mean just things i haven't even thought about and then you know the hypertext of the web is such that you know this is like linking out to michael kitz is his blog which has a whole bunch of stuff on social security i'm like oh wow that's something i didn't think about and you know so if you're a geek on this stuff like i am presently um it's it's just a rabbit hole that you can dive pretty deep on and i know you've followed his stuff for many years right do you continue to follow it i do i do i follow i would say i follow fewer sources than i used to yeah but fritz's uh you know the retirementmanifesto.com is definitely one that i still follow uh if nothing else you know different people have different perspectives yeah they use different tools some of it's very reassuring like oh i'm thinking about that in a similar way that that's good because i i think i'm kind of similarly wired other things will be like oh i hadn't thought of it that way before like that's new information yeah i'm going to go back and do a little work and get the spreadsheet out and think about this and all those things give me confidence that i'm still learning i'm growing i'm you know going to be more comfortable managing different aspects of this as our my life continues and this portfolio does what it needs to do so yeah i do follow it and um you know i take your point really well though this you know somebody just coming to this they're going to look at steps eight and nine and say i don't even know how to approach that and the answer is you don't have to approach that today right on day one as you said but just starting to think about what should we what is my retirement what does my ideal retirement look like how do i spend now and how do i reconcile those two concepts with my current assets that's going to get you to those next steps of okay where my assets need to be how will i draw them down it's a progression i mean one way of one the way that i've looked at this and i didn't um follow this exact template but laura and i when we have our monthly meetings we kind of have a list of things that um in notion that are things that we need to solve and you know like so one of the things is okay what's our drawdown strategy going to be and so we have in there you know how much cash do we want in you know there's a link to the post on the bucket strategy and so it's kind of points to be filled in at a future date but they are on this master list of okay before we do this these these are things we definitely need to solve and check back in with and in notion for example i mean you could assign dates to this if you wanted to put on a calendar or something like that and so it's just a way of taking a big problem and putting some order to it so that you actually eventually will get to it um and i find that i'm often searching for this information online and i'll see a post here or watch a video here and i don't always have the best way of collating and aggregating that information so for me notion tends to be that um yeah so anyway yeah it's a great tool and it's just worth mentioning to folks it's it's also free software as most people using it for personal use i highly recommend you check it out especially for somebody that has you know doesn't already naturally have systems in place for organizing large sets of information like this that you need to keep returning to and refining and maybe scheduling the eric's point notion is a great tool i i use it personally as well i've got some great videos on it too oh you do oh where would i find those 30x40.com no there's on my other youtube channel there is a notion it's called notion for architects but it's actually more broadly applicable to anyone who is looking to implement notion and the systems around it their notion can um if you go searching for notion content online it can get really deep really quick oh my gosh they can right so linked databases and there's like a whole bunch of information on it that's it's a little bit um opaque as as you first look at it but it's actually a very simple um reasonable price i mean you you picked it up in like a day or two i feel like yeah i mean i think the fundamentals are nice and straightforward they did a good job with the out of the box experience yeah there's a lot of power that i don't take advantage of but i don't need to i'm i'm okay with my level of use and but the other thing is there's tons of templates out there totally and that you can just to freely copy from different people and import them into your notion it's super useful [Music] do [Music] sorry the cat's throwing up it's great that's nice thanks for puking it's so old just wait when your cat gets old man dude my cat was doing this worse as young gets worse i think he stopped he didn't actually bring anything up so that's nice [Music]

Channel: Two Sides Of FI

Views: 53,028

Keywords: financial independence retire early, financial independence, fire movement, early retirement, early retirement planning, early retirement planning tips, retire early lifestyle, retire early fire, retire early fire movement, retire early fire method, first year in early retirement, eric reinholdt, two sides of fi, financial independence retire early fire, how to retire early, financial independence retire early stories, medicare, bucket strategy

Id: fuzo1UiM6yE

Length: 59min 54sec (3594 seconds)

Published: Sun Nov 28 2021