Planning for Early Retirement with the Financial Independence Baby Steps
November 28, 2019
Within the first year of our marriage, my wife and I were $230,000 in debt. Our net worth was a staggering -$130,000. Now, just ten years later we are completely out of debt and within one year of reaching financial independence!
Having found the world of financial independence a few years ago I know it can be daunting to figure out where to start. For that reason, I want to lay out a simple framework that can be used to communicate and plan the various phases of the FI journey.
The concept of baby steps was popularized by Dave Ramsey in his Financial Peace University course. My wife and I are quite familiar with his concepts as we applied them to get out of debt ourselves. We even taught the course for seven years!
People often discredit Dave because his financial advice is so simplistic. I can’t do that in good conscious. He has done a tremendous service to millions, including myself. I am grateful that I had the chance to shake his hand and say thanks.
I have come to see Dave as an absolute master of conveying complex concepts to people with limited financial savvy. His hallmark are the six Baby Steps: 1 Starter emergency fund, 2 Debt snowball, 3 Fully funded emergency fund 4 Invest 15% of income, 5 Kids college, and 6 Pay off the House.
Not the first to propose FI baby steps – Our friends over at Choose FI have put together the “Baby Steps of FI.” I like the concepts and tips in that post. In contrast, however you will find that the below Baby Steps are more step-by-step and include a broader view of the FI journey.
Baby Step 1 Start with your Why
In this first Baby Step I want you to have a clear picture of your dream lifestyle. If you are married, your spouse plays an important part in defining the shared vision for your future.
As mentioned in my introductory post my family’s dream is full time travel. I invite you to share your dreams in the comments below. There is tremendous power in writing them down!
Baby Step 2: Determine your FI number
Don’t use a retirement calculator – The thing that retirement calculators get wrong is they assume your retirement lifestyle will be a percentage of your current take home pay. For instance Fidelity estimates 60-80%.
To do this properly you will need to analyze your spending. You could do this manually by writing it down or by downloading transactions from your bank. Alternatively, I would commend you to the expense tracking software on our resource page.
Determine the worst case – By reviewing a few months’ data you will have a sense for your monthly expenditures. This represents the maximum amount you will need to cover your lifestyle in retirement.
As an example, let’s assume you are spending an average of $4k per month. Your maximum FI number will be:
$4k * 12 months / 4% safe withdrawal rate = $1.2M in investments
Note: If your current and post FI lifestyle will differ significantly, you may need to adjust your estimated monthly expenses accordingly.
In the next baby step we will work the expense and income sides of the equation which will make this very large number seem more approachable.
Baby Step 3: Grow the Gap
My family and I visited London recently. When you’re entering the train cars there is an automated voice (in a very pleasant English accent) that says “mind the gap!”
This is a reminder not to get anything stuck the gap between the landing and the train car. The gap is necessarily small to avoid such occurrences. This small gap is a lot like your discretionary income as you are starting this journey!
Uncle Sam wants you… for +40 years – Your employer and the federal government would love for you to be chained to your desk until traditional retirement.
Instead, let’s send that train screaming down the track and put some miles between it and the landing. We will do this first by scrutinizing and lowering our expenses. Consequently, the amount of investment funds we need in early retirement reduces significantly. For example:
For every $100 per month you reduce, you eliminate $30k from your FI number! Here’s how that works:
$100 * 12 months = $1.2k annually
$1.2k annually / 4% safe withdrawal rate = $30k in investments
Subscriptions cost more than you think – Now how much is that $100/month cable package worth to you really?
As you look into this more closely, you may find that you need to get out of debt. For that, I would also recommend you visit our resource page. I don’t think you’ll be surprised by what you see :).
Making more money – Lastly, In addition to working to reduce expenses it is important that we look at our income. There are many ways to generate additional income to widen the gap: 1 extra jobs, 2 start a small business, or 3 investing. We will explore these in future posts.
As we are doing this it is important to keep Baby Step 1 in focus. I would encourage you to avoid reducing your expenses beyond the level that you would foresee in your post FI lifestyle. This will avoid burnout and build confidence in your estimate of expenses after retirement.
Baby Step 4: Prep for independence
As with each of the prior Baby Steps, we need to consider our Step 1 vision. When we draw nearer to retirement there are a number of steps that we need to take to prepare.
For my family we will need to renew passports, implement a digital mailbox, and digitize our hard copy documents. We will also need to learn how to create and edit videos as we would like to create cinematic travel videos that we can share with you.
Each of these are long lead-time items that we need to prepare for weeks and months in advance. Your list will most certainly be different so start considering what you will need and plan accordingly.
Baby Step 5: Fire your employer
Somewhere along your journey you will reach a point where you could “technically” retire and have your basic needs met. Around this time you will find that you relax in a place you didn’t know you had!
You will find that the fear you had of losing your employment is no longer there. Consequently your confidence in dealing with office situations raises. Ironically, your boss may take notice and give you that needed raise and promotion!
My wife, who is always several steps ahead of me asked “when you quit, what if they offer you more money or location independence?”
My response was “it is hard for me to imagine they could offer something that aligns well with what we want to do (i.e. Baby Step 1).” This is why it is important to have Baby Step 1 clear in your mind.
Baby Step 6: Your Life on FIRE
I can’t tell you what Baby Step 6 will hold for you. That said, I do want to encourage you to determine what aspect of Baby Step 6 that you can apply to your life today. For us that is continuing to travel a couple times per year.
I want to give back to the community a little of what I have learned over the last few years. I started the blog to share my narrative in hopes that it can help enrich and accelerate your journey towards early retirement.
Let us know in the comments if you found the post helpful. Also, looking for your input on things that would be most helpful to you.
It is incredibly difficult to get a new blog off the ground. One thing you could do to help is simply share this content in any way you see fit. Until next time, keep living your life on FIRE!