About 2 years ago, I started realizing my investments were doing pretty well. This was helped in large part by two real estate purchases, both of which appreciated a large amount in a short amount of time. In spring 2015, I sold one of the properties, locking in my gain and adding what was to me a very large sum to my investment portfolio. Taking stock at that point, it occurred to me that my investments would eventually reach my Financial Independence/Retire Early (FIRE) goal in my late 40s, even if I didn’t add anything more to them. My FIRE goal is the amount of money I’d need in my portfolio to retire without a military pension, assuming my current passive income (dividends and real estate) stayed the same.
When I did my annual net worth checkup at the beginning of 2017, I realized that actually, I could reach my FIRE goal even earlier. As of January 2017, my invested net worth was a little more than half of my FIRE goal. Using the Rule of 72, my investments will double in about 10 years at an annualized average 7% return, 9 years at an 8% annualized average return, and 8 years at a 9% annualized average return. So I have a realistic shot of reaching financial independence in the first half of my 40s. Boom! Now you know approximately how old I am. You’re welcome.
I’ve since learned that this concept is known as “retirement inevitability.” At least, that’s what The Frugal Vagabond called it in his (I think The Vagabond is a he?) post The Point of Retirement Inevitability. He describes it very simply:
There’s a milestone on the path to financial independence that, for most people, goes unnoticed. I call it the Point of Retirement Inevitability. It’s the moment when, left completely alone, your assets will appreciate enough between now and retirement to achieve your retirement savings goals without any further contributions.”
Basically, you reach retirement inevitability when your retirement/FIRE goal can be reached by the time you want it to happen, using a reasonable projected average investment return. Anywhere from 2% to 9% or so would be reasonable, in my opinion. The 2% return is if you put your money in super safe low risk investments (government securities, say), while the 9% would be something like an aggressive but diversified stock portfolio. If you are predicting an average return above 12%, you may have been sold on your buddy’s neighbor’s pitch about how he always earns 15-30%, even in 2008. Or you follow Dave Ramsey.
I’ve also recently heard this concept described as “Coast FI.” That is, you are “coasting” into financial independence because you can take your foot off the proverbial gas by not contributing towards your retirement fund. Based on a quick interwebs search this might actually be the more commonly used term, but I kinda like the thought of “retirement inevitability.” It’s like, gonna happen. Inevitably. That’s awesome.
Bingo Bango, Now I’m Done-zo!
Alright, so I can lay off saving and investing now, right? Use that money to buy a really BA car or start staying at the Ritz Carlton when I travel?
I’m going to keep my savings rate high. I’ll keep investing at least as much as I have been investing. Probably more, when I receive raises. I’d like to dedicate a little more towards other causes (for instance, I raise my charitable contributions percentage a little each year) but basically, I’ll keep investing a large percentage of my income each year.
There are actually several reasons why I’m still saving and investing. The first two cover why I think everybody should keep investing part of their income once they reach retirement inevitability. The third reason is one that makes sense, although it’s certainly not absolutely necessary. And the fourth reason is more personal to me and people in like situations.
Reason #1: I Need To Keep Expenses Down
The biggest potential problem I see with retirement inevitability is that a person would celebrate reaching retirement inevitability by upping their expenses. Why is this a problem? Because usually people base their retirement number on their standard of living. If you all of a sudden change your standard of living, your retirement number is no longer valid and now you are no longer in retirement inevitability!
Let’s say Bob has determined he needs $1 million after all forms of expected passive income in retirement. If Bob has $500,000 now and is aiming for retirement in 10 years, he needs to achieve a 7.2% average rate of return based on the Rule of 72, right? So I’d consider Bob safely in retirement inevitability if he has a portfolio that could reasonably achieve a 7.2% average return.
Now, let’s assume Bob’s expected retirement expenses (pre-tax) are $50,000 in current-day dollars. He’s been living off of approximately that much for the last 2 years and knows it’s a sustainable, comfortable standard of living for him. So he plans to retire when his passive income and investment portfolio combined can support that much in annual expenses.
Bob expects to be earning $10,000 annually in passive income from real estate and needs $40,000 annually from the $1M portfolio. That’s based on the 4% rule, which I’ll be talking about in an upcoming post. For now, assume it’s correct. So with Bob’s expected passive income and expected expenses, a $1M portfolio is a good goal to have.
Now, Bob didn’t get to a $500,000 portfolio by magic. He’s been setting aside $20,000 each year into his investment portfolio. Good job, Bob.
If Bob decided to celebrate his newfound retirement inevitability by increasing his standard of living by $20,000 each year and no longer saving, he’d quickly get used to a $70,000 lifestyle. In 10 years, when his investment portfolio hits $1M, it’s no longer enough to support the standard of living to which he is accustomed. Now he needs to work longer to let his portfolio grow more, or he needs to take a $20,000 cut in his standard of living to retire right away. Sad Bob.
Reason #2: Risk Mitigation
For the purposes of my planning, I am assuming that a 7-9% average investment return is likely, so I am firmly in retirement inevitability territory. Actual returns could prove that to be false, but I won’t know that until it happens so I have to plan based off likely scenarios.
But I don’t have to be stupid. In the military, we develop friendly Courses of Action based off the enemy’s Most Likely and Most Dangerous actions. In my financial planning, I look at the most likely and most dangerous market returns.
With the most likely returns, I achieve success in my early 40s through retirement inevitability – no more contributions needed. But if we are looking at a most dangerous situation – another Great Recession or even a Depression – I will need more money to buffer myself against harm. It’s how I can mitigate the risk of losing money. So that’s what I’ll do. I’ll keep investing money to mitigate against a most dangerous scenario, while planning for a most likely scenario.
You could always look at a best case scenario too, but that’s kind of pointless in my opinion. Catastrophic success in military planning can mean you aren’t prepared for follow-on operations. With your finances, catastrophic success would mean….what? You retire with too much money? You need to give more money away or leave more to your family than you were planning? Unless I win the lottery and simultaneously forget how to budget, I think I’ll be fine if things go better than expected.
Reason #3: Options!!
I’m pretty lucky. I have a great job that I actually enjoy doing. I’m not super eager to leave, and in fact I don’t know that I will leave as soon as (if) I’m retirement eligible. Plenty of people in the military plan to retire as soon as they are eligible, but I’ll definitely be waiting to see what my situation is like at that time. I’m in no hurry to leave.
But if you want to have lots of options available for when/if you retire, or you are in a hurry to leave your job, it’d be plain dumb to stop investing in your retirement if you have the money available! This doesn’t necessarily mean you have to put money into a TSP, 401k, or IRA. But it does mean you should be doing something productive with that money if you want to stop working. I mean, that seems obvious, but I just thought I’d throw it out there. If you can’t wait to stop working, put the pedal to the medal. Be the Dave Ramsey gazelle. Hustle, baby, hustle. Insert other motivating phrase here.
(yes, I know I have both mocked and praised Dave Ramsey concepts here. He has both good and bad points, like all of us)
Reason #4: My Pension Isn’t Guaranteed
I’m working hard for a military retirement and associated pension. And by this point in my career there is an above average chance I will receive one. But there is no guarantee for me yet. I haven’t served long enough for that. And several friends of mine have left service when getting close to a retirement, either by choice or not.
That means I need to make sure I keep investing enough to guarantee that I can support my retirement on my own and not rely on a government pension. And while my FIRE goal is enough to support me comfortably, I’d like to have some cushion. If I earn a military pension, I will have a large investment cushion. A big ole Lovesac of financial safety. If I don’t earn a military pension, my cushion will be considerably smaller. More like a decorative pillow with a saying that your grandmother wrote in needlepoint. The point is, either way I’m giving myself a little space.
So that’s why I’m gonna keep on keeping on with my saving and investing plan. Could I stop? Yes. But it wouldn’t be a very wise choice in my situation.