In my first countdown post, I set out a goal to retire in 2 years (or 48 more checks). Well, 12 of those 48 checks are in the rearview mirror. How are things looking?
Oh what a difference 6 months makes. Due to a market correction, I’ve already blown past the $150K gap the 48 checks were intended to close, and my FIRE plans (like the broader market) are rapidly transitioning from bearish to bullish.
Inflation Recedes
The good news is Inflation is down to 4.1% (as of May 2023) from its 9.1% peak. Over this 2022/2023 period however, the U.S. experienced its longest bear market since the 1940s. It was painful (and long) for all of us to watch our investments dry up 20-30% while mortgage rates more than doubled and the price of eggs increased 8x.
While more turmoil is anticipated, it appears we are through the worst of it. All of the numbers I am tracking have improved much faster than my (intentionally) conservative forecast in January predicted that led to the 48 check countdown.
Houses in the Western market decline
Take a look at the graphic below and you will see that housing inflation is sticky for the vast majority of the country (grey and blue colored counties). But one exception is the West, where most metropolitan areas are seeing significant price erosion (depicted in red).
How does this affect me? It means gains on my Illinois home value (~$450K) are sticking, while Denver’s hot housing market has cooled, melting home prices in my range by ~$100K over 2022 list prices.
On the other hand, its also shriveled up inventory in formerly hot markets. Most Western homeowners are not willing to list right now and exchange a 2.5% mortgage for one at 7%.
This will hopefully improve due to pent up demand and eventual rate cuts in 2024, when I do plan to move.
Stock market gathers steam
The stock market is up 20% (July 2023) from its low in October 2022. With assets well over $1M, this has meant major improvement to the paper value of my money.
More importantly, the 20% correction technically ends the bear market.. So is it only up from here?
Over the medium / long haul, the consensus seems to be yes. But the jury is out over the short haul. With the Fed set to maintain elevated interest rates into 2024, its unlikely we will see equity growth continue at this rate.
In fact, we’ve already seen speedbumps and are likely to encounter more turbulence yet before the next bull fully takes root. Its a good opportunity for FIRE investors to keep socking money away at lower equity values before the next runaway bull.
Almost a multi-millionaire
Net worth is kind of a vanity metric. I can’t guarantee my debt free owned home is as valuable as Zillow says it is, and the paper value of my assets change daily with the market.
With that said, given we’ve been in the longest bear market for nearly a century, I am confident a current net worth snapshot is not over-inflated. So where is my net worth now?
I was just cracking $1.6M to start the year. Twelve checks later into my 48 check countdown, and I’m at ~$1.9M. That’s a whopping difference of ~$300K. I’m knocking on the door of multi-millionaire status, something I never could have even fathomed when I started my career at 25 with two useless English degrees and deep in debt.
Where did this $300K in gain come from? Private investments? Inheritance? Funny money?
Nope. The vast majority of my gain came from doing absolutely nothing. Buy and hold is a maxim as old as the market. I held, and the market did the rest over the last 6 months. I’ve also continued to save/invest ~80% of my income with my low expense lifestyle.
At this rate, I’ll cross the multi-millionaire threshold before this year ends. And I’ll be trending toward $2.3M or north by the time my 48 check clock is up at the end of next year.
Can I retire earlier than planned ?
Is 36 more checks truly necessary? Not for financial independence. I’ve been FI since last year, and the math says I don’t need 36 checks to maintain FI in moving to a house at 2X the value.
Let’s run the math. Say by the end of this year (2023), I have $2M in net worth ($0.45M home equity + $1.6M investments). If I move to a $0.75M house and buy it outright, I’ll have $1.25M non real estate assets left. Is that enough to cover my living expenses according to the 4% rule?
If I went with the 4% golden rule, I could safely pull $50K a year and have my money last forever. Even then, the 4% rule is likely too conservative for my personal circumstances as I explain here. A 5% withdrawal ($62K year) would be more appropriate.
Either number is far above my expected yearly expenses of ~$36K. Those expenses work out to a ~3% withdrawal rate, a number so safe that if I stuck with it, I’m likely to end up with 9X the wealth decades in the future.
Staying the course
If I stick with my 48 check target, my expected net worth of $2.3M will leave me with ~$1.6M in non-real estate assets to live off in 18 months.
Now my living expenses will be just a hair over 2% of my assets. It probably goes without saying, but at this point, my concern pivots from figuring out how to ensure my money lasts to figuring out how to spend more of it in retirement.
$2.3M in net worth (including real estate) might not get you as far in an expensive coastal city or if you carry multiple debts. But it is more than enough in a low tax state if you have zero debt and multiple tax free income streams.
In fact, according to a recent wealth survey conducted by Charles Schwab, most Americans consider it wealthy to have a net worth of $2.2M or more. While I do not need to achieve multi-millionaire status to comfortably retire, at this point I remain resolved to work through 36 more checks and achieve it.
Takeaway – Beating the SWR is easy
This boom/bust/recovery cycle of high inflation has been eye opening in so many ways. But my biggest learning is this: it’s a hard slog to move from to debt to FI in the beginning, but once there (or close), it easy to grow wealth far past the 4% SWR.
Let me explain. Let’s say you decide to go on a FIRE journey from ground zero. You have $10K in your 401K, and are able to save/invest $50K from your $100K salary by pinching every penny in one year. Lets say stocks have an out of this world 30% gain.
At best you might walk away with $70K in investments by the end of the year. Pretty impressive, but you are still a long way away from FI.
Now let’s compare that same scenario, but for someone close to FI. Let’s say you have 24X living expenses ($950K), just shy of the 25X you need to retire. You still make $100K, and are able to invest $50K in one year.
But now that 30% stock ROI compounds your $950K, instead of your $10K. Now one extra year of work grew your assets from $0.95 to $1.3M. You were just shy of being able to retire and live off $40K a year. But after just one year of work, you can give yourself a payraise and live off $53K a year in retirement.
In other words, one more year of work turned $40K of living expenses from 4.1% of retirements assets down to 3% in scenario number 2. Incredible.
The only difference between the two scenarios is the amount of money already invested. The beginning FIRE acolyte gained about $15K from the market growth; the grizzled FIRE vet gained over $300K.
The point: all of the debate about the appropriate safe withdrawal (3.5% or 4% or 4.5%, which is it?) in the FIRE community is a whole lot of picking the fly shit out of pepper.
Once someone pursuing FIRE grows their assets to ~20x of living expenses, their money starts to pull in a second salary. At this point, its easy to outperform even the ultra conservative 3.5% SWR bogey simply by working an additional year or so.
That’s it for now folks. I’ll check back in as the market continues to recover from inflation and the 48 check countdown continues.