Wealth Your Way (eBook)

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Charting Your Course

“You cannot escape the responsibility of tomorrow by evading it today.”

—Abraham Lincoln

“What’s your number?” If you ever have more than a casual FI conversation with friends or acquaintances, one of you is very likely to ask or be asked the somewhat intrusive question, “What’s your number?” The questioner is trying to assess the total FI Portfolio balance needed to achieve financial independence. As we’ve discussed, the answer is individual-specific, but that doesn’t stop the inquisitiveness. Twenty-five years ago, I asked the question of a friend, call him Billy Bob, and the response was “$2.5 to $3 million.” Years later, toward the end of Billy’s very successful career, I again asked the question, and this time Billy Bob responded, “$12,000.” Huh?

You will spend your entire career accumulating wealth to get to your number. And someday along the way, hopefully no later than today, you are going to come to the critical realization that getting to your number (i.e., the desired total balance in your portfolio) is only halfway on your FI journey. You then need to take withdrawals from your FI Portfolio to meet your spending needs for the remainder of your life. Billy Bob realized that having a $3 million portfolio is all well and good, but it’s ultimately the monthly cash withdrawals that will pay for his living expenses. And how much can be safely withdrawn without running out?

Just as you plan your monthly contributions, you need to project and plan those withdrawals. You will build your FI Portfolio monthly and then you will withdraw from it monthly. Those withdrawals will be your version of Billy Bob’s $12,000 per month.

“Liberty means responsibility. That is why most men dread it.”

—George Bernard Shaw

There are two basic ways to approach planning and managing your FI Portfolio. On one hand, you can simply start investing, hopefully accumulating wealth for a bunch of years until one day you proclaim, “I have enough and I’ve had enough!” You then quit your job and start withdrawing every month, hoping the money doesn’t expire before you do. (Can you hear Doris Day singing “Que Sera, Sera”?) I’m not sure about you, but this approach would most certainly leave me with some sleepless nights.

On the other hand, you can start investing while also projecting out what your FI Portfolio balance might look like on your FI date. You then take the additional step of projecting how to withdraw a monthly amount and how long those withdrawals might last. You effectively map out your projected cash flows over your entire life (both the accumulation and the withdrawal stages)—your Life’s Complete Financial Arc. What is the biggest advantage of doing this full lifecycle analysis now over the “whatever” approach? If you don’t like the projected answers, you have time to course-correct.

We know our ultimate goal is financial independence, meaning your FI Portfolio can provide you an acceptable monthly cash flow that you don’t outlive. To get there, we know we’re going to accumulate wealth in our FI Portfolio. But how do you monitor the progress of your wealth accumulation plan and how do you know when you have enough (your FI date) to generate those monthly withdrawals so you can consider leaving the workforce, traveling the world, etc.?

As we said earlier, the best place to start is with your end goals in mind and designing a plan to get there. Create a holistic, full lifecycle plan that covers your cash flows during both the accumulation stage and the withdrawal stage—Life’s Complete Financial Arc.

Design your plan so that, at a minimum, your FI Portfolio provides enough monthly cash flow to cover all your living expenses starting on your FI date and continuing for the rest of your life.

A plan is both a process and a reference point to periodically measure progress. To some, all this planning stuff sounds like a tall order. Let’s break it down and use some tools to do the heavy lifting.

“Whether you think you can or think you can’t, you are right.”

—Henry Ford

I purposefully think in terms of nautical charts—not roadmaps—when describing the voyage to and through financial independence. Unlike roadmaps, nautical charts do not always show a predetermined path. Rather, it’s up to the navigator to plot or course-correct using current data and navigational aids.

Just as the ocean’s tides and depths change, so too do the financial markets and economic realities. Once you set your financial plan in motion, you and your plan need to be flexible and you must adapt to the changing conditions. Take in new information, talk with people whose wisdom you trust, and reevaluate. It’s a living, breathing process. How you choose to navigate the ever-changing financial “ocean,” including emotionally, will be critically important.

At Some Point, Reaching Your Destination Will Require Changing Your Direction

If you are off just one degree in a spaceship leaving the moon and returning to Cape Canaveral, you would be off course by about one mile in the first minute. A simple course correction since you have 238,000 more miles to travel. But what would happen if you failed to course-correct for that one small degree? Well, I hope you packed a bathing suit. By the time you traveled those 238,000 miles, you would miss Florida by more than 4,000 miles, arriving west of Los Angeles some 1,500 miles out in the middle of the Pacific Ocean. A one-degree course correction combined with time leads to big changes.

The true benefit of financial planning is not only to envision the endgame but, more importantly, to link the accumulation stage and the withdrawal stage into one unified plan. A plan that provides a process to deal with the unforeseen circumstances and erroneous assumptions that inevitably reveal themselves as time goes by. Course corrections.

Consider the plan a snapshot of your progress toward your FI goals. The process of mapping, planning, reevaluating, and course-correcting is an exercise in financial awareness. Studies show that people who follow an FI plan are more successful than those who don’t.

Which Day of the Week Is “Someday”?

Ready to get started? There are several “free” retirement calculators online—do a Google search. Some of the online calculators are linked to advisors and their services where getting the detailed output you seek is tied to signing up (not quite my definition of “free”). There are also a few very good online calculators that come without catches and that do a decent job of running projections for you. The best of these calculators cover both the wealth accumulation stage and the withdrawal stage: Life’s Complete Financial Arc. Working with online calculators is a good way to begin to get your head around a broad view of your plan. You can always decide to pay for more intensive and detailed projections, but I suggest you start with a top-down simplified model.

I would also suggest you use two or three different models since they all have different limitations. With so many personal variables (timeline, rates of return, contributions, withdrawals, inflation, etc.), it’s extremely hard for any one calculator to be your panacea for modeling.

To start you off, one online calculator I’ve found to be detailed enough without being overly cumbersome to navigate can be found at financial-calculators.com/retirement-calculator.3 To be clear, this website does offer products for sale, but this calculator is currently fully functional without making a purchase or signing up for anything. (I have no affiliation with this site.)

I like their graphic output because it shows in one picture an estimate of your Life’s Complete Financial Arc: accumulating wealth, “Pre-Retirement Investing” (green bars); hitting your FI date; and then the withdrawal stage, “Post Retirement Income” (red bars), as you live your FI lifestyle. Don’t be intimidated. Just put in some assumptions and play around with it.

The more you use it, the more comfortable you will become with the modeling exercise. This is just one example of a model; there are many out there. Traditional fund managers such as Vanguard, Ameriprise, Fidelity, and Schwab offer online retirement calculators. Most financial advisors also have access to third-party or proprietary models.

If you are using money management software, you may already have access to a modeling calculator. For example, I use Quicken software and it contains a tool they call the Lifetime Planner. While I use Quicken primarily to manage my day-to-day finances, the Lifetime Planner is a convenient way for me to periodically monitor and course-correct my Life’s Complete Financial Arc.

Whether you use a website, an app, or software, or work with an advisor, you need to get your data organized and summarized in one place. To effectively manage your FI Portfolio and populate a model, you first need to accurately measure the data. Garbage in, garbage out.

NOTE: Retirement calculators give you a glimpse into a future, but not necessarily the future. With so many variables and a decades-long unknowable future, precision is an impractical goal. Use the output from calculators and models as directional indicators, not precise destinations.

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