Hi RIP friends,
FIRE math is easy, isn’t it?
You work for a decade or two (or half), save a shit-ton of money, at least 50% of you income, accumulate accumulate accumulate, experience the good feeling of watching your bank account go up up up, invest invest invest to make compounding work for you, work more, hustle a bit, see your net worth growing at unprecedented rate, then you reach FI… then you quit… and…
And you start withdrawing from your nest egg. Taking money out. On average still experiencing net worth growth – if you picked a safe enough withdrawal rate and didn’t face a 1929 thing right after retirement – but not as steep as you were used to.
Do you think this is going to be comfortable?
I’m getting used to complain if my Net Worth grew by only 100k in a year: “what a shitty year!”.
Ok, the FIRE movement fixed this bug, repeating again and again and again that you’re not going to stop working, to stop hustling, to stop being a creative person in retirement. Retirement is a misleading word, we don’t want to retire like grandpa did, we want freedom to pursue fulfillment. Sofa FIRE is not good for anyone.
But still, the math we use as “rule of thumb” is a variation of 4% rule. We want to plan for the worst, to be able to anticipate all the curve balls that life will throw at us (bad sequence of returns, never working again, no inheritance, no social security, unexpected huge expense…) to be safe in 99.9% of foreseeable scenarios.
Let’s say I’m going to use the 4% (3.5% in my case) rule literally. I’ll keep shoveling a 5 digits amount of money into my nest egg each month and then calling it done at one point in the near future.
How will I feel about withdrawing from my principal and not contributing to it anymore?
I can’t know it today, but I can imagine.
Let me tell you a story that made me think about this.
At Hooli we travel a lot between offices in all the continents.
I used to travel much more in my early days. In last 6 years I’ve visited New York City (3 times), California (10-12 times, stopped counting), Japan, most of Europe and, sadly, I missed a Sidney trip by few months when I changed team back in 2016.
For each travel A to B we have a transportation budget, accommodation budget, meal and local transportation budget. If you spend less than your budget, you can keep half of the savings as “travel credits” to be used for subsequent trips. With the flight budget you can usually afford one way economy and one way business. If you’re willing to fly with stops or mid week or book months in advance, even business both ways (hard but doable).
I’m a saver.
You tell me I can grow an account then I will. Even if I know I can’t cash it out.
So I’ve been flying economy all the time for years, and accumulated a good amount of travel credits.
I’m in California right now, working but mainly complaining about having to tip everyone. The weather is awesome and sunset over San Francisco financial district from Mission Dolores park is majestic.
“RIP, did you fly Economy this time? I remember when you bragged about your frugality and flying business class a couple of years ago”
Not exactly. I switched from accumulation to coasting mindset at one point, a couple of years ago. Let’s not accumulate credits anymore, and try to spend all the budget for each trip. Ok, almost all. I need to save at least 10% of the budget every time. That’s how I’m wired.
“Ok… good, enjoy life and live travelcheck to travelcheck. But wait, your accumulated credits won’t grow much anymore, but still… what do you plan to do with them? Why don’t you consume them?”
That’s exactly the question I asked myself when booking for this flight.
Why not indulge? Naaaa it’s not me.
So I decided to fly one way Business and the other way Economy. Going west takes more time (12 vs 11 hours) and the entire flight happens during the day, while going east – against the sun – is overnight. Plus I’d like to be fresh in US, so let’s buy Business for the Switzerland –> California leg and Economy the other way around to be slightly under cap and save my usual 10%… wait… why is that FIRST CLASS return flight priced same as business??
Holy crap, I’ve never flew First! That would mean spending ~2k CHF above the cap, consuming ~40% of my saved credits, my nest egg! My precious!
It took me a while to click on that offer, but then I did. I booked my return flight in first class. I will fly early next week back to Switzerland “as a boss“.
Problem is that right after the purchase I felt a mix of bad feelings:
First one is guilt. I don’t deserve it. Flying First Class? Who am I, a CEO? I know I saved for it, I flew a dozen times economy and stayed in crappy hotels to save money for the company (and to accumulate credits for me). I know I got an offer to fly first at less than half its usual price, but still it’s hard to accept. I felt guilty. And dirty. And wrong.
That got amplified when I talked to my manager.
He said: “It’s ok, you’re using your credits. It’s fine. Enjoy!“.
But then I asked: “I know you’re also flying to US in few weeks… did you get some awesome deals too? 😉”
“No, but that’s ok. I’m flying Economy both ways this time.”
Holy crap, my manager is flying couch both ways while my Business flight will be the uncomfortable one?? No no no it’s wroooong! impostor syndrome is skyrocketing!
Then fear arrived. I’m consuming an accumulated resource. A resource it took years to ‘stash away got almost halved on a whim. What if I run out of credits? Why does it feel so bad to see a number, that used to grow, going down?
That bad feeling lasted for a week after the booking. At least I saved some credits from the hotel budget. I’m staying in a relatively cheap place in San Francisco.
[Note: 220 USD/Night, under cap but “cheap my ass”. San Francisco is untouchable, that’s why Financial Samurai is not trolling when he says you need 300k per year to be middle class here.]
Then another layer of fear: what if I like it? Am I getting used to luxury? How will I feel about flying economy from now on? Will I hedonistically adapt to it? Luxury is weakness, I truly believe it is. So why did I book such an expensive flight? Am I becoming weak? Am I doomed to succumb to the hedonistic treadmill?
When the negative feelings settled down, I started thinking at the big question that’s title of this post:
Will I be comfortable withdrawing from principal in Early Retirement?
I felt bad for withdrawing from a credit it took me years to accumulate, even though it’s not my money. FIRE math says I will do the same with my money.
I felt guilty for having accessed to luxury without having earned it, FIRE math says I will do so once retired. I know, it’s not entirely true. I saved for it but it’s hard to connect savings with actual spending in the future. It’s bad behavior of my mind. When I save, I put the future before the present. But then future comes, and if I spend what I saved it feels like I’m not deserving it. A close to pathologic attitude to delay gratification indefinitely.
This attitude needs to change (a little bit).
Are you sure you’ll be comfortable with spending your nest egg down?
That’s why I’ll probably not do a brutal single stage early retirement, but a multistage one. I’ve introduced the idea in my recent interview on ESI Money, but it’s not an original idea: I first read it from Joe over at RetireBy40.
Here’s the rough plan:
- Stage 1: pure accumulation phase plus one or two passions being explored professionally – earn (as much as you can), save (as much as you can), and invest. We’re here right now. It may be over in 1-2 years.
- Stage 2: coasting – no more conventional 9to5, 40 hours per week jobs. Maybe switch gracefully, reducing work time to 50-80%, work actively on passion projects, try to monetize them to cover expenses, let investments compound and grow. Maybe exploit some sharing/gig economy too like hosting dinners at our place, rent rooms on airbnb… The goal is to pretend you don’t have a huge nest egg (and let it compound on its own), but aim to cover your expenses entirely with your income.
- Stage 3: passive & passion income – no more bullsh*t jobs. Keep working on passions, maybe explore new ones, or those hard to monetize. It’s ok to withdraw something, but one should aim to at least an active source of income.
- Stage 4: retirement – no need to generate income anymore. Work is optional here.
I don’t have a finalized plan yet, with actual dates and numbers, but I think we’re going that way.
As I said in my interview:
The four stages plan doesn’t need to be followed linearly. We may actually jump from 2 to 3 (to 4) and back several times, like every time I want to try out a new passion and see if I can monetize it.
We might end up in stage 4 earlier, in case investments grow quickly or some windfall event happens.
Ironically, that’s almost what I did with my travel credits: stage 1 for 4 years, stage 2 for 2 years and now… I’m in stage 4!
What’s your plan?
Are you still thinking in binary mode?
Now… good night!