How Much Do You Need for Early Retirement? (How to Calculate Your FI Number)

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2:38Mindy Jensen:Your fine number at its very base is 25 times your annual expenses, But does your fine number change over time? What considerations should you put into your fine number? And how frequently should you revisit it? That's what we're going to talk about today.

2:59Mindy Jensen:Hello, hello, hello, and welcome to the BiggerPocketsMoney podcast. My name is Mindy Jensen, and with me as always is my calculating co-host, Scott Trench. Thanks, Mindy. Great to be here with someone who excels at personal finance the way you do. So today, Mindy and I are going to be talking about calculating your FI number. Yes, it's 25 times your annual expenses, or if you're Frank Vasquez, you might argue it's 20 times your annual expenses. But there are a lot of nuances to that number. And what compiles your FI number? What are the expenses you need to plan for? There's a lot of depth to this discussion, and I'm excited to get into it with you today, Mindy.

3:34We have all heard of the shockingly simple math to early retirement, which is a blog post written by Mr. Money Mustache some 10, 12 years ago now. Go check it out if you haven't read it yet. We've discussed it multiple times here on the show. But the savings rate that you have and the amount you're going to spend after retirement may be different numbers. There may be different ways to massage or tweak that number. And we're going to get into all of that nuance here today on BiggerPocketsMoney. I think one of the best places to start on this is to talk from personal experience. Mindy, when did you decide on your FIRE number and what were your life circumstances like at that point in time?

4:13Mindy Jensen:Scott, this was back in 2012 or 2013 when we first discovered the concept of financial independence and that you could retire early. We did the math per the 4 % rule and our spend rate at the time, and we came up with$1 million or$1 ,120 ,000 because we wanted to have enough money to pay off our mortgage, but we didn't want to pay off our mortgage. My life circumstances at the time, I was a stay-at-home mom with two young kids. In 2012, I had a four-year-old and a seven-year-old. Awesome. And you said$1.12 million, and you talked about paying off the home mortgage. Did you include your home equity in that calculation, or were you excluding it with that statement?

4:58Mindy Jensen:The$1 million was our investment accounts, our 401k, Roth IRA, and after-tax brokerage accounts. And at the time that we discovered it, we were, I think this is on Carl's blog, at$586 ,000. So we had been saving. We were very good savers and investors already, and we just discovered what we were saving towards, which was financial independence. And then how long did it take you to achieve that number once you set out with that as the goal? It was supposed to be done in 1500 days, hence the name of the blog. But we actually achieved it. You know, it's been so long. I can't even remember when we got to our original number.

5:42Mindy Jensen:But I'm going over to the blog. Three years later, 2013, 2014, 2015, and January 1st, 2016, we hit$1 ,057 ,000. If you look back at the stock market, then it was just like hockey stick growth. That's true. Yeah. Both of us enjoyed really good runs in the stock market and in real estate during our journeys to financial independence, which hopefully continue for lots of other folks. Mindy, did that number, that million dollar target, your net worth is much greater now. Did that target change or did you just continue to want to live at that same level, that same level of expectations, even as your wealth far surpassed that number?

6:21Mindy Jensen:We continued working. Carl continued working. through 2016 and then one more year, so through 2017, and he finally retired. Our numbers stayed the same. We were aiming for a million and we didn't change that number. I don't think we've ever actually changed that number, although our spending is not in alignment with a$1 million portfolio, which would be approximately$40 ,000 a year. We've moved up in our spending to about $60 ,000 or$80 ,000 a year, depending on the year. We don't really have a budget. We're still really conscious of where our money's going, but we're not as tight as we used to be.

7:07Mindy Jensen:I think that if we were honest with ourselves, our new FI number would be 2 to 2.5 million. How about you, Scott? When did you calculate your FI number for the first time and what was it? My FI number, I think like a lot of other people at that time, around just 2013, 2014, started out as a goal of$1 million. And that net worth threshold was likely, I say likely because it's a little hard to peg the current value of real estate holdings and or the holdings in bigger pockets, which were my biggest investments, if you will, at that point in time. Those were likely crossed around the 2016, 2017 mark, generally speaking, because of the massive appreciation in real estate and my becoming the CEO and president here at Bigger Pockets.

7:56And it's kind of interesting in thinking about what my circumstance at that point in time is I was a single guy just meeting my wife right around that same point where I achieved financial independence or that initial goal. and my needs were very low at, you know,$30 ,000,$40 ,000 a year. It felt like a huge abundance, especially with no real massive outlay on housing. And that definitely would not be the target with a family and two little girls. I would definitely want to spend much more, potentially much more, somewhere in that$8 ,000 to$10 ,000 a month range would likely be the goal. My financial portfolio allows me to spend even more than that, including full-time daycare, for example, for two little girls.

8:38So that's, that's been a, the goalposts have absolutely shifted for me personally over the years.

8:43Mindy Jensen:Let's see, how do I want to say this? Did your goalposts change as you spent more or did you consciously think about, oh, you know what? 1 million isn't enough. Now I'm going to aim for 2 million. Or did, did your goals, like I didn't aim for 2 million. Our investments just kept growing. So we started spending a little bit more, but I don't think we ever actually changed our number. Did you ever actually consciously change your number? Did I change my number? No. But a couple of things happened in my situation. First, same as you, the portfolio growth allowed for much more spending. So it was kind of like, why would I artificially keep my spending very low when I can easily spend much more?

9:23And there is benefit to spending much more money, of course, bring better quality of life in many, many areas. So that was one, one component of it. And the other was the nature of the CEO job at BiggerPockets, which was so consuming. offered high compensation. And it was like, well, if I'm, if I'm doing this thing, then I'm either not spending time with my family or not doing the right thing for a company that employs 80 people and has shareholders and many, many listeners and followers and viewers. And so things like mowing the lawn or cleaning the house, those were things I outsourced at that point in time.

9:56I'm now insourcing those because there's not, you know, now that I'm not doing the big job at BiggerPockets, it doesn't make sense to hire those things out the same way. But that was kind of an interesting mindset shift in terms of how to think about my spending and my FIRE number in the context of these changes with expenses that were clearly there because they were the right thing for that point in my life, but were not for a more frugal FIRE portfolio.

10:23Mindy Jensen:I have another question about your FIRE number. Because you have a significant real estate portfolio, how did your FIRE number change once you started getting all of this real estate cash flow? Did you think about, I still need 1 million for the 40 ,000 a year? Or did you think my real estate is kicking off X dollars, so now I don't need, I need less in my stock market investments? The latter. And this is something I've been struggling with all year, right? I love the research we talk about with the 4 % rule. We've talked to Bill Bangin. We've talked to Frank Vasquez. We've talked to Michael Kitsis, many of the people who pioneer research in the withdrawal stage of a portfolio.

11:02And I just know that personally, I'm not the kind of guy who at 34, 35, I'll be 35 soon, can actually spend, sell off my, like sell off my stocks and live off of that to fund consumption. And so, and I, you know, as a real estate investor with significant experience, I felt that I can, I can better achieve my goals by thinking about my spending in terms of the income that my assets generate and staying within those limits. And that's the goal is I will always stay within those limits. I may earn more money, like doing bigger pockets money, a job that I absolutely love and other things in the future, but I will spend as if my portfolio is the only component of that.

11:44And that may cost me some opportunity cost, but as the portfolio grows, maybe I will reintroduce cleaning services and those types of things. It's just hard when I want to do work like this. My wife wants to write and the childcare at this season in our life is very expensive. So we can't have the childcare and have the house cleaned and, and, and, and, and, and there has to be some cutoffs and limits in place. And so we prioritize what's most important to us, uh, in that, in that spending and doing the lawn once a week is a small price to pay.

12:18Mindy Jensen:Yeah. You're turning into a true dad. Do you have new balance sneakers too? Oh my gosh. I got seven copies of this Costco shirt. I got the mustache, the wood-fired pellet grill, and then I don't have New Balance sneakers. I have running shoes. Not quite full-on dad then, Scott. You need a pair of white New Balance tennis shoes if you want to be a true dad. But you're getting there. You're getting real close. Fanny pack? No, I don't have a fanny pack, and I'm not a mammal yet. What's a mammal? Oh, Google it. It's safe for work, but barely. Okay. How should you calculate your fine number if real estate is in your portfolio?

12:55Mindy Jensen:We'll find out after the break.

13:01All right, we're ready to cash flow back into the discussion.

13:05Mindy Jensen:Okay, so Scott, somebody listening to this episode wanting to get a more accurate fine number for themselves with real estate as part of their portfolio, how are they treating the real estate, because we're talking cashflow. I think real estate investors who want to be real estate investors are there for the long-term cashflow more than the appreciation. I'm not really talking about flippers because that's kind of short-term gains. That's income, which should be invested in a different way or could be invested in a different way that would provide long-term cash flow. But for the rental real estate investors who have, let's say, 50 % of their expenses, their current expenses are coming from the cash flow.

13:54Mindy Jensen:How are they to think about this when they're determining their FI number? I think you just think about it exactly like that, right? If your desired spending target is$80 ,000 a year and$40 ,000 is a conservative approximation of the cash flow net of vacancy capex, those types of things from, for example, a paid off rental or two, then the rest of your FIRE portfolio would need to be about a million dollars to generate the remaining$40 ,000 you could spend. So I think it's as simple as that in the context of a real estate investment. A business might be thought of differently, right? Because the business income could be much less predictable, for example, than real estate income over a long period of time.

14:38Businesses can grow dramatically and shrink dramatically. So I think I would be reluctant to count business asset in my net worth statement, unless it was very conservatively stated or about to be sold in the imminent future. Mindy, I think the first thing that we should talk about, if we're talking about this concept of you're calculating your FIRE number, is what is a FIRE number and how does it differ from a net worth statement?

15:04Mindy Jensen:Ah, Scott, I think this is a really great question and something that the FI community hasn't really done a great job of separating out. I think for a lot of people, net worth and FI number are the same thing for a long time. If you're just starting out on your financial independence journey and your net worth is$20 ,000, it's easy for you to think of, oh, I've got a long way to go to get to my fine number, but your net worth includes all of your assets, including your homes, equity, your car values, your collectibles, all of the everything that isn't really going to generate cashflow and liquid investments that you can sell to fund your lifestyle in your fine number.

15:54Mindy Jensen:Some people will say, well, I have a million dollars in net worth, but it's all tied up in my home equity and my 401k and I can't access it. And money tied up in your net worth is not to be included in your FI numbers. I think I made a miss speaking a couple of minutes ago and said net worth and FI number as I intertwined them. I think it gets confused a lot in this community, but we definitely need to be talking about financial independence number. the amount of money that you are saving so that you can then start withdrawing from it at 5 % per Fink Vasquez or 4 % per Bill Bengen or 3%, 3.25 % per big earn.

16:35Yeah, absolutely. And I think for most people, it boils down to the very simple concept. Don't include your home equity in your FIRE number unless you intend to use your home as part of that FIRE number. So if you are living in a home that you expect to live in for the next 20 years, like me, you should exclude your home from your FIRE number. It's part of my net worth statement. I know that my home's value, and I track that. If you said, what's my net worth? I would say it's my financial portfolio plus my home equity. I also include my cars, for example, my net worth statement, but I would not include my home or cars or personal property of any kind that was not intended to be sold anytime in the near future as part of my FIRE number.

17:20The FIRE number is the investment portfolio that is intended to distribute wealth that I can actually retire on. And that would include all of my investable assets. And I would include things that are illiquid in there too. A business that is conservatively valued or likely to be sold, even if it's an illiquid, can count in that FIRE portfolio number, just as a rental property can, even though they're less liquid. You may want to think about them differently and how they're going to impact your ability to spend in early retirement a little differently than you would a traditional 60-40 stock bond portfolio.

17:51But they're there. They're a part of the FIRE portfolio. They're intended to be used to generate liquidity or cash flow that you'll spend.

17:57Mindy Jensen:Scott, I would push back on that just a little bit and say that if your rental portfolio, the cash flow from your rental portfolio, you're planning on that funding part of your lifestyle in retirement, then I would almost count that as your net worth, but like the portfolio is your net worth, but not your fire number. The cashflow affects your fire number. Does that make sense? Absolutely. So my rental portfolio, right? I'm only spending the cashflow that's generated by the rental portfolio. I'm not spending the principal in those properties. And I don't know any real estate investors or hardly any real estate investors who use that as a primary mechanism.

18:34Maybe you refinance one when your kid goes to college and that's how you pay for college tuition. But it's a rare person who's selling off rental properties, I believe, to fund consumption on a regular basis. But I think you got to include the rental equity in the FIRE number, in the FIRE portfolio number, when you're thinking about what is my FIRE portfolio, right? If you've got a million dollars in rental real estate that is part of that$2.5 million FIRE target, the rest is that 60-40 stock bond portfolio. I think that's a$2.5 million FIRE portfolio. I would argue it is, even though we're going to have to think about the distributions from the 1.5 million stock bond piece using the 4 % rule.

19:12And we're going to have to think about the income that the million dollar rental portion generates. What do you think?

19:16Mindy Jensen:I think we're saying the same thing, but in slightly different ways. I would say that if you have a$1 million rental portfolio that kicks off$10 ,000 a month, then you can count that$1 million rental portfolio as$120 ,000 a year. I would also like that rental portfolio very much. I would say if that's your conservative approximation of spending, you're gonna be just fine. Obviously the big gotcha for a lot of real estate investors is those projections don't always map out. So it's a conservative interpretation of that cash flow. But my spending is governed by the cash flow generated by my portfolio, rental and stock bonds.

19:55And that's how I govern my spending personally today. That may change in the future if I begin to decumulate in some way. But that's how I govern it today.

20:03Mindy Jensen:So Scott, you mentioned that your fine number has changed because your life circumstances have changed. And my FI number changed because my portfolio far exceeded my expectations. What are some of the things that changed in your life that caused your FI number to change? And did your FI number change based on those or based on future projections? Like when are you looking to define your FI number? Right now you've got childcare, but you're not going to have childcare in 10 years. So are you looking at your number now or are you looking at your number in 10 years? That's the fun of this game is everyone says, nail down your spending.

20:44This is a much easier game, I believe, for someone who is approaching traditional retirement and has their spending for them and their spouse locked down and the kids are out of the house. And the question is how much to give or not at that component of time. I think it's much more challenging for someone with young children to project these because absolutely there's childcare expenses, which right now are very high. When my children are school age, my expenses will, they'll still be high. I have no illusions that children are going, that can be very expensive and that the most expensive years could be college.

21:17For example, I have assets set aside for college expenses that will be ready to go at that point in time. I think that my expenses will go down over the next several years, or at least I'll be able to shift or alternative, they'll be able to shift spending away from childcare towards other items, like maybe more travel. Travel is a much lower bucket of spending because we don't have the desire to travel quite as much with two young children that we might if we did not have those two young children.