Family of Four Taking Flight to Financial Independence

Is The 4% Withdrawal Rate Safe?


This is us exhausted with our busy schedule!

We are back!  I (Tara) am sorry we've been absent ... between being a new leader of our daughter's Girl Scout Troop, to preparing for a Fall trip to Disney World in 2018, then everything that comes with the holidays ... not to mention our son's birthday in January, and just life in general - things have been busy!  But 2019 is going to be a big year for us regarding FI (decisions, decisions!), and today we bring you ... Is The 4% Withdrawal Rate Safe?

-Tara

This is a popular question that has been discussed extensively in the FI (financial independence) community, and the short answer is yes -- the 4% withdrawal rate is very safe.  

The 4% withdrawal rate comes from The Trinity Study and shows that historically a person could safely withdrawal 4% of their money for 25 - 30 years (a traditional retirement) from investments and never run out of money.

But wait, if you are retiring in your 30’s or 40’s you need that money to last 50 - 60 years.  Will the 4% withdrawal rate still work?  

The short answer is yes.  There is a very high probability that the 4% withdrawal rate will work great in even a 50 - 60 year retirement.  But I don’t want you (or expect you) to just take my word for it.  I am going to introduce you to my favorite FI Calculator: FIRE Simulator.  (Fair warning: This calculator can be addictive.  I’ve spent many afternoons tinkering with our numbers to see how they would hold up in the long run).

What does this calculator do?

It will take your data and run it against all of the years that the stock market has been in existence (From 1871 - Present) to see how your portfolio would hold up throughout history.   

For purposes of this post let’s call a plan successful only if it has a 100% chance of working.  In other words, through all of the ups and downs from The Great Depression, to World Wars, to stagflation in the 1970’s, to the dot-com bust, you could safely withdrawal your money and in 100% of the time you would never run out of money.  

Before we get to our scenarios, lets first go over how to fill out the information.  

Step 1: Enter your planned retirement year, and then enter the year you plan for your retirement to end (umm, you die).  For example, when I run our scenario I usually put in the year 2020 – 2085 because I plan to live to be 105 (shoot for the stars, right?).  We will also use this date range for the purposes of this post.

Step 2: Enter your portfolio value at retirement.  This will obviously be different for everyone, but for the purposes of this post let’s just use good old $1,000,000.

Step 3: Enter the percent you have invested in equities (stock) and bonds.  If you have followed our investment advice so far, this is simply dividing up how much you have invested in VTSAX versus VBTLX.  You also need to enter the fees that you pay on your investments.  Again, if you are invested in VTSAX / VBTLX your fees will be $.04. 

Step 4: Go to the “Spending Plan” area to the right and select “inflation adjusted.”  What this means is that you will give yourself inflation increases of 3% every year.  

Step 5: Put in your initial yearly spending.  This will be your 4% withdrawal.  So for our example of a portfolio with $1,000,000 we will enter in $40,000 ($1,000,000 * .04).

Step 6: There are other fields you can enter in below such as social security, or other spending (such as college for your kids) and other income (part-time work, inheritance, etc).  For now, let’s leave these blank.  We will come back to them.  

Assumptions For All 3 Scenarios:

  • $1,000,000 Portfolio Balance
  • Allocation of 90% Equity to 10% Bonds
  • Fees on investments of $.04
  • Inflation adjusted spending of $40,000

Scenario 1: 

For our first scenario we are going to use our assumptions above and run the simulation without adding anything else.  This will give us a good feel for the safety of the 4% withdrawal rate.

Scenario 1 Results: 

97.5% success rate right off the bat.  That’s not too shabby.  Our average ending balance looks great at $22,600,830.  This is a great example of the power of compound interest.  Even while withdrawing 4% per year, our investments were able to continue to grow to what is really an unnecessary amount of money (but I am not complaining!).  That said, our worst case scenario is an ending balance of ($1,983,767).  Overall, these are great numbers and with the use of one of our safety margins we could easily turn this into a 100% success rate.  However, this doesn’t factor in any major expenses that life sometimes throws at us so in Scenario 2 let’s add in college tuition for 2 kids and see what happens.




Scenario 2: 

We have everything set according to the assumptions above, and now we are going to add some extra spending down at the bottom for 2 college tuitions in the amount of $75,000 each.  

Scenario 2 Results:

We see that this plan has an 86.25% chance for success.  Let’s look at some of the numbers from this scenario.  The first one that jumps out is the average ending portfolio balance (while still great) dropped from $22,600,830 to $19,910,212.  Of course, the worst-case scenario is absolutely horrible with an ending balance of ($8,496,314).  We have our work cut out for us to get this success rate up.  




Scenario 3:

In Scenario 3 we are going to tap into one of our safety margins and add some part-time work as part of our early retirement plan.  As we have discussed before, its ridiculous to retire in your 30’s and 40’s and expect to never earn another dollar for the rest of your life.  Keep in mind, we no longer need an income of $100,000 + to make ends meet.  Rather something like $10,000 per year will do.  For this scenario, we will assume that we have an income of $10,000 per year from the year 2022 – 2035 (these dates are completely random).

Scenario 3 Results: 

We have managed to bump our success rate back up to where we started at 97.5% by adding $10,000 worth of side hustle from the years 2022 - 2035.  Our average portfolio ending balance has also gone up to $24,455,720, and our worst-case scenario is now ($3,153,613).  We are on the right track, but we aren’t there yet.  




Scenario 4: 

For this scenario we will keep everything the same from Scenario 3 except we will add a very modest $22,000 per year in social security starting in 2045, and it will carry forward until 2085.

Scenario 4 Results: 

There we go!  Now we have a plan that would not have failed during any point in the history of the stock market.  Not to mention our average ending balance in 2085 is $29,038,982, and our worst-case scenario is $1,381,774.  These are numbers we can live with.   




What are some other ways we could have improved our success rate? 


  • Make more with side hustles/part-time work.
  • Only take inflation adjustments every 5 years or so.
  • Save less for college (maybe $60,000 per child instead of $75,000.)
  • Invest the extra time you have as an early retiree in your child's education so that college is completely paid for by scholarships.
  • Or have them attend college at a very affordable (basically free) European university.   

So, is the 4% withdrawal rate safe?  At a 97.5% success rate that we illustrated in Scenario 1 I would say, yes, the 4% withdrawal rate is extremely safe.  Does that mean we should just blindly withdrawal 4% every year regardless of the current market situation?  Absolutely not.  Rather, we withdraw our 4% while remaining flexible and tapping our safety margins as needed.  

I recommend that you try your own numbers in this FI Calculator.  It’s a pretty neat tool to use when planning / preparing for something like FIRE.  Good luck!

What do you think?  How do you feel about the 4% rule?

-Erik


How A Family Of Four Lives On A Teacher's Salary


Teacher's salaries have been a hot topic lately (as they should be).  TIME Magazine made the subject of teacher's salaries a cover story in September 2018: 13 Stories of Life on a Teacher's Salary.  

I definitely know how challenging it is to be a teacher (no one can understand unless they are in the trenches as a teacher) and how (in most cases) teachers aren't adequately compensated.  And related to that ... yes, the profession in general (at least in our country) seems to not be appropriately respected by the general public.  But this blog post isn't about that.  This post is about how at least one family of four (our family) can live on a teacher's salary (and save the higher salary).  We definitely understand that every situation is unique.

-Tara

We want to break down more specifically just how a family of four is able to live comfortably off of just one salary (a teacher's salary at that).  We are able to allocate the second (higher) salary to savings / investments for our journey to financial independence (FI).

We touched on this in previous posts, but now we want to take you line by line to see just how we do it.  

We would not be able to do this if we were still carrying around debt from cars, school loans, credit cards, etc.  It wasn’t until 2015, (the year that we paid off all of our debt) that we were able to start living off of just one salary.  

We will break this down exactly as it appears in our budget, which is just a very basic excel spreadsheet that I have been using for the last 10 years.

Total Teacher Salary (After tax) Per Month = $3,998


Our youngest working in my (Tara's) art classroom.


Tara with both kids on the first day of school (in my (Tara's) art classroom).

Item 1: Tithe = ($589)

This is the amount that we give to our church on the 1st of every month.  We started consistently doing this 7 years ago by giving 1% per month and have upped it by an additional 1% per year with the goal of eventually reaching 10%.  I tried just giving 10% outright in the past, and I never stuck with it.  Building the percentage up slowly has helped us with consistency.  (Others who don’t tithe could use this part of their budget for donations, etc.)

Item 2: Mortgage = ($1,750)

This includes principal, interest, windstorm, and property taxes.  We could actually pay this off at any time with the money in our Vanguard account.  But since the interest rate is so low and we only plan to live in our current house for another couple of years, it makes more sense to put the money into the stock market with VTSAX.  

Item 3: Groceries = ($300)

We have been able to maintain this level of spending for groceries by eating a plant based diet revolving around whole grains, fruit, vegetables, potatoes, and nuts for the most part (no, not just bread and water on $300 / mo).  That said, with a little bit of planning, I am confident I could make this same budget work while also buying meat and eggs.  

Our homemade food on a $300 / mo budget.
Here are some tips to help get your grocery spending down (what tips do you have?). 

Drink water!  Don’t buy juice or soda.  It’s not good for you, and the cost adds up.  I confess I will break down and buy the kids orange juice, but only when I am able to buy all of our other staples first (and if we have money leftover within our $300 budget).  After all, if you want orange juice, eat an orange!

Don't drink milk / drink less milk.  Only use milk for cereal, coffee (if that’s how you like it), or baking.  All your body needs is water so you can stop drinking it.  Spinach helps with calcium, and the sun is great for Vitamin D.

We actually make our own vanilla rice milk at home which saves at least $20 per month.

Baking Soda and Vinegar: Use as your primary cleaning products.  Both are cheap, and do a great job.  (Baking soda also has many other great uses!)

Make a List: Don’t go to the grocery store without a list.  This is just asking for trouble.  We like to plan our meals for the week ahead of time so that we know exactly what we need once we are in the store.  I also remember the prices of products like a Price is Right winner, but for most people just having a list written out (and sticking to it) will help you save.

Item 4: Gas = ($120)

We became a one car family by choice back around 2013, and this helped cut down on our gas bill (we were recently gifted a second car (see below), but we still only use one car 95% of the time).  While this may not seem like a realistic option for most right off the bat, think about it before you completely write it off.  If you are a couple that both work is it possible to carpool to and from?  Could you ride your bike (I do) or walk/jog to work?  What about taking public transportation in your area?  If you really stop to think about it, you could probably eliminate one of the cars if you really had to.  It doesn’t hurt to try it out for a month.  If it works then great - get rid of the extra car.  If not, then at least you tried!

Item 5: Cell Phone = ($41)

Say it with me, Republic Wireless, Republic Wireless, Republic Wireless.  We switched back in 2013 and haven’t looked back. 

Item 6: Internet = ($63)

This is one area that I would actually like to get the price cheaper than this, but it’s hard to do when you aren’t bundling cable, phone, etc. (and you shouldn’t because you canceled cable and use Republic Wireless for your phone, right?).  

Item 7: Car Insurance = ($75)

Alright confession time.  A couple of months ago we were gifted a car by our much too generous parents (who says no to a free car?) and so this cost went up from $45 per month to the current $75.  I still consider us to be a one car family for the most part because our old car just sits in the driveway 95% of the time.  In fact, we have had two cars for over three months now, and I still haven’t used a tank of gas in the old car yet.  All that said, if you haven’t tried GEICO for your car insurance needs, now is the time.  They will almost certainly beat the rate you are currently paying. 

Item 8: Natural Gas = ($40)

This expense is pretty self explanatory, and we actually over budget a little bit for it because it does tend to go up during the “winter” months (Houston "winter" months).  If you live in a really cold climate where this bill gets in the hundreds, then drop the temp!  We keep ours at 60 when we aren’t home and no more than 64 when we are home.  This keeps our bill manageable during what few cold spells we experience living in Houston.

Item 9: Electric = ($31)

This is not a typo.  Our electric bill has been $31 since we switched to our new plan back in April.  To sum it up, if we stay under 1000 Kwh for the month, we have a fixed bill of $31.  When I originally signed us up for this plan I anticipated having a couple of the summer months go over 1000 Kwh.  They probably would have had it not been for two long summer trips (one week each) that we took in June and July.  We are also pretty conservative with the thermostat (which is where the majority of the electricity is being used).  We keep our AC at 80 when we are home and just hanging out and usually drop it to 78 (me) or 76 (the wife) when we go to sleep.  When we aren’t home that bad boy gets pushed up to 84.  If 84 seems too extreme for you then take baby steps.  Try bumping it up to 80 or 81 when you leave, and work your way up.  There really is no point to have it below 80 when nobody is home, that’s just throwing money away.  One final note, we live in Texas where we have the power to choose our electric provider.  If you are lucky enough to live in a state that allows you to choose, by all means shop around for the best deal!

Water / Sewer = ($50)

Not much to say here.  Some months we are able to stay under budget on this, and some months we are a little over.  We don’t stress about this one all that much; it is what it is. 

Dance = ($70)

This is our daughter's ballet and tap class.  Unlike sports which have seasons that end (logical right?), this little rascal is basically year round so it gets lumped with our monthly budget rather than just our variable spending (and I digress).  (Although she doesn't go during the month of July).

Dog Food = ($65)

You have to feed the beast!  We have stuck with the same dog food that the breeder recommended.  This cost is for a 25 lb bag, and it gets delivered (PetFlow) right to the front door every month. 

Netflix = ($12)

Ahh Netflix.  This $12 is worth its weight in gold because it will allow you to cancel your $100 cable bill (do it now!).  Also, check your local library for free DVD’s (movies and TV shows).  We have been using a combination of the two for the last 5 years and haven’t missed cable at all (we also use a Mohu Leaf to pick up all of the local channels for free).  We have Amazon Prime too, but that isn't counted in our monthly spending.

Let’s Do The Math


Our youngest working in my (Tara's) art classroom.
So there you have it!  That is how a family of four is able to live off of a teacher's salary and save 100% of the other (larger salary).  

What do you think?  How do you stretch out or make your salary work?

-Erik


Did We Just "Lose" $55,000 in 3 Weeks?


When people make statements like “I lost $X in the market today,” or “I made $X in the market today," most of the time the statements are not true.


$55k SCARRRYYYYY

What Do You Mean?

On any given day the stock market is going to go up or go down, but the only way a person can actually lose or make money is if they actually sell some of the shares that they own.  Before we go further, let’s go over what actually happens when you buy stock.

When we tell you to buy VTSAX, we are recommending you buy shares of a company (or in the case of VTSAX you are buying a portion of every single company that is traded in the US Stock Market (thousands)).  These shares have a value placed on them, and that value fluctuates on a daily basis. Over the long term (assuming you are invested in VTSAX) you can expect the value of the shares that you own to go up by about 10% annually or 7% once you factor in an adjustment for inflation.  Note, that doesn’t mean they will go up 10% every year.  Rather, on average, over the long term you can expect them to go up about 10% before inflation adjustments.

When people say they lost money in the market today, unless they physically sold shares, they haven’t lost anything.  To further illustrate this, let’s look at our two retirement accounts and how they have performed over the last 3 weeks.  

Did We “Lose” Almost $55,000!? 



This is when most people would say, “I’ve lost $55K in the market over the last 3 weeks.”  But a closer look actually reveals that you have in fact gained (bought) almost 60 shares of VTSAX at a discount (congratulations savvy investor)!  The shares will eventually go back up.

So….

Being invested in the stock market is going to be a wild ride.  The important thing to remember is we are in the stock market for the long haul, and we are buyers no matter what!  Block out all the outside noise, and continue to buy more shares.

What do you think?  Did you gain / buy in the stock market in the last few weeks?

-Erik