I’ve observed a common pattern among readers I’ve met. Many of you are natural savers. You’ve amassed enough money, often more than enough, to likely last the rest of your life. You’re ready for change in your life. But you’re afraid to leave your career and start spending assets you’ve worked so hard to accumulate.
My story may seem different at first glance. I left my career as a physical therapist at the age of 41. We had a then five year-old child and less than twenty-five times our annual expenses saved in our investment accounts. We moved across the country to seek more outdoor adventures in the mountains.
Am I fearless? Absolutely not.
Reckless? I like to think I’m thoughtful and prudent.
Risk management is the key to safely navigating outdoor adventures. A quote of American mountaineer Ed Viesturs has become a mantra that keeps the importance of risk management front of mind for me. “Getting to the top is optional, getting down is mandatory.”
Risk management skills we’ve developed over years of outdoor adventures have helped us manage this life transition. Focus too much on risk, and you’ll never take action. Focus too little on it, and you expose yourself to unnecessary and potentially catastrophic risks.
So I would like to share a simple climbing concept that we’ve applied to our finances to allow us to take the requisite actions to change our life sooner while minimizing the real risks that trap so many people in fear.
A common theme in climbing is having redundant systems. This means that whenever possible, every component of a system that could catastrophically fail should be backed up. Both systems should independently be capable of handling a load. If one system fails, the other will work.
Here is a simple demonstration. The first system should be good enough. Every component of the system (point of attachment to the rock, bolt, carabiners and nylon) is strong enough to support the full weight of a climber. But imagine what would happen to the person on the end of the rope if any one failed.
The second system is redundant. Again, imagine any component failing. You would be left with the system in the first picture above.
Is Redundancy Necessary?
The term redundancy can have a negative connotation. It can mean being unnecessary, inefficient, and thus wasteful. Redundancy is vital when the consequences of failure can be catastrophic.
This concept is not unique to climbing. Former Navy seal Jocko Willink frequently uses the saying “Two is one, and one is none” as a reminder to incorporate the concept of redundancy where failure is not acceptable.
When the consequences are serious, whether leading soldiers into battle in a war zone or hanging your weight on a rope hundreds of feet off the ground, redundancy can literally mean the difference between life and death.
The stakes aren’t quite as high when leaving your career and entering early retirement. But having too little money could make early retired life less desirable than the known lifestyle you’re leaving behind.
Related: Not Going Back to Work
That is an unacceptable risk in my book. I’ve witnessed that fear trap others. We need to develop systems that enable us to safely step off the cliff. Redundancy can provide the safety to take that crucial next step towards a different way of life.
Redundancy to get to Financial Independence
I frequently write and talk about Kim and I choosing to live off only one salary from the time we merged our finances. We didn’t have a grand plan of achieving financial independence quickly and retiring early. FIRE blogs didn’t exist then. The ideas I now share would have sounded absurd to my younger self even if they did.
Like many of you, we saved because saving felt good.
Kim grew up in a house where money was a source of constant stress and anxiety. She wanted a different way of life, one of stability and safety.
I grew up in a home with a healthier relationship to money, but money still limited options. I also wanted a different way of life; one of freedom, travel, and adventure.
While most of our peers inflated their lifestyle to match their salaries, we made a different choice. Major decisions like purchasing a home and cars were made so that we could afford our lifestyle on either of our incomes.
We considered all our worst case scenarios. What if one of us lost a job, suffered a serious injury or illness, died, or we were divorced? In any case, we as a couple or either one of us individually could live on one income. The other provided redundancy.
Some people may consider this too conservative. It wasn’t for us.
Redundancy gave each of us what we desired. Because we lived so far below our means we had security, and it was easy to splurge when opportunities arose or circumstances dictated. Consequently, we lived a life free of financial stress and full of adventure and amazing experiences on the way to financial independence.
Making the transition to early retirement
As we approached financial independence and early retirement, we began to feel fear and anxiety around our finances, just as so many readers have shared with me. Rather than continuing on with the feeling of abundance, we pictured a life of worry.
Worry that we didn’t save enough money. Worry that we wouldn’t be able to return to our high paying careers if needed. Instead of abundance, we developed a mindset of scarcity around spending.
Even before starting our transition to early retirement, we began fighting about money. This was remarkable to me at first.
We managed to fall in love in college when neither of us had two nickels to rub together. Early in our careers, we lived on Kim’s small starting salary while my salary went to paying off debt, saving for a down payment on a house, and then starting to invest. Yet we were always happy, adventurous, and able to have fun.
We saved diligently for fifteen years. We educated ourselves and took control of our investments, had enough money to last decades, and were approaching the point of having enough to likely last the rest of our lives.
And this is when we started fighting about money!
So we stepped back and asked important questions:
- Is retirement, never working or earning money again for the rest of our lives, our ultimate goal?
- Are we willing to give up the feeling of abundance and flexibility we’ve had with our finances our entire adult lives?
- Do we really want to lock ourselves into a lifestyle constrained by the performance of our portfolio?
- Should we just maintain the status quo? Is that ultimately preferable to making hard changes?
The answer to each question was a resounding no.
Redundancy in Early Retirement
So we kept asking questions. What did we really want?
- More time for our daughter, each other, and deeper relationships with friends and family.
- The time to seek more outdoor adventure while we are young and healthy.
- The flexibility and freedom to continue spending money when a need or want arises without stress or worry about whether we have saved enough.
We knew we didn’t have enough time to do all the things we wanted while working. Retirement would solve our time problem, with the tradeoff of creating new financial stress and worry.
We developed an alternative plan to overcome our fear and still be able to have the things we really want. That meant having to earn enough income to cover our expenses each year and having a portfolio that should cover our expenses indefinitely. Redundancy.
We did this by Kim continuing to work remotely about 30 hours per week while I worked on writing my book and this blog. In our first year, our earning “anchor” didn’t quite support our spending due to me contributing very little financially and our expenses being high while moving across the country.
Since then, our expenses have come down as we’ve settled into our new lifestyle. Simultaneously, my writing projects started producing income.
Our combined income “anchor” has been strong enough to not only support our spending needs, but to allow us to be net savers each of the past two years. We anticipate saving even more this year. We have reached a point where Kim can further reduce her hours or switch completely to a new lower paying line of work whenever she chooses, without losing this redundancy.
Simultaneously our portfolio “anchor” has grown substantially stronger due to a combination of favorable market conditions and us not having to stress it by taking regular draws.
Expenses in Early Retirement
Doing something similar may seem unreasonable to you at first glance. But before you write this off, consider what most people’s biggest expenses are and how you can lower them in early or semi-retirement and how much income it would take to support your expenses.
In the Choose FI book, I wrote about three valid investment approaches to achieve financial independence quickly. The paths are:
- A high savings rate combined with investing in low-cost index funds
- Real estate
- A personal business
The people who I talk to who tend to have a hard time transitioning from saver to spender primarily utilized the first path. This makes sense because to achieve financial independence with this approach means you lived well below your means on the way to financial independence. You’re a natural saver. So naturally, these people would have a harder time shifting from saver to spender.
The other two paths are more compatible with incorporating leverage, so they don’t require such a high savings rate. They also tend to produce more income in retirement, rather than requiring spending down principle. Thus, they don’t elicit the same feeling of scarcity.
We can assume someone on this first path to FI is saving at least 20-30% of their income in order to be in position to consider early retirement. Someone catching up on savings later in life or a FIRE type like myself may have a savings rate of 50% or more to achieve FI more quickly.
If you no longer have to save, you can live on much less than you made while on the path towards financial independence. This lowers the bar for how much is needed to create a redundant income stream to complement your portfolio in early or semi-retirement.
Our early retirement plan included living in a fully paid off home. With no mortgage or rent payment, we eliminated the biggest expense most households face.
We also lowered many secondary expenses by relocating to a smaller home in a different area. This move lowered our utility bills and property taxes. We also drastically lowered travel and adventure costs by moving closer to the activities we want to do on a daily basis rather than having to fly across the country or drive substantial distances to get to them.
Related: Where Should You Retire?
Once we paid off our mortgage, our biggest expense when working was our income tax bill. Cutting our pre-tax income by about 60% from a two full-time income household to our current semi-retired lifestyle drastically reduced our income tax bill. We now keep about $.07 more of every pre-tax dollar we earn.
Earning less money cut income that had been taxed at our highest marginal tax rates. Our earned income now falls under the standard deduction and into the lowest marginal tax brackets. This lower income means we also pay a 0% tax rate on our long-term capital gains.
Since I’ve left my job, Kim and I both have the freedom to work from home (or anywhere else in the world with a stable internet connection). I’ve eliminated my hourlong daily round-trip commute and the gasoline, maintenance, and accelerated depreciation costs that came with it.
We found that after living a year in our new location, we didn’t need a second vehicle at all. Selling it and becoming a one vehicle household lowered our insurance and maintenance costs. We also added the proceeds of the sale to our savings.
Related: Downsizing — Any Regrets?
In my final years of working, I invested some of my time to learn about how to get more value out of credit card travel rewards. We’ve continued this practice to offset most of our airline and hotel costs by using these points for travel credits.
The combined effect of cutting our biggest expenses lowers the bar for how much income we need to create a redundant income stream in early retirement or semi-retirement.
Earning in Early/Semi-Retirement
Understanding what your expenses will be in early retirement will help determine how much money you need to earn in order to create a redundant income stream. Many people who are able to achieve the high savings rates necessary to be in position to contemplate early retirement have considerable earning power.
When high earning power is combined with relatively low expenses in early or semi-retirement, creating a redundant income stream may be easier than it seems at first glance.
For a household with one primary income earner and relatively high expenses, the easiest way to create a redundant income stream would likely be to simply cut back to part-time work if that is possible and desirable. Those with lower expenses and two potential income earners are limited only by your imagination.
Redundancy in Traditional Retirement
In our society, conventional wisdom says it is hard to retire securely. Some people will argue that what we’re doing is not retiring at all. When we “really” retire, it will be nearly impossible to maintain redundant income streams that could each cover our full expenses.
For someone on the path to early retirement, I respectfully disagree. This is exactly what we aspire to do.
I would argue that not only is it possible to have a redundant income stream in retirement, but I anticipate this is our most likely outcome unless something drastically changes with our spending or our conservative return assumptions.
We saved aggressively for financial independence. We likely accumulated enough to retire early, but elected not to start drawing our portfolio down to any significant degree most years. This choice should mean our portfolio will grow substantially by the time we reach traditional retirement age.
Continuing to do some work during early/semi-retirement means we are also padding our Social Security retirement benefits. These benefits are calculated based on your 35 highest earning years. Completely retiring very early would result in years of $0 earnings factored into our average. Having even relatively low earnings compared to our peak earning years will help increase our retirement benefit.
An Income Floor With Upside Potential
Social Security benefits will likely cover a substantial portion of our spending needs in traditional retirement. We should be in a strong financial position to convert a portion of our portfolio into an annuity to cover at least our remaining core spending needs. This builds upon the idea Darrow has written about on the blog of creating an income floor while maintaining upside potential with the remainder of our portfolio.
Alternatively, if our portfolio grows enough, we may well skip annuitizing a portion of our portfolio. Our withdrawal rate will likely be very low by the time we stop earning income, making this measure to decrease longevity risk unnecessary.
Does Redundancy Make Sense for You?
Would doing something similar give you the freedom you desire in early retirement? What would give you the confidence to start making major life transitions sooner?
Do you need a fully redundant income stream? Would earning half or even a quarter of your expenses with early/semi-retirement work do enough to decrease stress to your portfolio to give you the courage to start making changes to improve your quality of life sooner?
We were hungry for a change, but we’ve always had a low tolerance for financial risk. Utilizing the concept of redundancy enabled us to overcome our fears and start making major life changes.
In retirement planning, there are no hard and fast rules. This can make planning challenging. But if you embrace that fact, it can also be incredibly freeing.
How much risk are you willing to take? What would enable you to overcome your fears and change your lifestyle sooner?
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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at email@example.com.]
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