Smash the 4% rule! Forget FIRE! Retire even earlier with F.I.ish P.E.E.!
So here I am starting yet another FIRE blog. I’m sure this one will stand out from the crowd. If not, then it will at least help me formulate my own FIRE plans. Unfortunately I caught FIRE a bit late. I’m currently 42 and my retirement account contains about four times my projected retirement spending. So after reading all the FIRE blogs I’m starting to think “Gosh darn, them young whippersnappers is retired already? I’m missing out!” To make things more complicated I have a wife and six children, the youngest of which just turned two. So what is a guy to do? Is there hope for the late starter with obligations? There sure is.
A New Hope
Standard FIRE advice would tell me to work the numbers, get my savings rate up, and start my new life of ease when my assets equal 25 times my expenses. If you are nearing that goal in your thirties or forties then by all means stay the course and retire with complete security. For me that would probably mean another ten years of saving and investing. This is not a deal breaker by any means. Retiring at age 52 is pretty early by most standards. But what if you’ve been reading all the FIRE blogs and retiring at age 52 seems like you’re wasting your life away?
Get there twice as fast for twice the risk (Yay!)
What happens if you just retire early anyway? Here’s the elevator pitch. You retire when you have around ten to twelve times your expected annual expenses and pivot to your passion projects. You turn your passion projects into a small source of supplemental income, and you get comfortable with risk and temporarily declining balances. What does that do for you? Well it cuts your target account balance in half for one. This in turn makes it much quicker to take the pivot. Financial Independence(ish) Pivot Even Earlier. F.I.(ish) P.E.E.!
F.I.ish P.E.E. in a shot glass
How does this work? Well it depends on a few adjustments to the FIRE template. First it probably works better for those that are a bit late to the party like me. This means you have fewer years to worry about before qualifying for social security or other pensions. That’s right, I’m betting my life on the solvency of social security. Let the doubting begin. Secondly, F.I.(ish) P.E.E. depends on you having passion projects that will reliably pay you some income throughout your retirement. In other words, this is not a traditional retirement, but rather a pivot. This is a consistent message of the FIRE community. If you are going to retire early, you need something to retire into. You want to have something that will get you up in the morning after you retire or you might end up wasting away. The only thing different here is that you can’t spend all your time in retirement on projects that are revenue neutral or worse. You will need at least one passion project that will pay you something. Fortunately you don’t need to pivot to another full time job. So if you plan to volunteer full time in retirement then go back to the FIRE place and relax. You’ll get there soon. You just won’t get there as soon as us in the FIish PEE community.
The Risks
During the early years of your pivot, your net worth will likely go down rather than staying stable or increasing as it would if you had followed the 4% rule. That’s OK. You are trading risk for return. In this case you trade the risk of having to go back to work for the return of cutting your remaining working life in half. Depending on how well you do with your passion projects you may flatten that out after a couple years as your passion projects ramp up in profitability. You might even cover all your expenses and see your net worth increase. You might just continue on as you started getting a nice supplemental income but not paying for your lifestyle with it. The target is to ramp your savings down slowly so that you still end up with enough to fund your expenses when you get to the SSA years. Yes, by ramp savings down I mean withdraw more than 4% of your total investments per year. This will mean that your sequence of return risk is magnified. So if you hit a big market downturn in the year or three after you pivot you might want to get a part time job for a year or two. That’s not as daunting as it might have been in the past. You can pretty easily add some uber driving into the mix for a while until the market recovers. Or rent out your car. You are biking everywhere right? Better yet, do some vacation coverage for a colleague in your field of expertise. For me, I have a pretty easy way to re-enter my profession part time by doing locums work a week or two at a time. A part time job at pivot time is also a good idea if you aren’t sure about a full pivot.
Here’s a spreadsheet showing my calculations.
The F.I.ish P.E.E spreadsheet
There are four sections to the chart. The dark blue line at the left is the accumulation line. Branching off of that are the possible pivots from year 3 to year 11. The six years following the pivot I assume I will be working part time while I figure out what I want to do with the rest of my life. Then full retirement with declining balances till my pension and SSA kick in. You can see that for each year I wait the risk gets less. I have more saved up and also fewer years to wait before SSA and my small pension kick in. But it wouldn’t be F.I.ish P.E.E. if I waited till all the risk was gone. I’m thinking the third or fourth year pivot curves might be optimal. And yes, one of those optimal curves goes to zero before I die. Does that mean I’ll be a pauper at age 82? Probably not. I think many people have not applied the same risk vs. reward calculation to the retirement study data that they have to their investment portfolio. You keep money in index funds not because they are without risk, but because you are willing to stomach risk in order to reap the rewards of the higher returns. Why not do the same for your withdrawal rate, or your anticipation of future passion project income. In many of the 4% rule simulations 5, 6, and even 7% withdrawal rates were safe long term. Are you willing to retire earlier, increase your withdrawal rate and stomach a bit higher risk of running out of money? Are you willing to bet your future on your ability to earn good money as a blogger, writer, online teacher, etc.? A little confidence can go a long way.
Spreadsheet Assumptions
In my spreadsheet, I used 8% return for the accumulation years and 4% return for the withdrawal years. That doesn’t mean that I plan to change my allocation to bonds when I pivot. I’ll keep it mainly in low cost index funds. It just helps account for the ups and downs of the market. In the famous 4% rule study, most portfolios stayed stable or increased in value over time with a 4% withdrawal rate. So without doing a monte-carlo simulation using historical data, I figured that assuming 4% return each year was relatively consistent with the 4% withdrawal rule. Then I add in my target hobby income, and proceed to break the 4% rule to pieces. I have a constant expense amount, so each year I wait to pivot the withdrawal rate goes down, but the first curve has a withdrawal rate of 9% once I stop the part time job.(Crikey!) That gives me a declining balance if I do end up with a 4% actual return rate over the years. The sweet spot is where the curve flattens out perfectly when I hit SSA at 65. At age 65 I add in SSA for me and my wife and a small pension from when I was a high school teacher. You’ll notice that I estimate a pretty low SSA (for two people) because I plan to pivot pretty early. I think I can do it in five years or so rather than ten or more that would be required to fully fund a 4% rule F.I.R.E. account.
What’s the plan?
So what are my pivot projects? I’m thinking writing this blog will be one, some kids books, perhaps a novel or two, woodworking, put up some courses on Udemy, 3D printing robotics kits for kids, etc.. I’m sure I’ll get into some other stuff along the way. Probably too many for one person to reasonably accomplish. I tend to get into a new hobby every year or two. And which trajectory will I pick? I’m not sure yet. A lot depends on how much I am able to ramp up the passion projects during these next three to five years. If they over perform, I may be able to go even earlier than 5 years. If not, and the market crashes right in time for me to pivot, I may want to put it off for a year or two. Flexibility is the key to successfully drinking the F.I.(ish) P.E.E. Mr Money Mustache says you should create a cult rather than a brand. We can’t drink the Kool Aide, because that cult has been taken, and it ends poorly. So sit back and relax by the FIRE and take a sip of some nice warm F.I.(ish) P.E.E. Cheers!
