FILE/DINK/DWZ/3+1 - a personal financial quadrumvirate
By @edent
· FIRE money · 5 comments · 1,200 words · read ~389 times.
Brits hate talking about money. But this benefits no-one. This is my situation - it's probably different to yours. I'm acutely aware I'm in a better financial position than most. This isn't financial advice - but I'd sure appreciate anyone's thoughts.
I've recently moved down to a 4-day-a-week job. Taking a 20% hit to my salary0 felt like a moment of madness. But it was part of a (somewhat) calculated plan.
I've previously mentioned FIRE - Financial Independence Retire Early. It's a culty sort of philosophy which asserts that if you cut your expenditure to the bare minimum and save a chunk of money, you'll be able to retire extremely early.
I'm not quite sure I'm ready to retire to a beans-on-toast lifestyle just yet. But, after reading "Portraits of Childfree Wealth", I was introduced to the idea of FILE. Financial Independence Live Early.
FIRE is a light-switch - you flick it and your status immediately changes from a worker to a retiree. FILE is a dimmer switch - you gradually turn down the intensity of your work to allow you more time to live.
And so, that is what I think I am doing. I need more space to discover what I want to do with my time outside work. And an insight into what I will be like when I have no need for employment.
Of course this is made somewhat easier by being a DINK - Dual Income No Kids. It turns out that the average cost of raising a child to the age of 18 is £200,000. That's a cost my wife and I don't have to account for - which takes us several steps closer to turning that FILE dimmer all the way off.
It's also possible thanks to me reading a truly terrible book called "The 3+1 Plan"1. Again, it had a simple thesis - if you have 3 rental properties, they will pay for your 1 residential property. Each time we've moved house, we've rented our previous place out. It has more-or-less worked out for us. We try to be conscientious landlords - rent stays stable, maintenance is carried out promptly, pets are welcome - but it isn't a brilliant ethical position to be in.
The final piece of the puzzle is the knowledge that my time on this planet is finite2. After reading "Die With Zero", I started to understand that money has utility now. I don't have any kids to leave it to. If there are charities which need funding, better to give them help now. So I might as well spend it while I'm alive.
This all comes down to a single figure. In the FIRE community it is referred to somewhat ominously as... The Number.
Let's say that I am likely to live another 50 years. Let's say that I want to live on an average salary of £33k per year. Let's say that inflation is static3.
The basic calculation is 50 * £33,000 = £1,650,000
If I had a shade over £1.6 million, I could retire today and live on a fairly average salary. On the last day of my life I would have spent my last quid and - one hopes - died with zero.
There are, of course, some problems with that.
The most obvious one is that no one knows exactly when they're going to die. So best to keep a little in the bank in case Centenarianism is thrust upon you.
As one grows older, the costs associated with personal care are likely to rise. There may be fewer all-night partying bills to pay, but that may not offset the cost of a nursing home.
On the positive side of the equation, having over a million quid in the bank and spending it over half a century is likely to attract some fairly hefty compound interest.
On the down side, the value of your portfolio can fall as well as rise.
Sites like https://cfiresim.com/ are good for this. They simulate would have happened to your portfolio if you started retirement every year since 1871.
In this example, it's taking a million dollars, investing it in a fairly balanced portfolio, and spending a $40k per year. You can take a look at that exact example. Across 100 years, 80 simulations were a success - they did not run out of money. But 20 were failures - the portfolio hit zero before death.
There are other methods of forecasting using similar data - here's FireCalc's estimates which reckons about a 75% success rate.
Of course, if it's looking like stocks are crashing, you can tighten your belt or go back to work.
There's also the "Rich, Broke, or Dead" calculator. It has a similar premise - but with the added joy of predicting your death!!!
Property
I never wanted to be a landlord4. But the stupid system the English have for buying and selling houses made it a necessity. We needed to move quickly to take new jobs and couldn't be stuck in a chain. So renting out became the easiest thing to do. And, of course, once tenants are in it becomes unethical to sell from under them. So, as and when our tenants give notice, we'll sell the property.
Despite all the hype about the profitability of BTL, our yields have remained under 4%. And house price growth has been about 3%. So, not nothing but hardly a path to infinite profitability.
So what's the plan?
Well, predicting the future is a mug's game. But here's my attempt.
Retire no later than 50. The ideal being around 47. That then gives me about 10 years until I can start drawing my private pensions, and about 20 until the state pension.
This means the next new years will be about reducing work, increasing pleasure, and getting ever closer to The Number.
If you've gone down the FILE / FIRE journey, I'd love to know what you've experienced and whether you have any tips.
An adult gap year?
Interesting thoughts and links! I suppose I'm a bit FILE-y thanks to entrepreneurial capitalism. For me it feels like 'retirement' (health permitting) may be a continuum from the part-time working balance I'm aiming for now - some paid things, quite a few unpaid things, and some family things.
DinoNerd says:
I intended something like FIRE, 40+ years ago and I believe before that acronymn existed. It didn't quite happen, even though I saved a lot more than most of my peers; my concept of enough money to be "comfortable" increased over time, from my original standards, formed in a working class family. I'm SINK (single-income, no kids); probably not a normal acronymn, living in an area where most figure dual income is a bare minimum, e.g. for home ownership. I'm now retired, but I didn't pull the plug until I was already in my 60s.
I didn't attempt to pick a number that would, on average, result in me dying with wealth down to zero. That would have given me a 50% chance of being completely indigent in my final life period. I tried for a good chance of ending retirement with the same buying power I had when I started. That requires rather more money for the same lifestyle; my income privilege is showing, that I could even consider it.
I'm also in the United States, where there's no real concept of pooled/shared risk, and the idea of a social safety net is politically unpopular, except that individuals want to keep their own existing benefits, and the AARP is a huge lobby in favor of old people.
I picked a bad time to retire; investments took a hit in my first year, even as my expenses surprised me. I'm unlikely to die with the same buying power as when I started. But I'm also unlikely to die after becoming flat broke, which is what's important here.
Currently I'm hitting all kinds of trivial aggravations because no one's sending me a monthly or weekly payment, and my annual taxable income is extremely unpredictable. Banks want to charge me extra fees for not having a regular direct deposit with them. If I sell $x of assets in a year, the tax implications depend on the amount by which those specific assets have appreciated, which I can partly control but not really predict. The government demands that I estimate my eventual taxes and pay quarterly, but brokerages often don't provide the needed data conveniently until tax time, and software to make good estimates tends to come out only in the fourth quarter.
Mostly though, it's great to be out of the rat race. I wish I could have afforded to do that when working first became something I hated, rather than merely a sometimes pleasant chore.
Chris says:
My (much older) brother ratcheted down his working hours, one day per week per year over 5 years, the kind of thing available then to some Profs, but rarely to normal folk. He now says he has no idea how he had time to go to work!
Somewhere I have large spreadsheets calculating finances based on the idea of running out of money when I'm 93, the age my father died (he sold his bookselling business two years before!). My spreadsheets turned out, of course, to be totally irrelevant, mostly because of political things, changing countries, getting (metaphorically) hit by a bus and then getting a very real compensation payment. I did retire a little early, and hated retirement at first (did a little consulting for a few years). I really missed some aspects of work. But it's probably 8 years now since I last thought positively of it. Now I have a thing that interests me intensely (and drives my OH mad); that thing has supplanted work.
Oh, and costs go right down when you don't have a mortgage any more. Or NI. We live quite comfortably on ridiculously small pensions, compared with previous earnings!
In the end, each to their own.
AHappierFollower says:
3 years ago I had planned to cut my hours to 60% but instead I realized I was clinically burnt out for the second time. Knowing the (mental/physical) cost of rehab from the first time around I chose to quit my job. I had already done a lot of calculations during Covid lock down on how much I needed to maintain my already frugal lifestyle. The choice was not hard, worst case I could always start working again when I felt better. 53 years old now and I don't intend to go back to work, I have way too many interesting things to occupy myself. I take better care of my body, mind and significant other now that work doesn't take so much. I miss some co-workers, but NOT the workplace politics and management. The creative kicks I got from work, I now get from my projects. My cost projections have a deadline at 70, when I plan on starting my "official" retirement, with a pension that looks to be a fair bit higher than my current costs. I worry about inflation and world changes, but even the last few years' terrible economic curves still have me living cheaper than my projections. I'd have preferred FILE instead of FIRE, but am VERY happy I had the opportunity to take this route given my circumstances. I'd say FILE is the best way anyone could phase-shift their lives, I just wish society would see and encourage that. I am a better me these days.
Peter Cooper says:
From my own noodling, it seems having no mortgage (or at least the ability to clear with the 25% tax free sum) will make a huge difference. I can run a 40 year portfolio of £1m with £40k per year withdrawals adjusted for inflation with 93% success. With no mortgage, though, I could easily tolerate adjusting the withdrawals down in lean times and get to 100% even at a 25x multiple. The only trick, then, is actually having that portfolio by about age 50.. which is no mean feat with three kids spending it already 😉
With my genetic history, I probably won't make 90 or at least be in a position to spend on anything interesting, so I tend to look at 40 year plans only.
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