In order to reach FI, many FIRE bloggers recommend setting aside a sum of investable assets equal to 25 times your expected annual expenses. That way, you can use the 4 % rule to provide the income you need for your anticipated expenses. There is some debate as to whether the 4% rule is an advisable strategy, especially for those seeking early “retirement.” But simply put, the 4% rule states that you can withdraw 4% of assets (adding inflation each year) invested in a diversified portfolio consisting of 75% equities, 25% bonds, and have an excellent chance of your money lasting at least 30 years.
This is not my plan.
For one thing, I want to reach FI in the next 10 years. Another reason is that I’m not willing to live off $30,000 for the rest of my life. Most importantly though, I have two options that work better for my situation.
A fire naturally occurs when the elements of heat, fuel, and oxygen are present and combined in the right mixture. Scientists call this the Fire Triangle. Financial Independence naturally occurs when the elements of Savings, Investments, and Time are present and combined in the right mixture. I call this the FI Triangle. Savings should be broken down further into Income minus Expenses since you can influence savings by either increasing income or decreasing expenses.
If I’m not willing to increase my income by getting another job, decrease my expenses substantially, or wait until traditional retirement age to reach FI, I’m going to have to focus on increasing my investment returns.
This is a big part of my plan.
Through my real estate investments, I have been able to generate leveraged returns of 14.5% on average each year. This will be the side of the FI triangle I intend to focus my attention on in order to reach my goals.
I am fortunate that I will not have to rely entirely on investment income.
There are several benefits that military service members receive as a result of their service. Financial benefits including “free” healthcare, tax-free zones, and military discounts at retail stores are just a few examples. Perhaps the largest monetary benefit a service member can receive is the traditional military pension. Service members who serve over 20 years receive 2.5% times an average of their last three years base pay. For the rest of their life. Starting the day they leave the service.
This is the other big part of my plan.
A third source of income that gives me comfort is that we also have money in a Roth IRA which we will continue to invest in. Since this money is tied up until we are at or close to traditional retirement age, it is not a major part of our FI strategy. Rather, it is another lever that we can pull if we have to, which provides us peace of mind.
Let’s talk numbers
My goal is to generate $100,000 of passive income a year by the age of 44 (when I plan to retire from the military). Is that how much our expenses are? No. Do we need that much? No. But I don’t want to feel like we can’t do the things we want to because we dreamed small. I want our finances to conform to the life we want to live, not our life conforming to our finances.
I have calculated that my military pension will provide just over $50,000/year assuming I retire at age 44. In order to reach my goal, I will need to create another $50,000 from rental income. The two rental properties I already own will, once paid off, produce a combined $27,000 in yearly income. I have my eye on a third house which would make up the difference but am waiting for the timing to be right to make the purchase. The last step in the plan is to pay off the outstanding mortgages on the rental properties over the next 8 years. This should be manageable with even a moderate savings rate.
We are lucky. Not many companies still offer defined benefit retirement plans. No other job offers a lifetime of inflation adjusted payments backed by the U.S. Government following 20 years of work.
I also realize that this is probably overkill. I think that we will find that once we settle down in one location post-military that many of the expenses we have gotten used to in military life will be much lower or disappear altogether. But I know for certain that we will be more comfortable knowing we can continue to save and invest rather than wondering whether we will have to get another job if there is an unexpected expense or a market downturn.
Our plan uses the tools that we have available in our specific set of circumstances. If a company pension is not available to you, maybe you have an employer match to your 401k. Whatever your situation, find a way to mix the elements of the FI Triangle in the right proportions to get you and your family to financial independence.