How We Set our Financial Independence Goal and built our FIRE Calculator
On April 20, 2020, Miss FIwithme and I sat down to have the Financial Independence chat. Where do we want to be in 5, 10, 20 years, and what will it take to get there?
Context: Miss FIwithme and I are both turning 30 this year. I’m a teacher and she’s finishing her Masters at the end of 2020, after which she’ll be a social worker.
This is a tricky discussion but, as with most things, it requires considering a few key factors. Here are the main things we considered…
- What are our expenses?
- Based upon these expenses, what’s our FI number?
- How much can we realistically save per month?
- Based upon these factors, how long will it take to reach FI?
Here’s how we broke it down.
Expenses
Miss Fiwithme and I have been tracking our spending pretty closely for about two years now. This came after reading your money or your life, a staple of the FI community, so we now had some pretty good data.
- Mr Fiwithme, 2018: $40, 541 ($28,004 without philanthropy)
- Mr Fiwithme, 2019: $35,880 ($25, 275 without philanthropy)
- Ms Fiwithme, 2019: $21,182 ($20, 208 without philanthropy)
Based upon these we concluded that we need about $60k to live on. We added another $10k for good measure (kids will likely cost more than $10k, but our donations to charity will scale back too) and settled on $70k as a manageable target that should cover the vast majority of expenses. (All these numbers are post-tax).
Calculating our Financial Independence Number
We went a bit more conservative than the standard 4% rate and, based upon this immensely detailed series on Safe Withdrawal Rates by Early Retirement Now, picked 3.5%.
In order to receive a total after-tax passive income of $70k, we require a total pre-tax income of $80k.
Note: ‘$80k pre-tax gives $70k post tax’ assumes that we distribute our pre-tax passive income evenly, $40k each, with tax implications calculated through paycalculator.com.au, as pictured below. You may need a Discretionary Family Trust to have this flexibility, which we’ll blog about soon!
You can calculate your Financial Independence number with the following formula,
(pre-tax passive income target/withdrawal rate) x 100 = FI number
For us, this meant,
(80,000/3.5) x 100 = $2, 285, 714
How much can we save per month?
Here’s where things get a little trickier. The challenge is to balance a stretch goal with what’s realistic. We thought about this as follows.
Firstly, we’re totally against the idea of killing ourselves now for some sort of delayed gratification. I’m a teacher and I’ve never worked full time for work/life balance reasons. At present, my after tax annual income is about $63k.
Miss FIwithme is looking to get a $66k per year job once she graduates, but only wants to work 3 days p/w, which gives an after tax income of around $35k.
Our combined income is therefore about $98k, which, after subtracting our $60k living + donation expenses, leaves $38k to invest each year, or a savings rate of about 39%
To keep the numbers neat, we figure our saving capacity is around $3k per month.
This is likely to stay pretty stable. We hope to have kids in 3-5 years, at which time Miss FIwithme will likely reduce her paid work hours, but my wage and side hustle income should be higher by then too, so $3k per month seems like a sustainable goal.
This isn’t a massive amount, and it is’t super stretchy, but I like working 4 days per week and Miss FIwithme is keen on three. We’re quite fond of the story of the mexican fishermen actually. If you haven’t heard of it, you may like to check it out.
How long will it take? Our FIRE Calculator
To summarise, here are the assumptions from above, plus a few more
- We can comfortably afford to invest $3k per month
- Our FI number is around $2.3 million.
- ETFs (our planned strategy) should return around 7% per year (inflation adjusted)
- We currently have about $200k we’re willing to put into the market (plus a cash buffer of around $30k between us)
Plugging that all into moneysmart’s savings goal calculator produced the following.
How very neat! $3k per month gets us to our FI target in 20 years!
BUT! These are inflation adjusted numbers. The numbers we see and work with in the real world won’t be inflation adjusted! To account for this, we need a spreadsheet! (btw, I love spreadsheets!!!)
Here it is below (create your own copy here*). In terms of inflation, there are two important things to note. Firstly, our target additions start at $3000, but then increase over time. This is necessary in order to match inflation. Secondly, the number at the end is much bigger than $2.3 million. This is because $2.3 million in 2020 dollars will be much closer to $4.4 million in 2040 dollars (assuming 3% inflation). That’s inflation for you!
Now, one final important thing to note. We’ve very carefully chosen the language within this spreadsheet. Our target is not our wealth, our target is our monthly contributions. This seems paradoxical given that we started this whole process with a FI number, but it also makes sense. Focussing on our net wealth as we invest can make us much more susceptible to an emotional reaction when we see our net worth take a dive during a crash. Taking a process focussed investing approach, we can continue to pat ourselves on the back throughout!
A comparison with other simple FIRE calculators
There are already a whole host of great FIRE calculators out there, so I thought it would be a good idea to test our calculations against some other options. Encouragingly, the impact of these was broadly in line with our calculations.
Here are the findings from those calculators based upon the same set of assumptions.
- Engaging Data’s FIRE Calculator – 19.6 years
- Playing with Fire’s FIRE calculator – 20 years
- Portfolio Charts’ fantastic ‘My Portfolio‘ tool – 16 – 21 years
Here’s what those calculators looked like.
But what about the impact of Superannuation on FIRE?
There is one very important factor that our calculator, and these other three calculators, didn’t factor in, and that’s Superannuation! Our Super system here in Australia is pretty different to that in other Countries, so super has the potential to make a significant difference.
Luckily, Aussie FIRE guru Aussie Firebug has build a powerful Australian Financial Independence Calculator that does factor in Super. What’s the result there?
Aussie Firebug’s article on his calculator is well worth a serious explore, plus his video which explains how and why the red and blue lines move the way they do!
Factoring in Super brought our FIRE date back by 5 years, or 25%. Now, this is pretty significant, so why don’t we go with this plan?
Fundamentally, we set our monthly savings goal of $3k based upon what we think we can sustainably put away. Both 15 and 20 years are both very far away, so the exact timeline for us at this point is kind of secondary to building the regular habit of investing sustainably towards FIRE each month.
Regardless, as Aussie Firebug’s graph shows, we have till 2030 before we’d need to start changing our investing behaviour anyway (at which time we could start pouring cash into Super), so there’s no rush on this decision anyway. But it is encouraging to think we could reach FIRE earlier than we’d initially thought!
There’s a long journey ahead, and we’re sure there will be twists and turns along the way. But you’re never going to take off the ground without a clear destination in mind. Wish us luck!
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If you’ve set your investment goals but you’re not sure how to start investing with shares, you may like to read our article on building an ethical investment portfolio for FIRE!
(You can also see how we’re tracking towards our goal on our FI progress page, or see how we’re tracking in our charitable donations in our Phi(lanthropic) page)
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*If you have any issues with this link, or want a hand editing the spreadsheet in any way, shoot me an email at mrfiwithme@gmail.com and I’d be happy to help : )