3088: This Is How Much You Really Need to Be Financially Independent by Chris Reining on How to Retire Early

[00:00:00] This Is Optimal Finance Daily. This Is How Much You Really Need to Be Financially Independent by Chris Reining of ChrisReining.com. A year ago, I watched Fight Club. So now I'm watching Fight Club again as a reminder of how much I've grown. You see, last year I put down my 14 year old cat, quit a career that took 15 years to build and retired at 37 while everyone was telling me I was nuts and ended a four year relationship.

[00:00:30] All those things happened in three months. And when huge changes are all happening in three months, it can feel pretty overwhelming. That's when you lay on the couch and watch Fight Club and Brad Pitt's character Tyler Durden says something that resonates with you. Quote, It's only after we've lost everything that we're free to do anything. End quote.

[00:00:54] I think it would have been easy for me to sit around my stuffy condo, sitting there, drinking orange juice, feeling sorry for myself. But I saw it as a once in a lifetime opportunity for growth. I wasn't getting the things I wanted to get out of life. And if you're not getting the things you want to get out of life, then you need to change to become the person who can. Why? If you stay the same, you're going to get what you've always gotten.

[00:01:20] Lately, doing interviews or podcasts, I get asked, what does your day look like? And I never know how to respond to that question. But here's the answer. I've been spending the last year transforming myself into the person who can get the things they want to get. That's another article for another time. But suffice it to say that I've grown more than I've ever grown before. I'm lucky because I had the space for it. And I had the space for it because I became financially independent.

[00:01:50] So if you've been wanting to know how much you need to be financially independent, it comes down to the 4% rule. The 4% rule means you can safely withdraw 4% from your investment accounts each year, adjust your withdrawal for inflation, and never run out of money. Here's an example. You have $500,000 in an investment account. You can withdraw $20,000 the first year. That's $500,000 times .04.

[00:02:18] Then you forget about the 4% rule and increase your withdrawal each year by the previous year's inflation rate. Let's say inflation is 3%. So in the second year, you withdraw $20,600, or $20,000 times .03. And so on. Make sense? There's been a lot of research to back this up.

[00:02:41] Bill Bengen's 1994 and 1996 papers and then studies by professors at Trinity University in 1998 and 2011. Originally, the 4% rule applied to traditional 30-year timeframes, but now it works for any time horizon. And this Reddit Ask Me Anything, Bengen said, quote, If you plan to live forever, 4% should do it, end quote.

[00:03:08] The new rule for a 30-year timeframe is 4.5%. I always told myself I'd be financially independent with $1 million because I spend about $40,000 per year. That's 4% of $1 million. When I finally convinced myself to quit my 9-to-5 job, the investments could support a 3% withdrawal. And now that I'm a couple of years into retirement, I'm withdrawing a measly 2%. What's going on? Well, two things are happening.

[00:03:37] First of all, I didn't realize how much work was costing me. Commuting every day, buying new work clothes, paying for convenience. Without the overhead of a job, my yearly spending has gone down by 15% or so. And as I'm sitting here watching my spending go down, my investments are growing. I knew I was overthinking quitting because I overthink everything to an absurd degree. And the 2% withdrawal confirms that.

[00:04:05] Anyways, if you reverse the math on all of this, you can simply multiply your yearly spending by 25 to find your number. And you should do this right now. Because when you multiply your spending by 25, you start seeing that becoming financially independent isn't about how much money you have. It's about how much money you spend. How much you spend determines how much you need. Here, let me show you.

[00:04:31] Spend $20,000 and you'll need $500,000. Spend $40,000 and you need a million. Spend $80,000, you need 2 million. Spend $120,000, you need 3 million. Spend $160,000, you need 4 million. So when you hear people say that 1 or 2 million isn't enough to retire, they're not wrong. What they're saying is that they have an expensive lifestyle.

[00:04:59] And having an expensive lifestyle is fine. But years ago, I realized that my number would be lower if I spent less. And if I spent less, I'd have more to save. And if I had more to save, then I'd get to my number faster. That's how you become financially independent. It's all about the relationship between your numbers. Which reminds me of a meeting I had with an executive once. We were pretty close. And he shared with me that he hated his job and didn't want to keep doing what he was doing.

[00:05:28] I'll never forget what he said. This is it for me. Meaning he was going to keep doing what he hated for the rest of his life because he wasn't willing to work on the relationship between his numbers. And if you're not willing to work on your numbers, then you'll never be free to do anything. Just like Tyler Durden said. You just listened to the post titled,

[00:05:54] This is how much you really need to be financially independent by Chris Reining of chrisreining.com. The beginning of this article reminded me of something I heard once about reaching FI. The reward for financial independence is an existential crisis. The reason this is true for many people is that they spend the years accumulating their nest egg focused on reaching a finish line where they can quit an unfulfilling job.

[00:06:22] Many of us are running so fast towards that finish line that we don't have the mental space to consider what we do once we get there. And that's pretty disorienting. I've heard some good advice about this predicament, which is that you should aim to retire to something versus retire from something. Chris mentions here that he has the space for personal development because he reached financial independence.

[00:06:47] But I would urge all of us not to wait that long. And if you're on the path to FI and experimenting with reducing your expenses, there are plenty of opportunities now to work on your growth. For example, when I started spending less money, I started spending a lot more time reading personal development books from the library, journaling and meditating.

[00:07:12] I spent more time exercising, cooking, taking long walks and dreaming up things I wanted to create. I even went through a period of time where I stopped wearing makeup and got comfortable with what my face looks like. Now, if that's not personal development, I don't know what is. We don't have to wait until FI to do these things because they can help fill the space left in our lives when we cut back on mindless consumption. That's a wrap for another Friday show.

[00:07:40] Have a great start to your weekend and I'll be back tomorrow where your optimal life awaits. With this great start to do all the work they Okay, met this. You're right, Hoo, my dad. Let's go ahead. Then we have to finish. The next season is to find some more. If we're going to work on an hour too long and we'll impact it. I will get a thumbs up. Is it my best to find out? I'll be sure.