Three Years Out: Are We on Track for FI?

Two weeks ago, I turned thirty seven. It's a weird feeling, getting old. I don't feel old. I feel like the same person, minus a little softness around the tummy and a hairline that isn't quite where I left it.

And yet here I am, older, supposedly an adult; not some kid trapped in a man's life, still playing kickball and board games and drinking too many beers on a school night.

As each year comes, we hit another milestone on our path to financial independence. We've only got three mile markers left before the big four-o. Will we make it?

Let's see what the Mad Fientist's laboratory says.

The Mad Fientist thinks we'll be done by forty.

Our spending, the green line, has been way more volatile since our last annual check in. The two outlier months were December 2016 and March 2017. December obviously had some Christmas spending, but it also coincided with our Asia trip as well as paying for the Kuku van we camped in on our trip around Iceland. If travel hacking is supposed to be free, I think we're doing it wrong.

And the increased spending in March is almost all due to the costs associated with buying a new home. There were the somewhat unavoidable expenses like a home inspection, appraisal, and fees to the lender. But we also bought a home that didn't have a refrigerator, washer, or dryer, adding a few thousand dollars to the new home budget. Maybe Kristy and Bryce over at Millennial Revolution have it right: maybe we'd be better off just renting.

With the bumps, we're trending towards an annual spend of $46,000, which would be a fairly big jump over the prior year. But with our new mortgage and the possibility of kids in the future, this really might be a reasonable estimate. Heck, it might be too low.

The other big change can be seen tracing the blue line, which is the estimated monthly income generated by our retirement nest egg. We saw a huge drop in April, right as we bought our new home and sold our prior one. Up to that point, we had been counting the equity in our primary home because, well, at one point we had paid off the mortgage, and we wanted to count that in our net worth. And even after we took out a new mortgage to tap that equity, the loan was still less than half of the home's value. Why shouldn't we count the equity?

Well, one reason is that Zillow's estimates are not all that accurate. Our prior home sold for about thirty grand less than the 'zestimate'. A lot of our expected gains weren't real, as it turned out.

Having learned our lesson, we changed our net worth methodology in April. Even though we supposedly have a good bit of equity in our new home (we put 20% down, so I sure hope we do), we're not counting any of that in our net worth calculations. Now, we only count our liquid investments: my 401k, our IRAs, my HSA, our taxable account, and our cash. Which kind of makes sense if we're using a rough 4% rule to calculate the income generated for financial independence. The equity in our home isn't going to throw off dividends or gains that we can spend: it's just going to sit there.

But since both of those changes hit in the same month, we had a huge drop in our expected income from our investments in April, as shown with the blue line. Anyway, I think it's a more accurate picture of how close we are to financial independence: two years and five months away, according to the Mad Fientist's lab. If things stay on the same path, we really should be done by forty.

But there's a catch. This timeline is based on two things: the first is our ability to continue saving at the rate that we are (trending towards 60% of our post tax income in 2017). This is, for the most part, within our control. I can continue to put in effort at work and make it less likely to get swept up in a round of layoffs. Even if I lose my job, I can probably find another. And Mrs. Done by Forty may want to pursue a career after getting her PhD.

Regardless of what happens with our income, we can always exert a lot of control over our spending, which is rising over time.

On the other hand, the second factor that will determine when we reach financial independence is the performance of our investments. What the market decides to do over the next three short years is not up to me. And with that short of a time frame, losses are certainly possible. (For those interested, we use Bernstein's Simpleton's Portfolio, sometimes called the "No-Brainer Portfolio". As always, nothing on this blog constitutes advice of any kind: consult with a real financial advisor before making investment decisions, yada yada.)

Even with some diversification, a double digit correction in the next three years is possible. Hell, it may even be likely. Such a correction would well exceed what we can invest in a year: we can't keep our portfolio balance where it is simply through frugality and investing more. At this point, it's not really in our hands.

It's a paradox of financial independence: as we get more control of our finances and approach the figure that will sustain our spending for the rest of our lives, we also lose quite a bit of control as we near the finish line. The amount that I continue to put towards our investments matters less and less, and the performance of the markets matters more and more.

It's an odd feeling: knowing that what you do, or don't do, becomes less impactful over time.

But that's our reality. And it's what I signed up for, too. Financial independence, by definition, involves my portfolio doing more of the heavy lifting each year until, one day, I will look over and realize it's doing all the lifting. I'll just be along for the ride, and I can let go, if I want.

As a Type-A control freak, letting go is hard. I like having my hands on the wheel, and knowing that whatever happens, good or bad, is on me. I can tell already that this will be my main struggle after reaching financial independence. I'm going to have to find something else to maniacally control.

Maybe I should have a son...

Hmm. That parenting approach might have some consequences.

Let's go with a new hobby instead.

As always, thanks for reading.

*Photo is from Steve Snodgrass at Flickr Creative Commons.