I recently wrote a post about how you might be able to stop investing and still hit your net worth goals. The gist of it is that if you are an aggressive saver, you might have enough money right now, and it can grow on its own to hit your goals. For example, if you’re a 21-year old kid and saved $50,000 now, it’ll be worth about $1,000,000 by the time you are 65. This was recently picked up by the ChooseFI Facebook group. Unfortunately I can’t participate in the group because then I’ll reveal my identity, so here is a bit more explanation of the post, which I hope will spur further discussion.
Where are these Mystical 7% Returns?
I heard this question was asked in the very beginning of the discussion. I also heard that it was resolved pretty quickly, but I just wanted to address this. Whenever I make a spreadsheet, I always use the exponential growth rate of 7%.
Well, the answer is evidence. If you look at the performance of the S&P 500 over the past 90 years, it has returned about 10% pre-inflation. If we factor in a 3% inflation, that number comes down to the 7% that we use.
I will say that this mystical 7% returns are just that, mystical. The index very rarely returns exactly 7%, or even something between 5 and 10 percent. In addition, if you tweak the time period, that number can change drastically. I stick with 7% returns because, well I don’t have a better number. If you want to be more conservative, use something like 5%.
Another thing to pay attention to is when you listen to somebody like Dave Ramsey. He typically advocates for a 12% return, but never mentions inflation, and I have no idea where you consistently get 12% returns anyway. He uses this number as a motivator to get people who wouldn’t normally invest to do just that.
You can nit pick his math all you want (I certainly do). It doesn’t change the fact that he’s gotten thousands of people to start paying attention to their financial future, which is an excellent achievement.
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“Stop Investing” is Anti-FIRE
Maybe. WHAT? Yes, maybe. If I advocate that you stop investing, it is inherently anti-FIRE. The thing is, most people aren’t on the FIRE path to begin with. Another is that most people simply cannot afford to FIRE. Remember, the median individual income in this country is about $37,000. Achieving FIRE with income like that is tough unless you’re spending $500 per month, including rent.
If you want to go down that path, check out Early Retirement Extreme, and get ready to live on rice and beans.
If you’ve been reading ZDF for awhile now, you know that I love using examples. Let’s say that your friend Jim is set to retire when he hits $1,000,000 in the bank. This is a pretty common goal. Well, let’s say that Jim is 37 years old, and has $500,000 in his investment account. If he doesn’t save another dime for 7 years, he’ll more than likely hit the $1,000,000 goal by age 42.
Does that sound like FIRE? Sort of. Jim can stop investing, quit his dreadful job, and find something more fulfilling to do. He will still have to work, but instead of pulling 60 hour weeks at his corporate gig, he can work 20 hours a week for a small bike shop (because that’s his hobby, of course). This all works assuming he can still cover his living expenses. So, Jim has become FI, but definitely not RE.
I will say that stopping investing isn’t for everyone. For all we know, the market can crash tomorrow and Jim’s portfolio will be worth $250,000, significantly derailing his early retirement plans. But he can always start investing again to boot his portfolio.
The point is that if Jim hits his “stop investing” number, he gets to make a choice, something that many people never get. Which leads me to…
“Stop Investing” can make you FI
This may seem a bit weird, but let’s take a step back. What does it mean to be FI? Well, it means that you are financially independent. You can make decisions without having to constantly think about money. Money no longer controls you.
Well, what if I told you that by doing nothing, you would hit your FI goal in 10 or 15 years? Do you feel FI? I sure would.
If you hit your “stop investing” number, you can stop aggressively investing, and be pretty confident that you’ll still achieve your FI requirements. This could mean continuing the work at your job but spending more now. It could be dropping down to part-time. Or you can pull a Jim, and start working for a local business. This works as long as you can figure out how to comfortably live between “now” and when you finally hit your FI number.
What this gives you is the choice to decide what to do. You can quit your job on Wall Street and start working for a Non-Profit. You could take a risk with a low-paying job at a startup, hoping to make it big. The thing is that once you hit your “stop investing” number, everything becomes easier. You aren’t FI right now, but you will most likely be in the future. So why at least think like somebody who is FI, even though you technically aren’t right now.
You can also build in a buffer. For example, say that your “stop investing” number is $100,000 at age 27. Well, if you get to $120,000 by age 27, that increases the odds that you’ll hit your goal, and you might even overshoot your FI goal by 20%, making for a more lavish retirement.
So… What’s the Takeaway?
The takeaway is that if you hit your “stop investing” number, you can relax a little bit. Instead of investing $25,000 per year, maybe drop it to $10,000, take an extra vacation, and eat out a little more with your family. As long as you stay on course, you’ll hit your goals, and maybe enjoy life a little bit more. And that’s the key that so many of us miss. Enjoy your life. Be happy, be thankful.
I’m going to end this post with my favorite quote from The Lord of the Rings. At the end of the day, this is what we get.
“All we have to decide is what to do with the time that is given to us.” – Gandalf