I had a friend who asked me this question recently:
When did you realize you were financially secure and didn’t need a job anymore?
I thought I will give an answer here (since we are a fee-only planning firm that helps people be financially independent)
I like the way she put the question because she is not asking when I want to retire, when did I retire.
She would like to find that point where I was able to conclude I felt secure enough that I don’t need a job.
The first time I realized that was in 2014 when I was 34 years old and have amassed $550,000.
Back then, I was still doing the backend work to ensure that some company’s corporate systems are chugging along. I know that I can be very, very independent of a job.
But I wasn’t 100% certain about it. It was just a good milestone to hit. Plus, the job was not so soul-crushing that I had to escape it.
The second moment was two years ago in 2018 when I was 38 years old.
I was fortunate enough to have greater wealth, but more than that, I learn more about the complexities behind spending down wealth that I have a greater degree of certainty that I am more financially secure and that I don’t need a job anymore.
The thing about security for myself is not that if I hit a certain magical number, then my whole world changes and my mind suddenly operates in a very financially secure way.
And I am pretty sure many do not become financially secured that way as well.
So in this article, I would like to deconstruct how I deepen my sense of financial security over time.
Financial security is a feeling.
If you wish to seek to understand a person’s relationship with money, seek to listen to their early financial life.
Our experience at work and research shows that our money stories when we are young have a profound impact on our current money relationship.
A person who has had to endure financial hardship when she is young, very likely grow up never wanting to feel so financially insecure again.
She would do all she can to ensure that it does not happen to her again. The problem for some is, despite amassing a lot of money, they never felt secured enough.
Abigail Disney grew up inheriting a large sum of money from her grandfather, Roy O. Disney, the co-founder of Walt Disney. The Cut did a very good interview with her about her relationship with money.
She mentioned a particular study that she found interesting:
They did a study at the Chronicle of Philanthropy years ago where they asked people who inherited money, “What amount of money would you need to feel totally secure?”
And every single one of them, no matter what they had, named a number that was roughly twice what they inherited. So that’s what you need to know about money, right? If that is your primary measure of success or value in life, then good luck with that, because it will never feel good.
I never grew up hungry.
Nor did I had the experience where I bathe halfway and the electricity got cut off because we didn’t have money to pay the utilities.
But not taking pocket money after 18 years old and having to make sure that my $250 part-time job income will last me for 1 month did strengthen a lot of my resolve that if I made more, I want to create a large enough distance between what I have and what I need.
And for many, they spend their whole life trying to create a wide enough distance but they have never felt secure.
I Rely on Some Sound Financial Spending Frameworks to Deepen my Financial Security
I didn’t spend my whole adult working career mindlessly trying to put distance between what I need and what I have.
I determined that I should be financially secured by using some rules-of-thumb.
Now, using the rule of thumbs or estimation can sound so unscientific and feels very reckless. And in a lot of cases, it can lead to potentially unsound financial outcomes.
The difference here is that I have enough financial insecurity to lead me down various rabbit holes to find different frameworks or strategies to determine how much I need to be financially independent or to be financially secured.
I Understand that The World We Lived in is Uncertain
After a few years studying this retirement subject, I realize that:
- This world is rather uncertain
- Markets are volatile and uncertain
- Your lifespan is uncertain
- Inflation is uncertain
- Your health is uncertain.
There Are No Perfect Spending Strategies Out There
I came across many retirement spending strategies and financial planning strategies to compute how much we need to not work or be financially independent.
I realize that each of these strategies or framework have their appeal and strengths.
But each of them also came with their own set of assumptions.
Somehow, each of these strategies will have certain of their own deal-breakers.
The traditional straight-line framework to planning for retirement is great but the problem is returns are never in a straight-line (if the return is a straight-line, highly likely is a fraudulent investment). There are unique sequences of returns that aid your wealth-building, but in retirement, it stresses your portfolio.
The 4% safe withdrawal rate is a great rule-of-thumb to figure out how much I need to be financially independent. However, potentially lower interest rate return in the future may mean 4% is not so safe. Also, the majority of us do not mandatory spend a fixed amount adjusted for inflation every year. While there is inflation, our personal inflation rate might be different.
The actuarial PMT method of determining how much I need and how much income I can get is very dynamic. It is able to allow you to adjust my income based on my longevity, current portfolio value, and returns expectations. The PMT method greatly prevents me from running out of money. However, that dynamism also means that year to year, your income fluctuates.
I Triangulate a Few Spending Strategies to See How Well I am Doing
Math-wise, I got around the idea that I am more or less financially secure when I overlay a few of these spending strategies and financial planning frameworks over one another, and that shows me that my wealth enables me to not work if I want:
- The traditional financial planning math shows my income need is much less than income the portfolio can provide
- My initial withdrawal rate is less than 3%. This is a reasonably conservative figure if we assess various challenging historical market sequences. The wealth should provide income for more than 50-60 years
- The PMT framework also shows me that my starting income in year 1 is way higher than my need
Each framework or strategy has certain appeal, weaknesses, and assumptions. What I did was to critically assess whether these weaknesses and assumptions:
- Apply to my own personal situation
- Are there viable and sound ways to counteract weaknesses in the framework and whether they are implementable?
My wealth is fungible.
This means that in most cases I can take what I have and reallocate my portfolio to accommodate a certain spending strategy. The financial securities used are liquid enough that if another strategy requires particular cash, equities, bonds, properties allocation, I can shift them accordingly.
The Importance of Understanding the Assumptions and Weaknesses
Each of us leads unique lives and while general spending strategies act as a good blueprint to start planning, eventually what we use depends on our unique situation.
For example, the assumption of a safe withdrawal spending strategy is that you will adjust the income available for spending every year. This places greater stress on the amount of wealth needed.
By understanding the assumptions, I know from other research that everyone has their own inflation rate. A large part of the spending I planned for are essential expenses and less discretionary. While they are necessary, the amount that I planned for buys for more than I need.
If there is a poorer financial market outcome, I may not have to adjust to inflation upwards. The end result of what I spend might be somewhere in between and not the full inflation rate.
I can use the safe withdrawal spending strategy to determine how much I need because the income I planned for has already built-in some buffer.
Since the majority of my expenses are essential expenses and not expenses that are good-to-haves, the reality is that a flexible spending strategy would not work so well for me.
A flexible spending strategy is a modification of the safe withdrawal rate strategy in that the income provided can change depending on your portfolio value and market volatility. The strategy ensures your wealth lasts longer at the expense of preserving purchasing power.
The flexible spending strategy is one of my favorite strategies.
When I first discovered it, I got really excited because it lets me know that the $500,000 I accumulated in theory allows me to be financially secure if I am willing to be flexible in my spending.
If you think about it, most of us may not want to stop working at a young age but want to self-insure against retrenchments and temporary unemployment.
A flexible spending strategy helps you determine a healthy amount of wealth to protect against that. It does not mean you can stop work forever but it does feel liberating that you are not handcuffed to your job.
Financial security to me means that I know how things would fail and be prepared for it.
If an adviser does not know a plan has a weakness, or god forbid, know but intentionally not tell you about the weakness, it is a false sense of security.
I got Comfortable with How I Managed My Wealth Management
I can be financially secure and don’t need a job because I have enough wealth to replace the load of my job.
My wealth needs to be able to provide income.
I don’t subscribe to the model that the financial securities you invest in need to give you a cheque with money. To me, as long as the wealth grows well and if I spend at a reasonable rate, it will last in perpetuity.
Income is part of growth. It would be better to assess based on total return.
I have a higher degree of confidence I don’t need a job because I been investing for the past 13 to 14 years. I gradually learn to manage a growing amount of money.
Over that period, I started with less money, and was able to get educated, know the quirks of different financial instruments. I made errors or avoided errors and I learn about certain quirks that I have omitted or didn’t know about initially.
As wealth grows, I also grew comfortable having a relatively concentrated portfolio. There are a lot of risks associated with a concentrated portfolio if I do not understand it well.
I learn to live with volatility and uncertainty.
Volatility and uncertainty are what you sacrifice for a high growth rate. Greater volatility makes things appear risky and because things are risky, the risk premiums are higher, and we hope to gain compensation for it.
- In every financial security, there may be some form of risk such as currency risk, liquidity risk, credit risk, frauds, inefficiencies in knowledge
- Every strategy has some weaknesses, whether it is too active that you need a lot of micromanaging, need well-functioning markets, need lots of capital
Financial security is a feeling that comes from knowing how badly things can end up and how far you are willing to push yourself in the risk spectrum to get the returns.
It also comes from how much control you have over that strategy. When I feel like I do not have control, anxiety builds up. When I feel that I am in control, I feel very secure.
Most of us are going to go through at least 2 to 3 market downturns for different asset classes even in a 30-year retirement.
I realize many have the requisite net wealth.
However, they are uncomfortable with the recommended way their advisers, or friends want them to allocate their net wealth.
If they shift from properties to funds or stocks, they exchange liquidity and concentration risk to something diversified but with volatility.
I felt that you do not need a job when you have the requisite wealth but also spend a period of time acclimatize to how you will eventually allocate your wealth.
You will feel more comfortable with it, and sleep better at night (unless you have been forced by circumstances to leave your job, why would you leave your job and have more stress at night?)
What made me feel more financially secure might not work for you (you can write in if you disagree with me or thoroughly agree with me)
It worked for me because I was naturally inquisitive about the topic of money.
There is a reason why some of these ideas didn’t make it to your financial plan. The main reason is that some of these frameworks are only usable if you understand most of the framework. If not, it creates more confusion, distrust, and breeds insecurity.
Your planner will, however, introduce certain applicable ideas to improve your financial independence plan if he or she believes that it will give you a better outcome in life.
While all of us are unique in our level of financial insecurity, I believe that financial planning can help give you an idea in the spectrum of security, whether your plan is secure or totally not secure at all.
Financial security is a feeling, but part of that feeling can be shifted if you know your true financial position, or where you could get to.
In the financial planning world, financial security may also be the level of trust in what your financial planner tells you.
A planner can tell you that you are financially secured but if you do not trust what was presented, you walk away still feeling rather insecure.
As a client, if you are willing to ask thoughtful questions, and the adviser is competent and clear in her presentation, she can chip away your insecurity part by part until you shift towards more financially secure.
Financial security requires you to take ownership to be aware of your financial position and factually why you are secured. After all, you own that financial insecurity, not your planner. The onus is still partly on you to chip that away, not all on the planner.
If you have less experience with investing, consider starting with a controlled amount so that you can learn about the quirks of investing in a certain manner.
You will feel less uneasy about not having a full-time job if you have greater confidence your wealth can realistically provide income.
Find someone to be your financial guide to walk along with you, narrating the uncertainties you encountered along the way, explain the complexities the mainstream media throws at you, and frame volatility in a way that makes the journey more liveable.
The article you have just read is part of Providend’s Think Space- a repository of content that we research about and reflect upon in a bid to provide only the best solutions and recommendations to our clients.
Think Space is narrated currently by Kyith Ng. Kyith is a Senior Solutions Specialist at Providend, Singapore’s First Fee-only Retirement Financial Adviser.