Financial Independence: Building your bridge

The other day I read a great post by another financial independence blogger. She wrote:

There seem to be two camps. The first is that group of people who believe “that sounds about right” is more than adequate in terms of preparation. For them a rough 4% rule is all the calculation they need to pull the plug and walk away from paid employment and they will deal with whatever happens when it happens.

I sit firmly in the second camp which comprises those for whom the numbers are critical. We believe the security of our future is based on the accuracy of the maths,  so we better damn well get it right. We refer frequently to our spreadsheets, model a range of different scenarios based on varying annual returns and expenditure levels and try to determine every conceivable outcome of our “what if” biased brains.

Although “that sounds about right” could be my motto, I can’t really afford to be in that camp when it comes to reaching financial independence. My situation forces me to have a plan. I need to understand what it takes to get to point where I am  financially independent and can retire (early).

But numbers may fool you. They may look great and convince you they’re an accurate representation of your (financial) future. But they’re like a house, big and beautiful, sitting on weak, contracting soil with a questionable foundation, causing it to constantly crack and sink, pulling it down.

Okay that sounds gloomy. What I mean is that the calculations are based on a lot of assumptions. About returns, inflation, the global economy. In any calculation you make, they’re your weakest link. And you know what a weak link does to the strength of the chain right?

Can nothing be done? Is it useless to do the math and to rely on numbers? Not at all. But I would advice you to make at least two calculations for each scenario. A pessimistic one and an optimistic one. This keeps you grounded and from getting carried away.

So what about the bridge?

The way I think about financial independence is that I need money to build a bridge. To bridge years. From early retirement until…well as long as I need it. How much money I need to save depends on its span.

The classic bridge

Here I bridge the years from early retirement (at 2028, but that’s my pessimistic scenario) until full pension age. From 2018 until 2028 I save money (the orange area reflects my savings) and from 2028 to 2036 I deplete the savings by withdrawing money (yellow bars). From 2036 I will fully rely on my pension (blue bars).

This bridge is easiest to build. Surely, it requires a fair amount of savings, but once you reach early retirement, you can withdraw quite a lot. As long as you ‘survive’ until full pension age.

There is a drawback. If you have any dependents, there won’t be anything left for them. And there won’t be any money left to supplement your pension. If your pension is good, no worries. If it isn’t, then this may not be the optimal model.

The (sus)pension bridge

In this scenario I save again until 2028, but only partially deplete the savings from years 2028 until 2036, when my pension starts. The benefit of this model is that it supplements my pension (which is fairly low).

A drawback is that I have to limit my withdrawals from 2028 until 2036. This may require me to work part-time. I wouldn’t be 100% financially independent, but partially financially independent is better than not at all. Note that another solution is that I reduce my expenses to an extend that I can be 100% financially independent from 2028.

Note also that I am slowly increasing my withdrawals from 2028 until 2036 after which they fall to a much lower level. I increase them because if I have to work part-time, I want to slowly increase my level of financial independence. E.g., I may work 50% in 2028, but then reduce this to 20% or so in 2032.

The endless bridge

This is the preferred bridge. Here I would save so much money that I can live off the return until I check out. No need for pension, no need for depleting my savings.

This scenario requires much more in savings or – if that is not possible – a drastic reduction in expenses.

So what’s my bridge?

This is where the math comes in. Going through all the numbers is beyond the scope of this post, but this is my current assessment:

The classic bridge – This is within reach between 6 and 10 years from now. When exactly I would be able to retire using this model depends on a number of factors and decisions. For example whether I sell my mortgage free home or not, how much I will be able to reduce my expenses, what return rate my investments have (4% in my calculations), inflation, etc.

The suspension bridge – I prefer this over the classic bridge, mainly because my projected pension is quite low.  I really need to supplement it. Obviously, my ambition is to be fully financially independent when I hit 60 (at the latest).

My chances? Fairly good I would say. I don’t need to save $1 million to make this work. And there are a lot of things I can do to reduce cost.

I really want to avoid not being 100% financially independent after I hit 60. But if I need to generate a little additional income for a limited number of years it is not the end of the world.

The endless bridge – This is my dream. I need to find additional income or make some fundamental expense reducing decisions to make it come true. It is not entirely out of reach and I will see how things will develop.

Immigration to a cheap(er) country would definitely make this possible. I am currently researching various options and will definitely dedicate some future posts to this.

What bridge are you building?

Would love to hear what your thoughts are. What bridge are you building?

Happy building and remember to subscribe!