Sunday 4th December 2022
Defining a FI number is a changing thing and the Cost of living Crisis is having an impact on this. Inflation has been a silent killer for the dreams of so many trying to retire early. This is because as expenses grow, one's FI number also gets larger as a result.
I was going to list out line for line what the budget is, however I decided against sharing such specific numbers (the numbers aren’t so important as the process of working this out), but I can confirm that I broke our budget into the following categories:
Electricity & Heating
Internet + Phone + TV
Household Costs (Mortgage, Maintenance, Property tax etc)
Kids Extra Circular
Back to School
Weddings / Special Occasions
I went through each category and worked out both the monthly and annual cost for each. For example, Transport has a monthly cost (fuel for our car) and an annual cost (motor tax, insurance and maintenance).
I then did two budgets. One for 2023 with our family of five, and another as an imaginary shadow budget, planning for a world where we were older and our children were no longer dependent on us. This allows me to keep track of what our FI number would be if we were retiring today without children and allows us to see how this changes over the years given the impact on inflation.
The reason for this dual budget approach is it is so unlikely we will be in a position to retire when our children are young, so planning for a world where our children are no longer dependent on us makes sense as it allows me to focus on a more realistic FI number for when we actually retire.
I actually already looked to define my Shadow FI number back in my update in March 2022. My calculation then was nearly the same as what I defined now (€500 more today - thanks to inflation).
Finally, it should be noted that we do receive extra income for our children in the form of a Children’s Allowance, which every family in Ireland receives. This works out at €420 per month. I have deducted this amount from our calculations for our FI number for 2023 because the money goes directly into helping us reduce our expenses.
Once we had our budget, I would then work out the gross amount needed to cover these costs - in other words, work out the pre-tax income amount needed. Effectively, I added 17% to account for the rate of tax we pay on our personal income.
Here is a summary of our expenses for each budget and our FI number based on multiplying the expenses by 25. I have rounded the figures to make calculating the FI number easier!
|Budget||Total Expenses||FI Number (x25)||% Covered by Portfolio|
|2023 Family Budget||€42,000||€1,050,000||31%|
|2023 Shadow Budget||€33,500||€837,500||39%|
It can be tricky to work out a true FI number with a mortgage. As it is, a mortgage will be paid down one day, and it can be difficult to plan for that in early retirement.
I really like the approach taken by the ‘1500 Days’ blogger. He calculated his FI number without his monthly mortgage cost and instead added the balance of his mortgage onto his FI number.
This way, when one does finally decide to fully retire and start withdrawing from their portfolio, the option is there to simply pay off the mortgage balance and live a mortgage free lifestyle.
Our mortgage balance stands at €145k today, and assuming I didn’t adopt the shadow budget until age 50, the balance will be €90k by the time I reach that age. Effectively, the longer I wait to retire, the smaller our mortgage balance will be.
Our mortgage currently costs us around €9,000 per year in gross income to cover the repayments. By being mortgage free, our total expenses are greatly reduced. Here is how our Retirement FI Number changes when our mortgage is paid off.
|Budget||Total Expenses Less Mortgage Expenses||Mortgage Balance||FI Number (x25)||% Covered by Portfolio|
|2023 Family Budget||€33,000||€145,000||€970,000||34%|
|2023 Shadow Budget||€24,500||€90,000||€702,500||46%|
I mentioned back in September 2021 about the idea that in Ireland we could use a 5% withdrawal rate instead of a 4% rate, due to a number of reasons.
My latest thinking is that a 5% withdrawal rate is fine initially, but long term, we will want to settle back to a 4% withdrawal rate.
This tends to tie in pretty well with our lifestyle however. Our expenses are higher today with kids, so if we were to retire early, we could simply withdraw 5% early on and eventually reduce this to a 4% withdrawal rate once our expenses decrease as our children start to support themselves.
Therefore, based on this logic, we could define our FI number based on the 5% initial withdrawal rate as:
|Budget||Total Expenses Less Mortgage Expenses||Mortgage Balance||FI Number (x20)||% Covered by Portfolio|
|2023 Family Budget||€33,000||€145,000||€805,000||34%|
I guess the really interesting question here is can we actually retire with children based on our 2023 budget. We currently have an investment portfolio of €325k. We currently save €10k per month, therefore how long would it take us to hit our FI number based on say a 5% annual return (after inflation).
Here are the results:
|Budget||Time to Retirement|
|2023 Family Budget||3 Years, 3 months|
|2023 Shadow Budget||2 Years, 8 months|
So there we have it. It is technically possible for our family to retire within a little over 3 years assuming we continue to save at our current rate, assuming a 5% after inflation return from here and assuming that inflation doesn’t knock our expenses too far out. Keep in mind that a 5% after inflation return in the current inflationary environment is unlikely, so inflation really needs to come down for this to be realistic - but it at least gives an idea of what is possible.
As it is, given my oldest son is now 11, I find it unlikely I will continue to work through at the same rate as I currently am, as I like the idea of adopting some form of semi-retirement in my 40’s (I am currently 38). Much of this FI stuff is about finding a balance between working hard and balancing family life. At the moment, I am still too overworked for where I would like to be, so in the long run I will need to find more balance.
I thought it might be fun to explore some of the alternatives - or early exits - that are possible for me at this stage. Remember, going for “Standard FIRE” is only one approach. There are several alternative FIRE approaches I could adopt - some of them from today if I wished. Let’s explore some of these below:
Coast FIRE is the first exit point in anyone’s FIRE journey. Assuming that I stopped making contributions from today, and assuming my portfolio returned 5% after inflation on average, I would hit my FI number at age 54. While I waited for that to happen, I would need to work part time on a semi-retired basis until I hit full retirement.
Because I would be retiring at 54 in this scenario, I could adopt my Shadow Budget, rather than my Family Budget, as my children would be grown up by the time I start to withdraw from my portfolio.
It is more likely I would want to hit a bigger number before adopting this - and thus Flamingo FIRE might be a better path.
Flamingo FIRE is similar to Coast FIRE, except the idea is to hit 50% of your FI number and then coast the rest of the way. Based on my shadow budget, I am currently 46% of the way, so I would only need to grow my portfolio to €351,250 to hit Flamingo FIRE - less than €30k to go.
The idea of Flamingo FIRE is you add contributions until you hit 50% of your FI number, then let compounding do the rest of the heavy lifting for you. Once you hit Flamingo FIRE, you can work part time and simply wait 10 - 15 years until you can retire fully.
Because I would be retiring at 49 at the earliest in this scenario, I could adopt my Shadow Budget, rather than my Family Budget, as my children would be grown up by the time I start to withdraw from my portfolio.
This is a really tempting path and would allow me to be semi-retired by the time I am 40 based on my current savings rate.
The idea of Slow FI, is to simply take extreme early retirement off the table and look to adopt as much of the semi-retirement lifestyle now that you can.
For example, let’s see I decided that I wouldn’t retire until at least age 50. If I were to adopt Slow FI from today, I could adopt my Shadow Budget FI number. Assuming I continued to earn enough to cover our annual expenses and contribute €1,500 a month to my portfolio and assuming a 5% real return, I would likely hit my FI number by age 50.
It should be noted, Slow FI doesn’t rule out early retirement - 50 is still considered early retirement - I think it just rules out extreme early retirement! But heck - semi retirement in your 30’s still sounds pretty great!
I am constantly tempted by Slow FI. I have mentioned that I have been trying to build a portfolio of €500k and then simply let the portfolio compound in the background, however the more I reflect, the more I realise that Slow FI is the better approach.
This is because Slow FI allows one to move the the semi-retirement phase sooner, and also acts as a barrier against two of my biggest fears:
2. Poor Investment Returns
Both inflation and poor investment returns are a major problem when it comes to adopting any form of Coast FIRE. A few more years like 2022 and it could take years to recover. I think it is important to continue to add contributions to your portfolio, even if they are greatly reduced. For example, it would still be possible for me to work part time and make contributions of say €1,500 per month pretty comfortably. I could then adjust these contributions as needed depending on market returns and inflation over the years.
In many ways, I already have my life in semi-retirement planned out. It isn’t much different to my life now - just a slower pace of life with more focus on lifestyle.
My life in full throttle FI has become like running around like a headless chicken. There is always another line of code to write, another email to answer, another Slack message to reply to. With Slow FI, I would look to reduce my workload considerably and look to give myself more time. It is the rushing around constantly that gets to me more so than anything else - that feeling of needing to be in two places at once, that just gets harder to manage day to day.
I would love to take longer lunch breaks, play more golf, take longer walks, get more exercise, spend more time with my family and be there more to help out with homework after school. It really is just a matter of looking to take the foot off the pedal so to speak and stopping to smell the roses here and there!
If I am honest with myself, the only thing preventing me from adopting Slow FI from today, is that I am keen to secure another two investment properties in 2023. This would give me five investment properties all up, which I think would put me in a strong position to move to semi-retirement.
While I could still technically buy property under ‘Slow FI’, the thought of a deposit taking a couple of years to save for is somewhat sobering. My current savings rate has allowed us to save deposits for property in a few months.
If I am going to stick it out and buy another two properties in 2023, this will mean another 12 months of full throttle, however the path is now clear to me and my goal seems to be moving closer each and every month!
Our contract ended in November and so did our 26% discount. Finding decent discounts is a lot harder these days. We ended up getting a 14% discount, so our electricity price has moved to 37c per KwH. At these levels, the idea of getting solar panels as a hedge against rising electricity costs looks better and better.
We also received word that we will be back dated on the electricity that we supplied the grid at 21c per kwH, so I have adjusted our previous numbers to account for this.
Even though November was one of the worst months of the year for solar, our panels still provided a positive ROI. December will be the darkest month of the year, so it will be interesting to see how the panels compare in December.
We consumed 309 KWh of electricity during the month, buying 214 KWh's. Our solar panels covered 31% of our electricity usage, saving us €12.05 (based on 37c per kWh). We received a credit back of €2.10 from supplying 10 KWh's to the grid. Our annual return after depreciation was 1.76%.
Here is a breakdown of our solar panel usage since they were installed in July:
|Solar Panel Return - Year to Date|
|Month||Percentage Covered by Solar||Electricity Saving (after depreciation)||Credit from Supplying the Grid||Annual Return|
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