Lessons From My Financial Independence Journey

Through a friend of a friend I got connected to Chris who generously volunteered his time to tell me about his similar experience after recently joining Abundo Wealth. Abundo is an advice-only, index fund supporting, low-cost firm. Checks all my boxes.

I reached out to Eric (the founder) and thought he was amazing and his mission equally amazing. Since I had secondary skills from my marketing days and money wasn’t my main goal, it was a great match for a growing low-cost firm. I now get “paid” in a mix of salary, time flexibility, location flexibility, and (most importantly) a sense of purpose helping others achieve their goals in a field I love talking and learning about.

Oh, and a subtle-but-important financial benefit of working: we won’t have to worry about the ACA in the future. Abundo offers health insurance, so we can Roth convert to our heart’s content without managing the counterpunch of higher ACA premiums. That will have big value in the long run.

Related: Maximize ACA Subsidies to Minimize Health Insurance Costs

The Comforting Math Behind a Lower Paying Job You Love

People struggling with high paying jobs they don’t like might take solace in this fact: a kickass $40,000 job with annual inflation raises enables similar annual spending capability as a $1M portfolio using the 4% rule-of-thumb.

So if you’re an early retiree looking to fill the 30 year gap from say age 40-70, finding a lower paying job you love and can stick with would replace quite a bit of portfolio value (and open the doors to quitting a job you don’t like sooner!). If you have a $2M portfolio goal to support $80,000 of expenses, you can slash that goal to $1M with a $40,000 passion career. The entire “boring middle” just got kicked to the curb!

Here is an alternative view of the same benefit. If you reach that $2M portfolio goal and are planning to take out $80,000 annually for expenses, that same $40,000 passion career could demolish any concerns you have about running out of money. Instead of hand-wringing about whether a 4% initial draw rate is too much, you just instantly knock it down to 2% while simultaneously finding a joyful way to spend time.

Another comforting fact about taking a lower paying job: net income is more comparable than gross income. Take a person who makes $200,000 and pays $80,000 in taxes on that income. That’s easy to do when your spouse still works.

A $40,000 passion job is not a $160,000 pay decrease. Net pay is what matters, and it’s possible to keep about $35,000 of that $40,000 by using retirement savings vehicles. The net pay decrease in that case is only $85,000. About half as much as that person’s gross pay appeared to go down!

Related: The Amazing Tax Benefits of Semi-Retirement

Our Investing Approach

Age-based rules of thumb about asset allocation are not a great thought process. I see the platitudes thrown around far too generically.

“You’re under 40! You’ve got time to recover. You should be super heavy in equities.” Well, that’s true for a lot of younger people because their future human capital (work earnings) far outweighs their low-to-moderate financial capital.

Don’t Follow Standard Advice If You’re Not On a Standard Path

But when advice is given to the average person, it’s always important to ask how you are different from the average. We now have a lot of financial capital and at the same time much less future human capital (with the FI acceleration). We immediately started de-risking our portfolio because the upside of more stocks was no longer needed.

As far as the portfolio specifics, we don’t think in terms of a percentage in fixed income. The percentage is an accidental outcome.

Asset-Liability Matching

We think about fixed income as offsetting specific spending liabilities. Just like someone who plans to buy a house in 3 years might buy a 3 year CD for the down payment, we treat all future anticipated expenses as liabilities due in a specific year.

I have a spreadsheet that calculates the expected gap between income and expenses every year. So if we have a $30,000 expected gap in 7 years, we buy a 7 year TIPS bond (using the iShares iBonds ETFs for simplicity) that will yield $30,000 of real value at maturity. 

Our 2030 TIPS has about $500,000 in it. You can guess the purchase we’re intending to make that year!

The asset-liability matching approach means we can more or less disregard interest rate changes in the market. They don’t impact the long-run expected value of these bonds at all except for slightly changing the coupon reinvestment rate of return. Another nice way to SWAN (sleep well at night).

Note: If you’re considering a similar approach, 2024 has been a pretty good year to start. With real interest rates above 2%, getting $10,000 of inflation-adjusted income in 5 years only costs about $9,000.

For all expenses that are 10+ years in the future, we have an aggressive index portfolio of about 90% equities. The stocks are 60% US / 40% non-US since we are big believers in diversification and avoiding recency bias. 

We also consider our risk capacity high enough that we take the extra risk of a small value factor tilt. About 20% of our equities are in factor funds, and that’s now a locked in life-long decision in our Investment Policy Statement so we don’t fall victim to bailing on the strategy.

Related: Creating and Adjusting an Investment Policy Statement

Our Strategy For Saving A Little On Taxes

That modified fixed income ladder approach can be optimized by what I call the hidden bond trick. Even though we need the income soon (and therefore holding it in taxable would be the simplest choice), we can instead hold those funds inside a retirement account where the ordinary interest is tax-protected.

When we need to access the money from each year’s maturing TIPS ETF, we use a two step process: (1) sell the TIPS ETF and purchase VTI or VXUS in retirement accounts and then (2) sell VTI or VXUS in taxable to raise cash. The VTI/VXUS purchases and sales offset, and the net effect is that we sold the TIPS ETF and got spendable cash while mitigating taxes along the way.

A Case For Simplicity

Rick Ferri has a great quote about indexing that I love. “A successful index fund investor goes through four phases: 

1. Darkness – takes advice from everyone;
2. Enlightenment – realizes a market return is superior to their return; 
3. Complexity – overdoing everything to find optimal;
4. Simplicity – invests in a few total market funds.”

That applies so perfectly to my Financial Independence journey. 

1. First, I knew nothing about it. 
2. Then, I realized it was possible. 
3. Then, I got a PhD in the Big ERN safe withdrawal rate series and every other withdrawal method and blog. 
4. Now, I just look for the big learnings and themes.

I feel confident that any reasonable withdrawal rate is good enough, confident in our capacity to adapt, and know our spending will not be constant because no one’s is.

I respect that dying with too much is a risk just like dying with not enough. Now, I focus a lot more on how best to spend our other precious resource – time. There is peace to be found in stepping back from the financial rabbit holes!

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]

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