The Thing We Never Talk About

Timothy Iseler, CFP®: Hi everybody.

Thanks for being here.

This is The Thing We Never
Talk About, a podcast about

personal finance for weirdos.

My name is Tim Iseler.

I'm a Certified Financial Planner™ and I
run my own independent financial advisory

business in Durham, nc, helping musicians,
artists, and other people with weird jobs

make smarter decisions with their money.

You can learn more at Iselerfinancial.com.

And if you have a question about money
or personal finance, please send it to me

by visiting Iselerfinancial.com/podcast

and I'll answer it in a future episode.

And if you enjoy this podcast, check
out my Keep It Easy Newsletter.

I write about exactly this kind of
stuff and share it there weekly ish.

You can subscribe at
Iselerfinancial.com/newsletter.

I work with lots of people who love
what they do so much that, against

all odds, and in some cases against
all common sense, they have turned

that thing they love into a career.

Some of them are musicians and authors
and filmmakers and illustrators, but I

also work with lots of people who operate
what I call practitioner businesses where

the business is essentially inseparable
from the work or vision of the founder.

That's why I use the umbrella
term "and other people with weird

jobs" to describe who I work with.

It's more about self-determination than it
is about a specific job title or industry.

Here are two characteristics that nearly
all of those people have in common.

First, they didn't choose to do what they
do because it's an easy way to make money.

Doing your own thing is
almost never the easy option.

And second, they're not aiming for
some magical future when they have

enough money that they don't need
to do that kind of work anymore.

If you love what you do so much that
you build your entire life around

it, then being so successful that
you can stop is not really the point.

The point is to keep going
as long as you possibly can.

Which is the long way of saying that
some of my clients bristle when I throw

around the term retirement or talk
about investing in retirement accounts.

If a conventional retirement is
not your goal, then telling someone

to save for retirement or open a
self-employed retirement account

might sound kind of silly, right?

It might sound like you're saving
for a life you don't really want.

So let's leave the term "retirement"
aside for a minute and just say that it

would be nice if the financial pressures
of your work got easier over time.

I think that most people, regardless
of mission or career or life's work

can appreciate that eventually being
able to make work a choice and not

an obligation would be a good thing.

So if you're a writer or an artist or
a small business owner and you want to

keep doing the thing you love forever
more power to you, that's awesome.

But just imagine how much better
life would feel if the pressure to

make money was reduced or removed.

You could still keep doing
the work you love, but just

with less financial pressure.

That sounds like a pretty
good future, right?

So whether we call it retirement,
financial independence, or just making

life a little easier, can we agree that
the freedom to choose when to work or

not represents a pretty good life goal?

It hearkens back to that definition of
wealth that I lifted from Morgan Housel

in the last solo episode: the ability
to do what you want, when you want, with

whom you want, and as often as you want.

That sounds pretty great to me.

But if you're a creative professional or
self-employed in any way, it's kind of

hard to know what you would need to make
that kind of life a reality when you can't

say with any certainty how much money
you'll make this year or even this month.

So how do we get a handle on this?

What amount of savings and investments
is air quotes enough to reduce

the obligation to earn money?

Or to fully retire or transition
into a second act, or take

only the work that excites you?

How do we put a number on that?

Well, it turns out the calculation
is easier than you might think.

A guy named William Bengen, who is also
a Certified Financial Planner™, wrote

a paper in 1994 using historical data
from investment markets and inflation

to determine how much a retiree could
withdraw annually without running out

of money over a 30 year retirement.

As a starting point, Bengen assumes
that a typical retiree portfolio has

50% stocks and 50% bonds, and that
withdrawals over time should be adjusted

for inflation to maintain quality of life.

And his conclusions suggested
that 4% was a safe drawdown rate.

In other words, a person should be
able to take 4% out of a typical

retiree investment portfolio each year,
adjusting for inflation, and not run

out of money over a 30 year period.

This has become known as the 4% rule,
and it's good for some back of the

napkin math to figure out how much
money you need to make work optional.

We'll get to that in just a second.

More recently, Bengen has
revised that number up to 4.5%.

However, the math is a heck of
a lot easier with 4% than 4.5,

and a bit more conservative as well.

Taking out slightly less than the maximum
safe withdrawal rate should allow your

money to last longer, meaning both a
longer retirement and a more secure one.

In any case, I wanna make this point
again: it's totally 100% fine if

you don't actually want to retire.

So when you hear me say words like retire
or retiree or retirement account, what I

want you to imagine is that your life just
gets easier and your options get better.

That's all I want for you to make
smart financial decisions that will

give you more and better options.

Okay, back to the so-called 4% rule.

There's another rule that
goes hand in hand with the 4%

rule called the 25 times rule.

You might also see this as the 25 x rule.

And in fact, they are mathematically
equivalent if you're the kind

of person who shuts down.

When you hear the word math, I promise you
that the concepts I'm about to share are

easy to understand and that understanding
the concepts is the whole point.

Being a human calculator does not
make you better at managing money, but

understanding important ideas does.

So don't get too hung up on the numbers
and just try to take in the big picture.

Here's the 25 times rule: you can start
thinking about making work optional

when your investments reach 25 times
the amount you need to spend each

year to maintain your quality of life.

Here's how it works: bengen's research
says that you can safely take out

4% from your retiree investment
portfolio each year for at least 30

years without running out of money.

So if that 4% is enough for you to live
on, then you will have enough money

in your nest egg to potentially live
off of it for the rest of your life.

And when we multiply
4% by 25, we get 100%.

In other words, if we take the amount
of money you need to spend and multiply

it by 25, we will come up with the
total amount that you would need in your

investment accounts such that a 4% annual
withdrawal can cover your expenses.

Does that make sense?

If we assume that what you spend each
year equals 4% of the total amount

you need to make work optional, then
multiplying what you spend by 25

gives us 100% of your target nest egg.

So I already mentioned that a lot
of people I work with don't know how

much they're gonna make this year
or next year, or really any year.

But almost anyone can figure out how
much they need to spend each month

within plus or minus a few hundred bucks.

Your housing costs will be more
or less the same each month.

Utilities will flex with the
seasons, but it's not that hard

to come up with an average.

And I bet you can figure out
more or less how much you

spend on groceries each month.

And then we have all the subscriptions
like streaming audio and video,

and the recurring expenses like
insurance payments, et cetera.

And those are really easy to anticipate.

All in, I bet you could come up
with a very realistic average of

what you need to spend each month in
about five hours or less per year.

So if you wanna calculate your target
nest egg, you take that monthly amount,

multiply it by 12 to figure out how
much you need to spend in a year, then

multiply that by 25 to figure out how
much you need to have in your investment

accounts to make work optional.

It's pretty simple, right?

Now a clever listener will have
already noticed a couple of things.

First, I keep saying the amount you quote
need to spend which is not always the

same as the amount you actually spend.

And second, since the math involved is
all just arithmetic, when your need to

spend number goes up or down, it directly
translates to that target nest egg number.

So if you add a thousand dollars each
year to your expenses, that means you'll

need an extra $25,000 in your nest egg.

Similarly, if you reduce the amount
you need to spend by a thousand

dollars each year, you will reduce
your nest egg target by $25,000.

When it comes to how much you need
to spend to maintain your quality

of life, that is totally up to you.

Only you, and absolutely no one else,
including me, can decide what kind of life

you want and why that life is important.

If that life costs more
money, that is totally fine.

As long as you're saving enough
of your money to buy yourself more

and better options in the future.

I truly don't care how you spend the rest.

The only thing I would ask you to consider
when going through your expenses is

whether your spending improves your life
and brings genuine fulfillment, or whether

it just scratches a consumerist itch.

One kind of spending is awesome
and you won't regret it, and

the other kind is a black hole.

Now, if your cost of living means that
you are not able to save and invest

enough for that brighter future, then
there is kind of a problem because

now the choice you're making is to
prioritize present day quality of life

at the expense of your future self
not having more and better options.

In practice, people tend to want both: a
nice life now and an easier life later.

So while I want you to live your
best life, I also want you to balance

that with saving and investing for an
easier life with better options later.

Okay, now we get to the part where
you say, fine, Tim, I can figure out

my 25 times number based on how much
I spend, but how do I get there?

My answer to that is a mantra that I've
shared in previous episodes: spend a

little less than you want to save, a
little more than you have been, pay down

debt a little faster than you need to,
and invest for the rest of your life.

If you can consistently do those things,
even in small amounts, then over time the

magic of compounding will help you turn
those small actions into big results.

Let me give you an example,
and I promise this is the last

math that I'll share today.

So right now, you make whatever
you make and that income

supports your quality of life.

It doesn't matter what the number
is, it doesn't matter if it goes

up and down; that's the money
that you use to support yourself.

Based on everything we've talked
about so far, it follows that if

you had 25 times your current annual
income saved up in your investment

accounts, then you would have enough
to potentially live off of that money.

Right?

Remember that 4% multiplied
by 25 equals 100%.

So if your investments equaled
25 times the amount that you

make, then taking out 4% would be
equivalent to your current income.

Is everyone with me so far?

Now, let's say that you invest 10% of your
income each year in a low cost index fund

that returns an average of 10% each year.

It's nothing crazy so far, right?

We're saving 10% of your income,
we're putting it in a super

simple, low cost index fund.

With those assumptions, if you are
starting from scratch today, you will

have saved enough money to reach that
nest egg target in about 35 years.

Now, 35 years is a long time, no
doubt about it, but I want you to

consider a few things First, it's
possible even if it takes a long time.

Secondly, if you're not starting from
scratch and already have some investments,

even if it's not a ton of money,
that will help you get there faster.

Third, saving more than 10% of your income
will also help you get there faster.

And fourth, you don't have to replace all
of your income with investment income in

order to reduce the obligation to work.

What if three quarters of
your income could be covered

from investments or even half?

Wouldn't that still feel a lot
better and give you more options?

In other words, you don't have to
have everything perfect in order to

build a better life for yourself.

Okay, that's all for today.

If you take anything away from today's
episode, I want you to remember that

saving and investing now is equivalent
to buying yourself more and better

options in the future, regardless
of whether you want to retire or

keep doing what you do forever.

And if you take away a second point,
it's that how much you spend and save

now is directly correlated to how
big your target nest egg needs to be

to make work optional in the future.

So what do you think?

Does that all make sense?

If you have any questions about your
own saving and investing habits,

feel free to shoot me an email
at podcast@Iselerfinancial.com,

or you can submit a question to
be answered in a future episode

at Iselerfinancial.com/podcast.

Next week I'll be talking
with Benjamin Percy.

Ben has written all kinds of things,
including novels, comic books,

scripts for television, movies, and
podcasts, and he has a really cool

new project coming out in November
that involves a physical newspaper

subscription delivered to your door
from a fictional post-apocalyptic world.

I'm genuinely really looking
forward to checking that out.

And now it's time for everyone's
favorite part of the show.

It's disclosure time.

The Thing We Never Talk
About is for educational and

entertainment purposes only.

It's not legal, investment or tax advice.

People on the show, including myself,
may have interests for or against

any investments discussed, so do
yourself a favor and don't ever make

any investment decisions based on
what you hear on this or any podcast.

If you like what you hear, please
like and subscribe to this show

wherever you get your podcasts.

If you have a money or finance question
you'd like answered in a future episode,

please visit Iselerfinancial.com/podcast.

And again, you can get my insights
on money and more delivered directly

to your inbox by subscribing to
my Keep It Easy newsletter at

Iselerfinancial.com/newsletter.

Thank you so much.

I appreciate you.