I have some news to share. I’ve reached FI – I’m Financially Independent!
The crossover point, when my passive income from investments (stocks and real estate) equaled my expenses, was when I officially became financially independent. My crossover point occurred on July 5, 2021.
I know, I know, late to my own celebration.
My 2021 Annual Expenses
To understand how I reached FI, we need to understand my annual expenses. To track my expenses, although I’ve never been a budget kinda guy, I use Mint. My annual expenses this past year are categorized below. (I fully recognize I have not captured every single expense of mine this past year).
However, a few things first. I own my principal home outright as my mortgage is paid off completely. That’s why you see a zero in that column. I also don’t own a car or pay for television cable or Netflix. It’s not because I cut back to the bone to reach FI, rather I just don’t value a car or television or would make enough use out of them to make it worth the expense.
Lastly, I do recognize that 2021 as another unfortunate COVID-19 year, was a tad different from other years: Less travel, less Uber rides, and for me, more coffee and more booze (#NewYearNewMe – cutting back on takeout coffees and alcohol in 2022).
At the same time, if I was retired, some of my expenses would probably be lower, such as my cell phone bill and home internet which I would downgrade as I wouldn’t be home as much nor working from home, my newspapers and magazine subscriptions would be cancelled due to additional travel, and I’d have more time to cook meals at home.
2021 Expenses | Total |
Principal Residence | |
Mortgage/Rent: $0 Condo Fees: $7,615.85 Electricity: $399.10 Property Insurance: $633.92 Property Taxes: $2,743.45 | $11,392.32 |
Living | |
Cell Phone: $462.03 TV/Netflix: $0 Music: $100 Home Internet: $780.36 Newspapers/Magazine: $1,074.99 Art/Museum: $102 Personal Care: 650 | $3,169.38 |
Transportation | |
Car: $0 Public Transportation: $73.97 Rideshare: $275 | $348.97 |
Food | |
Groceries $4,000 Takeaway $625 Restaurants $4,217.02 Coffee: $600 Booze: $434.40 | $9,876.42 |
Gifts | $1,500 |
Travel | $3,900 |
TOTAL | $30,187.09 |
Calculating my FI Number
To calculate my FI number, I simply multiply my annual expenses by 25. This is a rule of thumb to determine your FI number. That’s how much you need to have invested to retire.
Calculating my FI number looks like this:
- $30,000 x 25 = $750,000.
- $40,000 X 25 = 1,000,000
- $50,000 X 25 = 1,250,000
- $60,000 X 25 = 1,500,000
- $70,000 X 25 = $1,750,000
- $75,000 X 25 – $1,875,000
So if my annual expenses are $30,000, I need $750,000 of invested assets to be FI and retire. My 2021 annual expenses were about $30K. My invested assets (stocks, bonds, ETFs, etc., but not including principal or investment real estate) exceed $750,000.
Recognizing that my 2021 annual expenses may be different from my projected annual expenses in retirement, say if I want to travel more in early retirement or want to build in safeguards for when a tenant doesn’t pay a month’s rent on an investment property that still has a mortgage on it, I included FI numbers for $40K and $50K and even double my 2021 annual expenses at $60K. Even after doubling my annual expenses, I still surpass the the FI number noted above.
The 4% Rule
The 4% rule is a common rule of thumb in retirement planning used to avoid running out of money. In short, you can withdraw 4% of your savings in your first year of retirement and adjust that amount for inflation for every year thereafter without risking running out of money (for at least 30 years according to the Trinity study from which the 4% rule is derived) based on historical market returns.
So using the math above, if you have $750,000 in assets saved for retirement, you can spend 4% of it each year or $30,000 ($30,000 / 0.40 = $750,000) adjusted for inflation going forward.
Others have posted more than you’ll ever care to read about the 4% retirement rule. If you’re interested in reading more on the 4% rule, I recommend checking out the following links to blog posts on the subject: Mr. Money Mustache and My Own Advisor.
What about Sequence of Return Risk?
My goal in early retirement is to live off of my dividends for at least the first 5 years or so in order to avoid sequence of return risk. Sequence of return risk is the risk that in early retirement, the stock market declines at the same time that you’re selling stocks at a low(er) price for cash to fund your lifestyle. This would result in lower principal left to live off going forward and a lower principal or base from which gains can compound off of once the stock market increases again (or bounces back) after a bear market.
My 2021 annual dividend income was almost $50,000 ($48,844.87 to be exact). Of that total, about $30,000 was dividend income from my taxable and TFSA investment accounts which are more readily accessible in early retirement in the sense that there is no penalty per see for early withdrawal unlike an RRSP for which you pay a tax (You pay tax on dividend income from a taxable account by its very nature so I don’t view it as a penalty per se).
Based on my 2021 annual expenses, it’s possible to live off dividends and if the going gets tough financially, to sell a portion of equities at significantly lower than a 4% withdrawal rate to fund early retirement. However, as I outline below, in “retirement” at least for the first few years, I will probably have some work income coming in, in addition to real estate investment income. Others like Tawcan talk about early RRSP withdrawals and collapsing one’s RRSP before turning 71 years old.
Ok. What Next?
Lately, I’m thinking a lot about “designing” my future life. My why for FI is more freedom. The freedom to choose to work and how I work.
This year I’m working on getting out from under the 9-5 corporate grind that is all too often a lot more hours than that, and being my own boss. This will enable me to work less if I choose by taking on fewer clients, in addition to having the freedom to work from anywhere in the world.
This way I could continue to work even part-time or less than that and supplement my income from dividends to further de-risk any sequence of return risk and to avoid having to spend any principal if the need should arise. It would also enable me to spend more of winter down south and not be beholden to the standard 2-4 weeks vacation most of us enjoy each year. You can read more about my 2022 goals here.
Ultimately, I know it’s my money or my life. I have to decide (and probably this year or shortly thereafter at the very least) if the tradeoff of my finite amount of time on planet earth in exchange for more money is worth it. How much is enough?
Money Is Something You Trade Your Life Energy For. You Sell Your Time For Money. It Doesn’t Matter That Ned Over There Sells His Time For A Hundred Dollars And You Sell Yours For Twenty Dollars An Hour. Ned’s Money Is Irrelevant To You. The Only Real Asset You Have Is Your Time. The Hours Of Your Life.”
Vicki Robin, Your Money or Your Life
For now, I’m inspired (and I think you’ll find inspiration to) in the Mindful Explorer:
I am captivated by thoughts of the future, the dreams of adventure and life less structured. I enjoy being that 40 something year old chasing adventure and hanging out with 20 year olds in the mountains. I want to feel as young as I do in my mind.
Live your life mindfully in each moment. Enjoy the happiness that comes from simplicity. Avoid the pursuit of the infinite loop that an unhealthy desire for money can bring.
The Mindful Explorer
Really inspiring details you’re sharing in this post. Like you, money for me is entirely about freedom. Couldn’t care less to show it off or make others recognize it… I just want to live on my own terms.
Congrats on reaching your crossover point, and definitely looking forward to continue following what comes next.
Take care,
Ryan from Get Rich Brothers
Thank you. Happy you found it inspiring as I’ve found so much inspiration too in this FIRE community in Canada and abroad.
Congrats 🎉 Dividend Daddy! Thanks for the all the details, well resumed. 👏 You are an example for many DIY investors in Canada! So happy for you man! 😃👍
Thank you so much for your encouragement.
Congratulations. I became FI last year. I am still working part-time. I have a one-year emergency fund to deal with the sequence of return risks.
Welcome to the club. 🙂
Thank you and congrats to you as well. Are you living off dividends with part-time work or simply earning enough part-time to meet needs?
Budgeting and expenses, are so important! Great post!
Thanks Richard. Glad you enjoyed the post.
WoW! Great write up and congratulations on achieving FI. Love your expense detail and how even though you cut back to hit your number you left room for travel. Excited for you and and your freedom to choose your own adventure and what you do with your time (whether you RE or not). We hope to see you out there 🙂 ⛰️