The FL-Approved 3.5% Rule!

A big ‘ole FL right-handed tattoo across the face of the 4% Rule is where we left off. Yeah, it was a nasty slap, and it left the 4% Rule slightly mangled.

But it tore away the risky side of the rule. To meet our high standards here at FL, the 4% Rule really needs to be the FL-Modified 3.5% Rule.

The post also left us smarter and doughier than ever. But now we want to put our newfound smarts into action.

Just what do we do with this 3.5%, you ask. Let me show you, I reply.

Use the FL-Modified 3.5% Rule to retire in serene style.
Use the FL-Modified 3.5% Rule to retire in serene style.

The Sheer Mechanics Are Mind-Boggling

First we take the reciprocal of 3.5%. That turns out to be 28.5.

Then we multiply 28.5 by our annual post-retirement spend rate. That gives us our magic number.

Multiplication is the easy part. It’s getting the right value for your post-retirement spending that can be trickier.

So before you stroke your abacus, read on: If you’re smart about engineering your post-retirement life, you can exit the workforce much earlier than you thought.

Pre-Retirement Versus Post-Retirement Spending

The retired life should entail some big changes in spending patterns, principally in outsourcing (i.e., we should be “insourcing” a lot more and consuming a lot less).

Translation: You might need less money to retire early than your current spending implies.

There are a handful of line-items that are such big tickets they can’t be ignored when building your budget. These things move the needle.

Daycare for Chucky

Outsourced childcare represents a big chunk of change that working parents shell out. But that spend goes sayonara along with mandatory work.

The National Association of Child Care Resource & Referral Agencies (NACCRRA), which specializes in childcare information and having an amazingly long acronym, estimates average U.S. center-based daycare costs to be nearly $12,000 per year.

Just let that number sink in. $12,000 per year. (!!!!)

In case you’re not sufficiently chafed just thinking about $12k in accounts payable, consider this. Twelve thousand dolares is the annual income on an asset worth $400,000 yielding 3%.

Wouldn’t you be ecstatic if you had $400k spinning off 3x the risk-free interest rate right now? That’s precisely how bummed you should be about this spending number.

Or think of the $12k invested annually into the sweet embrace of low-cost broad-based ETF index funds for five years. The geometric average total return on U.S. stocks over the period 2006 through 2015 was 7.25%.

Plugging $12,000 into the market at the beginning of each year for five years, we end up with over $74,000 – or pure gains of $14,000. I sure hope little Atticus and Sophia enjoy playing with their multi-colored petri blocks.

Removing childcare expenses is a nuclear-warhead-level adjustment to your spending. And it gives your kid something that can’t be valued: More time with ma and pa.


Post-retirement life means you can kiss your life-sucking commute adios. Without a daily double commute, your luxury chariot can depreciate quietly in its bedroom just off the driveway. And maybe you can finally get around to trading in your ride for a beautiful, used ATM on wheels.

That translates into less gas, lower auto insurance costs, and a general decrease in stress.

All told, that change can be worth anywhere from $2,000 to $20,000 annually.

Where You Be (At)

There’s increased flexibility in living accommodations and geography. You don’t have to live where your work requires anymore.

You can live anywhere. Say it again: Anywhere.

Geography has a Texas-sized impact on your Freedom Figure.

Smart choices dramatically reduce how much moolah you need to maintain, or even improve upon, your pre-retirement lifestyle.

Congested, polluted, crime-ridden cities like L.A., one of my former places of decline, boasts a cost of living 33% higher than my current vacation resort hometown in the Western U.S. Better life quality at a discount that would make Wal-Mart queasy: Check and check.

Figure the annual value of that change at around $10,000 a year for this Libre Family.

Don’t Get Soaked

Temptations lurk like so many Gremlins at a pool party. When faced with the freedom of no more days at the office, it’s tempting to splurge on trinkets to make home life more sparkly and other monkey-brained acquisitions.

To really be a brawny and sweaty Financia Luchador, to these extravagances you just have to say “hellnaw.”

We want to get that annual spend as low as possible without forgiving any life goodness. And, actually, spending less is a great way to improve happiness, health and overall life satisfaction. Win-wins are what we’re all about here at FL.

A Mortgage Adjustment

Not all cash outflows should be included in your annual expenditure estimates. Some cash outflows, which at first glance seem to be pure expenditures, end up really being balance sheet transfers between asset categories – and you keep that value in your portfolio.

The big ticket item here is your mortgage payments. Your mortgage bill is comprised of principal repayment and interest. Interest is a true expense; principal repayment isn’t. Look to your mortgage statements to get your current breakdown to budget properly.

Cash is king, though. So, even if we’re just transferring numbers on the balance sheet, we’re still using cash to pay principal.

There’s no good in having amazing assets if you’re desperate for cash and have to sell stocks at an inopportune time to cover liquidity needs. Plan accordingly for this when considering your housing costs in retirement.

Health Insurance

When you’re working, one of the key perks is health insurance coverage paid by your employer. Not so much when you’re on your own and retired in your 30s.

In the ACA era, you pretty much have no choice but to buy coverage as an individual.

And, come on, there’s nothing more important than health. You need coverage or else your whole financial house could come crashing down over a relatively minor health issue.

Budgeting for health insurance is not a line item to be overlooked when planning to cut the paycheck cord. Shop around, think hard about what coverage you really need, and understand the ACA-era relationship between your income and your premium cost:

Health insurance premiums are subsidized for those with low income. This fact can be used as part of a financial strategy for early retirees.

Depending on the size of, and demands you intend to place on, your doughy nut, you may want to organize your portfolio to keep your annual investment income low by limiting dividend-focused investments and interest-yielding holdings so as to obtain a high subsidy for health insurance. (Or, alternatively, by housing those sorts of holdings in tax-deferred accounts like IRAs.)

Anticipate Unanticipated Items

Big expenses occurring in one of the first years of retirement is a major cause of derailed retirement plans.

If you’re in your first year post-paycheck and you have a major unanticipated healthcare cost, housing repair bill, etc., your finances can get hit harder than a lanky wide receiver on a crossing route.

Try the following. When constructing your annual post-retirement financial needs, add an extra 10% or $5,000 (whichever is greater) buffer to the estimate. This ensures something unexpected isn’t going to knock your portfolio out of the playoffs.

The reason the higher of 10%/$5,000 ought to be used is because, as your annual rate of spending increases, the costs of misfortune rise. A Honda is cheaper to repair than a Maserati. Roof replacement on a 1,000-sf bungalow costs a fraction of that for a 4,000-sf compound.

You’ve now grabbed your abacus and are click-clacking away. I’ll save you the trouble. An extra $5,000 annual buffer means you’ll need an additional $142,500 in your portfolio in order to retire without risk of running dry of funds.

Before dismissing this as undue caution, consider the value of peace of mind.

We want an overall good, relaxed and happy lifestyle here at FL. What good is barging out of the workplace doors only to sweat each penny you spend for fear of the unknown?

Remember: We own money; not the other way around.

The extra buffer means that, in a worst case scenario, you’d have an additional $142,500 on-hand to use in an emergency. Most emergencies could easily be met by this kind of account.

On the other hand, without such a buffer, even a modest unexpected financial hit could cause you to have to make dramatic lifestyle reductions to remain solvent over the long term.

So, Um, Does This Look Right to You?

You’ve tallied up your anticipated spend, made the necessary adjustments, plugged in a safety buffer and multiplied the figure by 28.5. Your Freedom Figure awaits.

So, if our annual cash out is $35,000, then we need just a tick under a million bucks. If we spend $50k each year, our magic number climbs to a $1.425 million. If we spend only $20,000 per year, then we require a measly $570,000.

Holy sensitive, Batman. Our magic number is super-responsive to our spending patterns!

Yes, indeed. If we want to retire earlier, the very fastest way to move ourselves closer to our magic number is to cut our spending. Maybe trade that Batmobile in for a hatchback, Bruce.

Before swearing you can live on $8k a year and telling your boss to shove it, consider one of the most serious and real criticisms of the 4% Rule and its ilk (including our FL-styled 3.5% Rule). That is, retirees are rarely as disciplined in budgetary practice as they believe they will be beforehand.

They often spend outsize portions of their portfolios in the first couple of years after retirement – excited to be free, I guess – which is pretty much the worst possible thing someone can do for the health of their portfolio.

So be very, very realistic with yourself about what you will need to spend once you’ve stopped mandatory work.

Evaluate your lifestyle critically.

Determine what really makes you happy and fulfilled; jettison the rest.

Sometimes the simple act of simplification itself can vastly enhance life quality.

There are lots of killer strategies a veteran Financia Luchador has at the disposal to keep expenditures lean, and there are plenty of ways to make ourselves and our lives better while those strategies are deployed.

In the event those strategies are followed, there’s no reason your post-retirement annual needs should be much above $45,000.

I base that figure on my own experience – for a family of 3, accustomed to a very high standard of living, with a large and ravenous dog, all in a gorgeous (and not especially inexpensive) vacation destination in the Western U.S.

Our core living expenses average around $35,000 per year, or under $3,000 a month. Could we spend more? Sure – these numbers aren’t the result of any particular effort; it’s just the way we’ve always lived, which is very comfortably, even luxuriously. Would it make us any better off to spend lots more? Hard to see how.

So, as you turn to your own spendsheet, if you calculate anything above $50,000, implying a nut size of over $1.4 million, you should revisit your abacus. You don’t really need that much. You’re falling victim to consumer junkie smack and you’re diluting your own life awesomeness.

Although it can be done, anything much less than $25,000 (for a nut size of around $712,500) might mean you haven’t completely covered your financial needs with your calculation. Click-clack some more just to make sure.

Luchadores, drop a comment on what your Freedom Figure is: How big a nut do you need to drop mandatory work for life? What’s your post-retirement spend rate?


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