Three Years Out: Are We on Track for FI?

Earlier this month, I turned thirty eight. We skipped all the birthday stuff this year, no cake or parties or singing, opting instead to have a quiet day with just the family, as Mrs. Done by Forty mercilessly beat me at Kingdom Builder and Viticulture.

Birthdays be damned: her victory would not be denied. I love this woman.

"But wait," some of you might be asking. "If you turned 38, aren't you just two years away from 40? What's up with that title?"

What's up is that I'm worried that I won't be financially independent by the start of my fortieth year, so I'm cheating and giving myself until the last day I'm still forty.

That's cool, right? 

Let's see what's cooking in The Mad Fientist's Laboratory, for the Done by Forty household's financial independence plan.

This is where we're trending, if we assume the typical 4% safe withdrawal rate:

4% SWR, Assuming 7.1% Annual Returns

Amazingly, the Mad Fientist's lab thinks we still would hit FI a couple months before my 40th birthday, under these assumptions. I still don't know how likely this is as it seems we are spending more than ever, at the expense of our savings rate. But I guess the market is doing the heavy lifting at this point.

But here's what I think is a more realistic projection: where we're trending if we use the 3.5% safe withdrawal rate that Big ERN has inspired us to use in early retirement.

3.5% SWR, Assuming 7.1% Annual Returns

Very conveniently, we would hit financial independence in the last month that I'm still forty years old.

Success?

I really don't know what to make of these two projections, both of which are way more optimistic about us hitting the big honking goal than I am. Just consider the fact that our annual spending over the past twelve months has ballooned north of $50,000! That's a huge jump for us, and one that ought to delay achieving financial independence quite a bit, right?

I want to be kind to ourselves over this additional spending, because we've had some unusual expenses in the past two years: hospital and doctor bills related to Baby AF, new house expenses, furniture, stuff like that.

But if the main driver of our higher spending is just the mortgage, then maybe $50k is more or less what we should project going forward.

Speaking of that mortgage, the rub with the projections above is that we probably won't be done paying off the mortgage by either of those FI dates above (June 2020 for a 4% SWR, or July 2021 at 3.5%). So, somehow, we might be technically financially independent even though we won't have finished a major part of our FI plan: being completely debt free. There are a couple ways I can interpret this:

• Maybe we are just very fortunate, in that we could be financially independent while still having a mortgage, and everything will just get much much better once it's paid off in another year or three.
• Or maybe we are playing with fire (yuck yuck) because we're already in year ten of this bull run, trying to thread the needle on an arbitrage play. Once we approach FI, perhaps we should use some of those paper gains to pay off the mortgage all at once, capital gains taxes be damned.

And how do we account for the fact that our expenses are almost assuredly going to go way down (by about $15,000 or so annually), once we're mortgage free again?

Should we account for those lower expenses someway in these projections? Yeah, probably. But the small 'c' conservative in me just wants to build a plan around spending $50k annually, while knowing once we pay off our last debt that we'll spend somewhere in the $35k-$40k range.

With all this uncertainty, maybe we need a financial independence coach.

What would you do in our situation, kind readers?

If this bull market keeps running, would you take the profits once you hit financial independence and pay down the mortgage all at once?

Regardless of the mortgage approach, would you plan for a lower spending amount, post-FI, by subtracting the amount of your mortgage from your projected spending?

Let me hear it in the comments and, as always, thanks for reading.

*Photo is from Tim Green at Flickr Creative Commons.