The description of my blog is generally listed as “a financial independence blog for military families,” so I thought I would take some time to clarify what financial independence means to me.
In some cases, people mean financial independence to mean to not depend on anyone, like parents or friends, for financial aspects of their lives. Many may consider themselves financially independent when they move out of their home and pay rent and all their own utilities. This is a logical definition, but it is not the way I think of financial independence.
Financial independence is the financial freedom to make choices that suit your life the best. Effectively, financial independence is having enough in resources for yourself that you don’t rely on others (family, friends, paycheck, or otherwise) to get by. Financial independence buys you options.
In terms of our life and our journey, this comes when Eric will have completed 20 years of military service. At this point, we aim to have enough that if we choose to retire, we can. We might not. I always imagine I would have a career I would love, and I would probably stay, but I don’t want to be forced to. Eric will most certainly take a few years off, but will probably find a project or a job he loves. The key is that all of these are choices we can make based on not being tied to a paycheck.
How does one obtain financial freedom like that? Our path includes utilizing the military pension and benefits available to Eric. We live on less than we earn, and we save as much as we can.
In all retirement goals, the goal should be to accumulate an amount of 25x your annual spending. Of course, with the magic of compounding, a traditional retirement is moderately easy to save for. If you were to make $40,000 per year and save 12% of it ($4800/year, which could come from you or an employer match), with an annual return of 7% for 40 years, you would have $1,049,000 at retirement, enough to withdraw $41,960 annually. You might look at that math and say, “Well, what about inflation!” The average annual return of the S&P 500 is 10%; adjusted for inflation, it is 7%. (Source) This means that the numbers listed above are representative of an inflation-adjusted return.
Why 25 times your annual expenses? This would account for withdrawing 4% of the balance during the first year of retirement, and adjusting by the Consumer Price Index each year. A well known paper referred to as the Trinity Study hypothesizes that a 4% withdrawal rate could be sustainable for 30 years without running out of money in most scenarios, the exceptions being retiring during severe downturns. I’ve simplified this quite a bit, and I am glad to go into it further if you’re interested, but for the sake of those just getting started, this is a good overview.
Now when the timeline of saving is shorter, you don’t get nearly as much help from compounding. With the above example, the ending balance is very attributable to compounded earnings. $4800/year for 40 years is a total of $192,000 in contributions. This means over $800,000 can be attributed to compound earnings.
What happens if we double the savings per year, but cut the timeline to 20 years? With an annual contribution of $9600/year for 20 years at 7%, you would have… ~$416,000. What does this mean for those who want to retire early? Early savings are very important, and a lot of your total savings balance is going to come from your work, not the compounded earnings.
A reason financial independence is attainable to us is due to the military pension available to Eric. The current pension system is changing next year, and we are planning our futures based on the current system in place, but I plan to go into detail in the future on the pros and cons of the new system for those who can opt into it (or have no choice).
When accounting for the military pension, I usually do the reverse of the 4% rule. Retiring as E7 with over 20 years of service provides a monthly income of $2280, or $27,360 annually multiplied by 25 is the equivalent of about $684,000 saved. If you live on $40,000 per year, you would need to save $316,000, or about 21% of your base pay through all of your pay raises in the military.* When considering the other benefits available to military retirees, such as healthcare and commissary access, military retirement provides a unique solution for many who are aiming for early retirement or financial independence.
What does this give you? An annual income of $40,000, inflation adjusted, which can buy you a lot of freedom. If you were retired military and wanted to continue working, you would have the options to take a lesser paying job (you could stop saving and don’t withdraw, and your principal could continue to grow); you could turn down offers that don’t meet your needs; you could take off five years to pursue your passions. There are a lot of freedoms that come from being financially independent.
I target $40,000 as an income goal for financial independence because it is reasonably attainable and can still provide a good standard of living in many areas. Of course, your needs can be different if you live in a higher cost of living area or have other expenses. An important note to remember when saving for financial independence is that every dollar you cut out of your budget indefinitely is less you have to replace as income in the future. Our personal goal is to replace nearly $62,000 in income each year, which requires nearly $860,000 saved beyond the military pension available to Eric. Our personal plan also accounts for a withdrawal rate of 3.5% for an increased chance of long-term success (reducing the risk of running out of money), which would set our total invested savings goal at $978,000. If we reduced our spending to $58,400 (cutting just $300/month), it reduces our savings goal to $886,000. By spending just $300 less monthly, our savings goal drops nearly $100,000, which is an illustration into how reducing your spending can improve your timeline.
Of course, this is a lot of numbers and a lot to take in all at once. It’s hard to keep something as vast and mathematical as financial independence planning to one blog post, but I wanted to give a big overview to those who may not have considered it as an option for them. There is a lot more to say on the topic, and I plan to cover it in many more posts. If you have any personal or specific questions, please contact me! I would love to chat with you about any of it, but I must disclose that I am not a financial advisor, I will not recommend investments, and past performance in the market does not promise future returns.
*When I previously mentioned saving 21% of your income through your entire military career, I used income E1-E8 at the average DOD timeline for promotions of enlisted members across all branches. Some servicemembers will not get promoted within that timeline, and some will not reach the highest rank, so your savings goals may need to be adjusted. I also did not include any special or incentive pays, such as Sea Pay, Hazardous Duty Pay, or any allowances such as Cost of Living or BAH. I strongly encourage you to save any special or incentive pays, as they are intermittent throughout your career, and many members struggle when changing duty stations and losing any special pays. This would provide a steadier income and allow you to budget accordingly, and also vastly increase your savings rate.
