The road to financial independence isn’t a straight line. It’s not a curved line hockey-sticking up either. In reality, the path to financial independence has up years and down years and won’t look anything like what CF Fire Sim or FIRECalc say.
What is in your control are the basics:
- How much you earn
- How much of that you spend
- How much of that you save
Mapping your savings rate over time is a great way to see if you’re experiencing lifestyle inflation, but it’s still only telling part of the story. One thing that matters just about as much is how much you’ve saved up!
I recommend/propose a new way of measuring your progress to FIRE – The FIRE Matrix. Using only two things – savings rate and savings multiple – it shows a unique path to FIRE that’s specific to you.
You probably already know what “savings rate” means. It’s the percent of your take-home income that you put into savings in a given year. For example, if you earn $40,000 a year after taxes and save $10,000, then you’re saving $10,000/$40,000 = 25% of your income. You can’t save more than 100% of your income.
You can also have a negative savings rate – it’s typically called a withdrawal rate. For the purpose of this chart, I’m going to describe a “negative savings rate” slightly different:
Pick a withdrawal rate that works for you – maybe 3.5%. Assuming you have $1,000,000 saved up, that means you could spend $35,000 a year. If you withdrawal and spend $35,000 a year, that’s a -100% savings rate for this chart.
If you spent $70,000, and your 3.5% WR says you can only spend $35,000, that’d be a -200% savings rate.
In a “traditional retirement” where you have enough to coast forever, your savings rate will likely be between -50% and -100% depending on how close you’re cutting it.
If you’re making income, but not enough to cover your expenses, you’ll have a negative savings rate too. It’ll still be a higher savings rate than if you didn’t make that income.
Describing savings multiple is a lot easier. For the given year, that’s the multiple of that years’ spending that you have currently in savings + investments.
If you spent $40,000 in a given year and have $0 saved up, that’s a savings multiple of 0.
If you spent $40,000 in a given year and have $80,000 saved up, that’s a savings multiple of 2x.
What’s key here is that it’s based on your spending AND how much you had saved up during that year.
If you reached the point where you had 25x saving multiple, that would mean you’ve reached traditional FI using the 4% rule! That assumes your spending for that year wasn’t an anomaly and won’t rise more than inflation going forward.
Bring Out The Graphs!
Ok, that was a lot. I think it’s easier to show this on a graph. The X-axis is your savings multiple, while the Y-axis is for your savings rate in that given year.
In reality, your matrix may go much farther to the left if you have a bunch of student loans or other debt to pay off.
Going from left to right it looks like there’s a LOT of ground to cover. Going from that 0x savings multiple to a 1x is absolutely huge. It’s an amazing step that gives you as much in savings as you spend in a year.
The idea of “traditional retirement” usually looks something like this: you’ve saved up a bunch, say 33x your spending. You spend 1/33 of that each year without making a cent of income. In other words, in a “traditional retirement” model, you’ll be down here at that point.
From everyone I’ve talked to, this is pretty far off from what happens. Sometimes you’ll earn a little income and this will be only -50%. Some years you’ll move and have additional expenses resulting in a savings rate lower even lower than -100%.
Saving For Retirement
Ok, let’s look at this with some real data. In this case, we’re going to look at 3 different people. Each of them are starting out little project making $40,000 a year. They increase their spending by 2% each year – roughly keeping pace with inflation. They also get a 5% raise each year and save ALL of it. They save what they don’t spend.
The only thing that’s different is their starting spending.
Ok, so in other words here are the assumptions:
- Starting salary of $40,000/yr.
- 5% raise each year which is saved.
- 2% rise in spending each year (inflation).
- 7% market returns on their savings
- Different savings rates to start – 0%, 25% and 50%.
If we map these out we can start to see the makings of a path to FI!
Starting with a 50% savings rate and savings raises gets you to FI in only 14 years! Add another 7 years if your savings rate is 25% and an additional 8 if you start with no savings.
What amazes me about this graph is that someone who graduates from college at age 22 with $0 in the bank could potentially be FI by 36 by doing nothing other than throwing money into index funds and letting it grow.
It’s not that easy of course. Most people don’t want to live like college students once they start making money. Once I had the ability to eat out when I wanted, buy a video game when it came out and go on vacations my spending ballooned! That’s to expected. It’s also why someone making $40,000 and saving half will have a much different lifestyle than someone making $100,000 and saving half – even if they both would reach FI at the same time.
In all cases, the shape of the path is the same – it climbs the most at the beginning then levels out you reach about 5x savings multiple. It takes a surprisingly small amount of time before your investments are making more money than you’re saving each year! In the 50% SR example, the growth of your investment surpasses your yearly contributions around year 15. It’s around year 25 if you start by saving 0%.
Again though, this assumes a steady market, known growth for your income and consistent inflation. In the real world, none of those things happen.
A Real FIRE Matrix
My route to FIRE wasn’t anything like the charts above – and I don’t expect your path will look anything like that either. There were years I saved much more than I expected and years when my savings multiple went down due to the stock market.
Some years I ended up spending way more than I thought! Buying a house, moving across the country, fixing up a house to sell or combining our total spending between my now wife and I. All of these raised my spending, and effectively lowered my “savings multiple”.
Another thing to point out here – I had the same amount of money saved up when I was 24 and 29. I was saving 20%-40% of my income, but it didn’t matter: that was during The Great Recession. I lost about half my portfolio and it took years for it to recover.
I didn’t get 5% raises each year. Some years I got much more, or job hopped, while other years I saw my salary go down (that’s another story). In my case, I made up for that with some very unexpected windfalls – 3 to be precise. One when my mom passed away, one when the startup I was working for was acquired, and another when the company that acquired us went public.
Without these 3 super-saving events, this chart would look a lot more like the ones farther above. If you only saw a savings rate of 95% it’d be hard to tell how huge that was. Seeing it in context with the distance between the points nearest to it puts the impact into perspective.
Looking To Retirement
Where will this chart go next? I have absolutely no idea. Last year we still had Mrs. Minafi’s income (and insurance) which helped soften the blow. This year and next – who knows. We may even end up with a savings rate BELOW -100% – which would be a huge red flag.
What this chart did make clear for me is that reaching a specific “savings multiple” by itself isn’t enough to say I’m comfortable sitting there long-term. Instead, I’d say there’s an area on this chart where I’d like to be long-term. Here’s what I mean by that.
If I am anywhere in the green area, I’ll call myself successfully FI. I call this area my “FIRE Goal” – the area of the chart that I’m aiming to live in for the rest of my life (once I get there).
It goes from a 25x savings multiple at a -50% savings rate to a 33x savings rate at a -100% savings rate.
For example, having a -50% savings rate and 25x savings multiple would mean spending $80,000 a year with $2,000,000 in savings, but having $40,000 of that spending come from new income.
At 33x savings, I’d need $2,666,666 saved up to take out that same $80,000 a year – but now without the need for any side income.
That bottom right area around 25x is still considered “FI”, but it’s not the kind of stable, never-need-to-think-or-worry FI. It’s lean FI, where you don’t have much wiggle room long-term. You can still leave your job then (as I did! oh yeah!) but you’ll need to tightly monitor your spending long-term and potentially change your spending in down years if you want this to last a lifetime.
It’s still a pretty amazing place to be (and it’s where I am today obviously), but it’s not a place with a solid and secure foundation.
What About You?
What’s your personal journey to FIRE look like? Does it include ups and downs, or is it more of a straight line? If you were to define your own
If you would like your own FIRE Matrix created I’ll do all the work of creating one for you! All you need to do is copy my template (the “Adam” sheet”) and fill it in with your own data and let me know with a link to your data. I’ll create a chart and add it here to this post with a link to your site (if you have one, or just a name if you don’t).
The only requirement is that you have at least 10 years of savings rate and savings multiple data. Any less than that and there won’t be enough data to make a proper graph.