This article is the fourth in a series of seven that will discuss our approach to reaching financial independence, and determining key criteria for success. If you have not already read the third step covering replacement costs, please take a minute to visit that post. This article will discuss the reasons you should test-drive living on less income before retirement.
In Step 1, we outlined the many benefits of setting up a budget to take control of your financial life. In Step 2, we discussed why it is important to have a side hustle and create a passive income. In Step 3, we covered the need to plan for replacement and maintenance costs in the journey toward financial independence and retirement.
These steps are designed to help you see that if you do not manage your expenses and create income sources independent of work, you may be choosing a long and rough road to achieve financial independence.
You arrived at the finish line; is it time to quit?
The market, your job, and investments may have all worked out well for you. Over years of saving and investing while living frugally, you have grown your net worth and passive income stream. Frugality and planning has paid off and life is good!
In fact, it looks like your passive income could now cover all of your expenses, including any remaining debt payments. Is it time to quit because it appears you are “FI”?
What about taking a victory lap while you continue to work and stash your entire paycheck?
This test-driving concept suggests that you should build a safety buffer after you have reached the theoretical FI point. This is the strategy that “those fat cats on Wall Street” or your boss, for that matter, would like to keep secret. 🙂 Why stop work when you can continue to pad your E-Fund, savings, replacement and bucket list costs?
Consider these challenges with less income.
What happens if the finish line just moved out to the future? We all recognize that things do not always go as planned. According to your calculations, planning, and strategies, it looked like you had reached FI. But, do you know with absolute certainty that you have a stable foundation? Here are a few items to consider:
Is your passive income sustainable?
- If you are relying on stock dividends, are they consistent?
- How will your bonds fare with the expected interest rate increases? Do you have the yield you need?
- Are we heading into a bear market for stocks?
- Can you afford not selling any shares for many years?
- Business owners: is your business profitable and providing all the cash you need?
We have decades of experience working with rental real estate. In this business, there can be some good times and some very bad times. Sometimes the economy can have a huge impact on the performance of this business. There can also be a series of poor tenants and property managers. Properties can incur significant repair and maintenance costs.
For us, this year so far has been subpar for several of these reasons. Our passive income has dropped significantly this year, which has us scurrying back to our retirement spreadsheets. Had we stopped working when we reached FI, we would have been troubled by this latest trend with our rental real estate.
In our case, we have funneled all of one income straight into our debt snowball. In addition, our budgets for the past two years were based on a reduced passive income projection. We know that if we can plan to live on a reduced income, we can live through all the peaks and valleys that will certainly affect real estate and stock values in the years ahead.
Turbo-charge your debt snowball, savings, or investments
When you continue to work past your FI point, you are proving that it is possible to live on less than you earn. Should you have any remaining debt, this is an excellent time to focus on paying it off. The extra available income has the effect of turbo-charging a debt snowball. The debt snowball continues to gather strength, growing as each debt is paid. This allows the recently paid-off loan payment to be stacked on the next targeted debt, gaining more and more momentum. When one income stream is earmarked for the snowball, debts can disappear very rapidly.
There are those who are already debt free at this point in their financial journey. Congratulations! Now would be an excellent time to continue saving to build your passive income stream. If you invest in real estate, consider buying another property with cash. If stocks or bonds are your thing, take the time to research good picks and buy more. Consider peer-to-peer lending as another passive income option to feed the growing nest egg. The investment choices are limited only by your imagination.
You could have the enviable problem that your money is simply rolling in so fast you don’t know what to do with it. You could use the surplus to fund your future. Why not begin fully funding your replacement and bucket list items now? The idea of retiring early with enough money to experience all your dreams sounds quite exciting to me!
Strength in needing only one income source
There is a certain level of satisfaction and confidence in living on just one income source. You know that you have options: whether to continue working, or find other work that is more exciting. If you are at your breaking point with your employer, this could be a good time to stop working.
If you have felt stuck, this is a liberating point to begin your FI journey. You may see a shift in your attitude and motivation to retire early. The other aspects of your financial life may now start to fall into place.
The experience of living below your means is empowering. The budgeting process demonstrates that your finances are predictable. You know you can live on less money than your household brings in and that your expenses are covered.
Living a life with expenses that are reasonable for you helps lower the amount needed in the nest egg. The less you spend, the less your need to save. Needing to save less effectively lowers the timeframe and amount you need to work.
The financial independence steps are gaining momentum
We have discussed the importance of budgeting, managing expenses, saving, investing, passive income, and planning for replacements and bucket list costs. These topics are all vital considerations in the steps for our FI and retirement planning.
Now, in Step 4, let’s explore the concept of a “test-drive,” living on less income. This could mean one person in a two-income family no longer working, or (if you are single, or if you and your spouse are a one-income household) beginning to live on a passive income stream. You could also choose to budget your expenses as if you have one income source, and saving the rest.
Living on one income source and piling the difference into your E-Fund, replacement cost, and bucket list funds can help take years off future savings goals. This strategy of living on one less income stream ensures the other income sources are secure. Should you find your income or expenses are not as expected, you still have the safety valve of an additional income source to make up the difference.
In the next step of this progression toward retirement, we will consider the impact of becoming debt-free prior to financial independence. Thanks for stopping by and continuing with the series.
Young says
If gyration of stock market or boom and bust of housing market affect my retirement significantly, I wouldn’t feel safe to retire completely. We have been living on my husband’s income only, which was and still is the highest of the household for 16 years. We have only one car, which is Honda civic, makes us difficult to get out of the car as we grow older, my husband has government car for work only. We had a van that was gas guzzler not that long ago though. Pretty soon, we’ll buy truck or SUV that sits high, which makes us feel better physically. Money will facilitate our golden years smoother. A victory lap, who minds extra money?
Bryan says
I am of the same opinion that money will facilitate our golden years. We are a fan of it and making sure we have enough saved to weather the storms. This week’s stock market plunge is a good example and why we are still test driving our early retirement.
You and your husband are close to our ages and have seen the many changes with life, the economy, and our bodies as we all age. I enjoy reading blogs by the 20 to 30 crowd, attempting to escape the rat race early.
I encourage them but also don’t want them to throw caution to the wind. Retiring at 35 could mean they need to support themselves for 50 years. That is a long time!
Our Next Life says
Test driving your FI income is super important, but also really hard to do with any certainty. In our case, we travel a ton for work, and so have extra work expenses, but also get a lot of our meals covered when we travel. We don’t quite know how those will balance out once we’re no longer on the road, which makes it hard to say what our FI grocery or utility needs will be, for example. We also know our FI budget will change over time, especially after we pay off our rental property mortgage and get that rent as unobstructed cash flow. We also know we WILL do some freelancing, but don’t quite know what we’ll earn from that… though we’re preparing like crazy, we also know that a certain element of “winging it” is inevitable. For now, we’re living on an amount (not counting our mortgage, which will be paid off) that would qualify us for an Obamacare subsidy, which we think is a safe assumption and totally do-able — that’s as close to a test drive as we feel we can get!
Bryan says
I agree with you, there is only so much you can predict. I have taken a very conservative approach that will give us some breathing room if things don’t go as well as planned. We have not considered making any money with part time work for example. I think any extra income we bring in from sources other than our real estate will be a bonus and probably used for more exotic travel.
I plan on using Obamacare for our insurance coverage once we are no longer with our employers. We have so much paid in capital in our rental real estate, we will be in a lower tax bracket for years and should qualify for an inexpensive yet high deductible plan. We are also stashing the maximum into our HSA each year to help for out of pocket medical costs in the future.
Steve Miller says
I’ve been retired FI for 3 years now and I am finding that we are reducing our spending level each year as we acclimate to our new life.
Bryan says
Steve,
I appreciate your insight into you spending level with early retirement.
We will probably spend a lot of money for the first few years with travel and new experiences we have been putting off. I am curious, are you reducing your spending due to reduced income or have you found a new level of balance in your day-to-day expenses that works for you?
Bryan
Steve Miller says
The first two years, we traveled a lot (probably about half of each year). In the past year, we have traveled only about 3 months and we’ve figured out how to manage our money a little better when traveling.
We now stay longer in one place, cook our own meals when we can, and negotiate better rates for staying a month instead of a week.
We also have been shining a brighter light on our expenses and have identified expenses that were not really adding much additional fun to our lifestyle, so we reduced those.
So I would say that we are just managing our money better and enjoying it more.
Bryan says
Steve, that is very good feedback for those of us that have not pulled the trigger yet! We are suffering from “trigger aversion”. 🙂
I think we will probably follow that same path as yours at first with a “YOLO Bender” until we get that out of our system. Once we have some time to adjust, we would then default back to what our new normal.
Thanks for sharing!
Luke Fitzgerald @ FinanciallyFitz says
Love the idea of the Test Drive. Honestly never heard of that before but it makes perfect sense to do. And agree 100% on the single income = more security. If you can live on one source of income, it gives your the “responsible freedom” to venture out to new and exciting opportunities.
Bryan says
The test drive gives us conservative minded folks a little more buffer to try living on less income before quitting our jobs. Knowing that you can live on one income in a dual income household gives you more options should things not work out as planned.
Speaking of planning, it should be interesting to see what Mr. Market does over the next few weeks!
Steve @ Think Save Retire says
I think this is an excellent challenge for anyone interested in retiring early. Simply pretend that you are retired from a financial standpoint. There will be some things that you cannot control, of course, like commuting costs (and time). But as a whole, it’s great to be able to give this lifestyle a test drive before diving into it.
My wife and I both work, but we’ve been living off of a single income since we got married last year. We both make respectable salaries. We live off of mine and we completely bank hers. It means we end up saving around 70% of our total combined income every month, which is doing amazing things to our investments and our early retirement date, which has moved closer to us on two different occasions in the past as we continue to look at our finances and our proposed retirement lifestyle.
There are advantages to being a DINK. 🙂
Bryan says
Steve, I have several friends that are DINK’s and were able to retire quite early. In fact the Billy’s are a great example. Having said that, my kids have been a joy.
That is awesome that you are living off your income and saving your wife’s. A 70% saving rate puts you in the ERE and MMM range. You are rocking it! The math works out to working only 7 years when you save at that rate. It also provides a double benefit of keeping your focus on your spending.
I know we are going to meetup sooner as opposed to later. Maybe it will be in the Red Rock country or Tucson? It will be great sharing our story with you and your wife. I have a feeling our projected dates of reaching escape velocity (leaving our jobs) are very close to yours!
Take care,
Bryan
Steve @ Think Save Retire says
Definitely! In fact, I think you are targeting November of 2016 if I’m not mistaking. We are targeting December of 2016 – so yup, we’ll be giving corporate America the middle finger at around the same time.
Then, the REAL fun begins. We will definitely be rolling through Sedona at some point after we retire and get our Airstream going. So, if our schedules don’t work out for a meet and greet before then, we’ll probably wind up finding you guys in Sedona when we’re up there.
Keep fighting the good fight. We’re almost there. 🙂
Bryan says
We will keep the good fight going on our end! 🙂