Hello class. Welcome back to FIRE University, In today’s class I want to talk about the importance of setting financial goals. They say that the measure of a good goal it should be realistic, achievable, tied to a time frame, and motivating. For many of us, especially those of us in the FIRE community our financial independence goals are highly motivating and if we can tie them to a realistic and achievable time frame then we just may have a recipe for success. Now I want to share with you my own experience with setting financial goals. As a young man I set a goal of being independently wealthy or financially independent by the age of 35, that seemed old at the time. I am now 36 and have changed my goal to fit my current life. I decided to extend my FIRE age from 35 to 45, which is a little more realistic. So to define financial independence, it is when I have accumulated enough assets to completely retire and not be dependent on outside sources of income. The goal is to acquire enough income producing assets to cover my monthly expenditures, however at 20 years old I didn’t have a good grasp of what life would bring or what type of income I would require later in life. My original goal was to hit a million dollars in net worth, which at the time seemed like a a lot of money and a good round number. Originally I thought I would do this by starting a small business but later decided to achieve it through traditional earned income. Around the time I hit 30 years old I began changing my goal and moved back the age and the net worth. I decided on creating passive income since I wasn’t going to have access to a pension and then build up a nice investment portfolio of stocks and bonds. I decided to do this by investing in rental homes which allow for both monthly income from the renter as well as the renter paying down the mortgage, which creates forced equity. So we have income and equity as well as a host of taxable savings such as depreciation that I can claim. The next goal was to accumulate $1,500,000 spread between my 401K, ROTH IRA, traditional IRA and brokerage accounts. I figured that would allow me to safely withdraw 3% of my account value to live off of without ever exhausting the principle and in fact adding to it with a conservative return of 5%. So I’d be withdrawing 3% but earning 5% annually over time. At $1,500,000 a 3% withdrawal would equal about $45,000 in income, which is actually enough to cover my basic expenses but coupled with the rental income and the elimination of my personal debt obligations, it would all be a great amount of disposable income. At 45 years old I would use that income to leave corporate America and bridge to age 67 where I would begin taking Social Security income and be eligible for Medicare.
So did I fail at my goal, yes and no. I did achieve a level of wealth accumulation that would have allowed me to leave work but the income I needed in my twenties isn’t what I need now as a father of four children. I have changed my goal because now I am in a job I love and instead of selfishly leaving work, I plan to focus more on creating a lifestyle I enjoy and leaving a legacy to my four children. I feel that even though I abandoned my original goal that it was instrumental in allowing me to position myself for future success and to create a sense of strength from which I am able to make decisions.
Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.