Overview of The Physician Philosopher Annual SpendingWhen it comes to our annual spending, we put 90% of our spending on two credit cards. I have the American Express platinum card – which I love by the way – and Kristen uses the Chase Saphire Preferred card. The other 5% is paid from our bank account directly for things that we are not allowed to pay for with a credit card, including daycare costs and some of our bills. Here is the break down:
- American Express Platinum card = $88,496
- Chase Saphire Preferred card = $46,066
- Banking Account = $30,028
- Our mortgage = $27,600
Total Annual Spending = $192,190
Is This a True Reflection of Our Annual Spending?The reason anyone cares about annual spending numbers is that it helps you determine how much you need for Financial Independence. In general, the FIRE community espouses a 25 X rule. If you multiplied the number above, this would say that we need $4.805 million to be financially independent. Yet, this isn’t really accurate. When you try to approximate how much you need for retirement, it is important to realize that you won’t carry every current expense into retirement. Our annual savings number above includes several things most would not categorize as annual spending and/or that we should anticipate avoiding in retirement. For example, it includes:
- Charitable Giving (I won’t disclose an actual number, but it is ~10% of our Adjusted Gross Income)
- Childcare Expenses
- Mortgage Payments
What is Our Actual FI Number?If we subtract out the numbers above that won’t follow us into retirement, our actual spending changes quite a bit. It turns out our annual spending number (even with 3 kids we won’t be paying for in retirement) is closer to $120,000. Thus, our actual number to reach FI isn’t close to $5 million. It is actually $120,000 x 25 = $3 million. Of course, this 25 X rule is based on the classic “4 % Rule” where it is assumed that a safe withdrawal rate during retirement is 4%. If you are retiring early (before age 60) I am not sure that number will work, though. Even assuming a more conservative 3.5% withdrawal rate, our financial independence number is $3.434 million.
What About Other Factors?There are a few things we haven’t really touched that may impact all of this. First, we haven’t discussed inflation where every year a dollar has less and less buying power. Annual inflation averages ~2-3% annually. Assuming a 2.5% average annual increase, our current annual spending rate of $120,000 will cost us $153,610 in ten years. That is no small change! In fact, that’s a 28% increase in cost despite the same lifestyle. A second big factor we haven’t touched on includes costs we have in retirement that may be paid for by our employer. The biggest, of course, is health care expenses. Given that I plan on having health insurance through my employer for the next 20 years (even after we Partial FIRE), I don’t know what to do with this. Certainly, health care will change dramatically before that time. So, I don’t put a lot of weight into figuring that out yet. The third, and final, factor is that we may still have income streams in addition to the money we have saved. In fact, I support a hybrid view of financial independence where physicians have multiple sources of retirement income that may include passive income (think real estate, businesses, etc) and stock market assets they can safely withdraw.
Take HomeIt all comes back to that
What is your annual spending number? How much do you anticipate needing in retirement? Leave a comment below.