Back in June, I talked about flavors of FI/RE, in particular the two versions there of, coast-FI/RE and flamingo FI/RE. These flavors of FI/RE are quite similar in their core ideas, i.e., transition from the rat-race of full-time employment to financial independence and retirement, through an intermediate step of semi-retirement. The essense of this idea is to smooth the transition to FI/RE by separating out the dual objective for using income for savings and day-to-day living into two distinct phases. For more on this concept have a look here.

Determining whether one is ready to flamingo FI/RE or coast FI/RE begins with the analysis of annual cost of living. In my last post, I presented the budgeted numbers for AVI family cost of living. It may not come as a surprise to know that the actual cost-of-living for AVI family is some what different from what we budget for.

Digging into the last two months of AVI-family house-hold spending, I was able to garner a much clearer picture of where AVI-family money goes every-month. As can be seen from the table below, the differential between what we budget for every-month and what we actually spend, is about $2,200, quite a chunck of change I must say.

Take mortgage out of the picture and now we are talking! AVI family monthly expense drops down to 36 % of what we currently budget for! In retirement, we fully expect to be mortgage free and therefore in calculating our flamingo FI/RE number, we should be using our mortgage free-cost-of-living number. Lets figure out what our flamingo FI/RE number will be if we choose to do so.

Per Mr Money Flamingo, the formula to calculate flamingo FI/RE is quite simple, it is 12.5 X (where X is the annual cost-of-living in retirement). This number is based on two assumptions: (a) the 4 % rule, which is that the safe-withdrawal rate in retirement and follows from the Trinity Study (for an updated version of Trinity Sutdy for 2020, see here) and (b) Savings grow annually at 7 % (thus doubling in about 10 years). How realistic are these assumptions? suffice to say, there is a lot of room for debate, especially considering the 4 % rule was devised when the average treasury yield was around ~7% and today it is hovering around 0.7 %. On the other hand, the 7 % growth number seems quite reasonable to me (see for example, the Applied Value Portfolio, which has historically produced ~7.7 % returns per-annum, in a relatively high interest rate environment.

Regardless, using the above formula, AVI family flamingo FI/RE number, based on cost of living after a paid off mortgage is, $627,600. This number is very much achievable and if the goal is easing into FI, Mr AVI should feel quite relaxed!

Now instead of using the retirement cost-of-living, if we are to use our current cost-of-living numbers, expecting that the savings from paid-off mortgage may be used up for children higher-education needs, travels and healthcare, the flamingo FI/RE number bubbles up to $1,379,225, a number that I feel is a more realistic target to consider semi-retirement!

What parts of networth to include in the calculation to figure out if one is ready for semi-retirement? Again, the opinions differ. However, the general concensus is to include liquid networth in calculating the FI/RE numbers for semi-retirement, which usually mean, leaving aside the equity from primary residence. For AVI family, I want to include an additional margin of safety in our calculations by trying to achieve FI/RE number as stated above by using current liquid assets only, i.e., exclude retirement-account funds in addition to exclude all equity in the primary residence!

In summary, for AVI family, the easing into FI/RE number is to have liquid networth, which includes non-retirement investments and cash on hand assets equaling $1,379,225.

Video/Book/Article/Audio for the Week

• Podcast: Joel Greenblatt on Meb Faber podcast
• Video: Latest edition of Mohnish Pabrai lecture at Boston College (Carroll Scool of Management). Highly recommended! In particular, Mohnish talks about his reasons for why he is giving up on the strategy to seek 10 cent Dollar companies that has worked quite well for him for a better part of the last decade!
• Article: Yet another thought provoking article from Ben Thompson, this time talking about Disney as an intergrator model and comparing it against the aggregator models in business, i.e., FB and Google.
• Article: Ben Carlson piece on the value of long-term stock holdings!