A simple modeling mistake that can delay your retirement by years.

Sheer craziness: our net worth went from $2,326,157 to $2,452,960 in 90 days.

You know, The Room could’ve been worse. At least it was in focus.

Anyway, you’ve doubtless waited with vast indifference for our end-of-2017 financial summary. I’m happy to report that we crushed our 4% withdrawal rate goal–came in at 2.7%, in fact–but as I’ve covered elsewhere, the 4% rule isn’t to be trusted. So as an aspirant to FIRE, how do you cope with that?

Well…you cope with that by refusing to be rigid in your FIRE modeling, because that’s one of the biggest mistakes you can make. Modeling Rule #1 is: THOU SHALT CONSIDER ALL THE ANGLES.

Here’s a blasphemous question: are you over-saving for FIRE?

Maybe. To understand why, think about what the term “withdrawal rate” really means. Many people who have just joined this movement equate withdrawal rate with spending. They assume they’ve satisfied the gods as long as they spend 4% or less of their principle, so all they have to do is save enough to kick that out each year.

But it’s not necessarily so. Your FIRE modeling can benefit from an entirely different calculation: your net cash flow.

Example. I have a ginormous yard sale and get rid of a grand worth of cobwebby shite I’ll never again use. That evening I take the family out to El Swanko Burrito Company and run up a fifty-dollar check, which I settle in cash.1

See where this is going? If I pay my expenses in cash, I can keep my budget the same while decreasing my investment-sourced cash outflow. Hence to meet my budget I don’t have to sell as many stocks/funds/etc., don’t have to pay out dividend/interest income that I’d otherwise invest, and so forth. So my withdrawal rate drops, which in turn means maybe I didn’t need to save quite as much to hit FIRE as I originally thought.

When considering this approach you might be inclined to think that all I’ve done is found a new source of income. But is that exclusively true?

Another explanation is that I’ve performed an asset class conversion from illiquid to liquid. While most people won’t include material possessions as assets in FIRE modeling, they’ll sure as hell include them when buying renter’s/homeowner’s insurance, and they’ll also take a tax deduction for donating them to charity. A question of consistency therefore arises, so why not include proceeds from selling off stuff in a FIRE model or two?” You might, after all, choose to move from a larger home to a smaller one.

Decreasing your expenses is key to early retirement, but if you keep an eye on your cash flow you can still have nice things without punching a clock. For instance: a hobby I’ve been enjoying for the last few is churning credit cards. I’ll get into my churning in a later article, but in 2017 I scored a total of roughly $5K in cash, AirBnB gift cards, Delta SkyMiles, and Chase Ultimate Rewards points.

Since for the last year we’ve been reducing our spending so we can save money for a month-long trip to Ireland, we can now have our bangers & mash and eat them too. We may still spend what we’ve saved, but we get to defer the decision. Maybe we’ll hang onto the money to buy a car in a couple of years, but until then we’ll enjoy the gains (if any) from the investments we’d otherwise have to liquidate. Or not spend the money at all if times get lean.

And we’ve accomplished that without foregoing a nice trip.

So as you do your FIRE modeling, I encourage you to think about cash flow management. Your budget may be $X and your spending may be $Y, but see if you can knock your cash outflow down to $Z…and see what that does to your saving requirement.

Here’s another blasphemous question: do you really need an emergency fund?

The emergency fund’s a great example of a potential modeling pitfall. I often see beginning FIRE modelers assuming it’s necessary to maintain a pool of cash to handle emergencies, meaning they have to save even more money and they’re not allowed to invest any of it.

But what if you don’t have to maintain your emergency fund in cash?

Ask yourself: how big an emergency fund should I have? If you blow your car’s engine you might need $10K pronto…and if your kid then gets smashed in the ribs during a hockey game you might need another $4K to meet your health insurance deductible. So should you keep $14K on hand? $10K? Four? Six months of expenses?

You can pull all the numbers you want out of wherever you keep them, but you could also think of your asset pool as one big emergency fund. Since in early retirement you’ll be wise enough2 to maintain a few months’ worth of expected expenses on hand in cash, you can also use that cash to meet unexpected expenses…but to cover your future bills you can always liquidate investments. And maybe you’ll be able to do so by harvesting losses, thereby improving your tax position and therefore (again) your cash outflow.

And that’s not such a bad outcome. So do some FIRE modeling that way too, even though your actual tax position and therefore liability may swing wildly from year to year.

Those are just a few small blasphemies out of many, but you’ll want to give them serious consideration. To wrap this screed up, then: I caution you not to rely solely on running your budget forecasts through the online safe withdrawal rate calculators. Again, Modeling Rule #1 says: THOU SHALT CONSIDER ALL THE ANGLES. That’s what modeling is for, right?3

One last thing for The Room fans: Spoon!


  1. This of course costs me the opportunity to earn credit card kickbacks, but let’s keep it simple.
  2. Right?
  3. I further caution you that if you’re not yet comfortable with creating and running alternative scenarios in spreadsheets, you need to get that way immediately. Mistakes in assumptions can be severely compounded by mistakes in spreadsheet creation.

Author: ER Dude

Sick of your job? After a thirteen-year career, Early Retirement Dude fled corporate America for good. You can do it too! Visit http://EarlyRetirementDude.com or email EarlyRetirementDude@gmail.com.

7 thoughts

  1. Looking forward to the credit card churning article. It is something that I think I am going to get into but want to do it without destroying my credit by signing up for a bunch of cards and by running large balances on them.

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