Financial Independence for Federal Agents – Retirement isn’t always voluntary.
You’re in it. In fact, “we” are in it. Your friend Bob will ask what it is? Mom will ask? Your barber will ask? Common passersby will ask? You’ll have to know enough to explain it to them.
Welcome to the “Fi” community for Feds. As Federal Agents and Front-Liners we are in the Financial Independence (Fi) Community, whether we know it or not. I’ll explain why most of us need to understand and get familiar with the idea of a “work optional” lifestyle…because most of us will be retiring earlier than the average bear.
I recall getting the letter in the mail. It was 2004. I was anxiously awaiting word, any word. Would the U.S. Marshals Service (USMS) accept me as a lateral transfer? I was currently a Federal Agent at the Treasury Department and had just finished a money laundering case with ATF. Even though the case was big news in my hometown of Baltimore, Maryland, I was spending way too much time behind a desk. Alas, I was ready to challenge myself in a different way and try my hand at fugitive hunting. I loved the storied cowboy history of the Marshals Service and its legendary crime fighters.
Every acceptance letter from the USMS starts off similar to a college admissions letter, and since mine was in the positive, it read:
“Dear Mr. Feehely,
Congratulations on your selection to Class # 502…”
Thrilled beyond measure – yes, I was! But I wish I knew one big thing when I read that letter…and that’s what was not in the letter.
What was missing was something very important. You see, it should have also read:
“Welcome to the Federal Fi Community. Hope you make great
financial decisions starting at this moment because your
time is limited in this career whether you know it or not.
And if you go off track even just a little bit early on it could
cost you thousands or tens of thousands…or more! See you
at the Academy!
Well, maybe it would have been written a bit more professional than that.
So, let’s start with the first part of that line. What in the world is “Fi”? Well, it’s simply the acronym for Financial Independence, which is a way of life ascribed to by a community of folks who save, shall we say, enthusiastically. They are very focused on their Financial Independence number. And there is a number…and pay attention because it applies directly to you as a Federal Agent.
Now there are a variety of flavors of Fi and I won’t go too deep into them here. Suffice it to say, having a Fi mindset does NOT require that you live off ramen noodles, save 90% of your income and use candles to light your home instead of paying for electricity. Having a Fi mindset, at a very high level, simply means bringing in more cash than you spend and saving at a level that works for you such that you can eventually decide if you want to get up and go to work every day.
Financial Independence can also be viewed within the context of Financial Wellness. For example, we help folks get oriented to their financial vital signs through a built-out Financial Scorecard, like the one below. In this context, Financial Independence is also a concept that defines what it would take for you to be able to live off of the assets that you currently have. Within our Elements® Financial Monitoring software, this is known as your Total Term or Tt score.
Total Term is an efficient tool for broadly understanding and conveying your current health and progress towards Financial Independence. The big benefit for you – it’s a very measurable score. We can even anonymously benchmark your score against your anonymous peers. This allows you to see where you stand relative to others. And we can take into account certain factors like your age or income level. We do this so that it helps you get oriented to the “average” person in your cohort. Also, we can use it as a motivating factor to change financial behaviors for the better.
Total Term (Tt) = Net Worth / Annual Living Expenses
Example please:
A family has $1,000,000 Net Worth (just using round numbers for simplicity). They spend (Annual Living Expenses) $100,000 annually. This gives them a Total Term (Tt) number of 10 ($1,00,000 / $100,000 = 10). This means that the family could live 10 years with the assets they already own, assuming no growth and no change in spending.
The thought process is that if one is able to achieve roughly 25x – 30x their annual living expenses, then one can theoretically “Retire”…which I like to refer to as “Work Optional”. Remember, this is a generalized, “let’s-get-you-in-the-ballpark” number. It ignores taxes, inflation and growth in your assets in order to keep the concept simple and give us a starting point. A direction in which to start walking. However, it’s highly effective in changing (via encouragement) money behaviors for the better.
How to Calculate Your Score:
Step 1: Calculate your Net Worth. This is what you own, minus what you owe. Said another way, it is all of your assets (house, car, brokerage account, TSP, bank accounts etc.) minus all of your liabilities (mortgage balance, car loan balance, student loan balance etc.).
The difference is your Net Worth. The formula is:
Assets – Liabilities = Net Worth
Step 2: Calculate your monthly expenses. This is everything you spend money on, such as your mortgage payment, car payment, new holsters, daycare for the kiddos, pizza for the family every Friday, vet bills for Fido…everything. Then take this monthly amount and multiply by 12 to get an annual amount. In the above example, the family is spending approximately $8,333 per month. So $8,333 per month x 12 months = $100,000 annually.
Step 3: Calculate your Total Term (Tt), otherwise known as your Financial Independence number by using the formula, Net Worth / Annual Living Expenses or $1,000,000 / $100,000 = 10.
As a MoneyArmor™ Member or Private Client, these numbers are input and monitored in your personal Elements® account.
Tell Me Why This Is Important:
In broad terms, it answers the question we all have…which is: “How am I doing?!” It further provides an anchoring point that helps get a handle on where we are today. We give the number in years, not dollars. Doing this helps us more concretely understand how we are doing relative to our age. Total Term is very important to assist families who wish to get oriented to their money because it provides such a solid starting point.
A big part of good financial planning is being able to meet folks where they are on the journey to Financial Independence. So it doesn’t matter if your Net Worth is $10, $10,000 or the $1,000,000 referenced above. Knowing your Total Term (Tt) helps you see which behaviors really start to improve your financial scores. Without a Scorecard to measure financial health, most of us are just floating along, unsure of where our money goes and unsure of which steps to take to improve.
Where Do We Stand:
Personal finance is just that, personal. However, it does help to have some general understanding of where your family may stand relative to averages. These aren’t gospel by any means…but they are helpful in gaining further clarity for your own
number. The following graph represents the average Total Term (Tt) scores based on age ranges:
What Can We Do To Improve:
Without going too deep, there are some questions to ask yourself and some high level behaviors that you can consider when trying to improve your Total Term (Tt) over time.
Savings:
- Can we save more money?
- And can we automate those savings? If you get a raise, consider saving a percentage of it right away. This is known as paying yourself first. We often don’t miss new money that we never see since it automatically goes to savings.
Asset / Income Growth:
- Are we appropriately invested? Or do we need to reallocate our investments to pursue a different growth rate strategy?
- Can we do anything to increase our income today? Have a bunch of “stuff” laying around taking up space in the attic and garage. Every little bit helps, so consider decluttering your life and earning some extra cash by selling it online or at the neighborhood yard sale. Minimizing your “stuff” can often make us feel lighter, more in control and reduce the “noise” in our life.
- Will we do anything to increase our income during our “Work Optional” years? Working in retirement, especially doing something for which you have a passion, can add to your savings and increase the likelihood of a successful financial plan.
Debt Reduction:
- Is there room for accelerating our debt payments?
- Is there any opportunity to refinance any of our debt such that we can improve our cash flow? Meaning is there an opportunity to move to a lower interest rate? Refinancing your mortgage to a lower interest rate when you will stay in the home long enough to make it worthwhile is an example.
Spending:
- Can we reduce spending in a particular area of the budget? Common places of overspending are eating out and groceries. Trust me when I say you’ve likely underestimated how much you spend on groceries and dining out (don’t worry, our food spending with a 10 year-old eating machine matches that of a small country). If you can identify a budget item that seems a bit inflated, there may be an opportunity to reduce those expenses, thereby lowering your annual spending and increasing your Total Term (Tt).
How Asset Mix Can Affect Retirement Readiness:
The following graphic displays the general principle at play when assessing if your asset mix is appropriate:
Generally, a family with a heavier allocation toward Liquid Term – Lt (easily accessible cash) and Qualified Term – Qt (retirement accounts) will have more flexibility in their retirement strategies (those on the right). Whereas a family with a heavier allocation towards less liquid assets like Real Estate Term – Rt and Business Term – Bt will have less flexibility in their retirement strategies (those on the left). Your goal over time is to take the orderly steps to build up your liquid assets and retirement savings to be ready for a “work optional” life later on. This is critical for Federal Agents and those who will retire early.
Further, when considering your “retirement readiness,” look at both the composition and overall size of your Real Estate Term. Generally, you should not consider Personal-use real estate as part of your retirement strategy. So if your Real Estate Term is highly or completely composed of your primary residence, you might want to consider reducing your Total Term by that value to have a more accurate overall Total Term score.
Example please:
You have a Total Term (Tt) of 28.0 and a Real Estate Term (Rt) of 12.0. Approximately half of your Rt score (6) is composed of equity in your primary residence. The remaining is composed of income-producing investment properties. Therefore, your Tt score is more reasonably closer to 22 (i.e., 28 – 6 = 22).
While the journey requires discipline and strategic planning, Financial Independence offers the ultimate reward of personal and professional freedom. Using a measurable Financial Scorecard and having the ability to monitor your progress over time is invaluable. Your Total Term is particularly key to knowing, at a high level, if you are ready for retirement…ahem…I mean a work optional lifestyle!
Be the Hero for You and Yours!
