On this episode of The Long View, Jackie Cummings Koski, author, podcast host, and certified financial planner, discusses her financial journey and introduction to the FIRE movement, how investors can get started with FIRE, and her new book, F.I.R.E. For Dummies.
Here are a few excerpts from Koski’s conversation with Morningstar’s Christine Benz and Amy Arnott.
The 4% Guideline and 25 Times Spending Target
Christine Benz: You spend a lot of time in the book talking about the logistics of FIRE, how to do it. And you talk about this 4% guideline that many people inside the FIRE movement, and also traditional retirees, use to guide their spending. And you also cite the 25 times spending target in the book. So, do you think those are good starting points or should people perhaps be more conservative given that if you’re FIRE-ing, you’ve got like a 40-year-plus time horizon oftentimes versus the traditional 25- or 30-year time horizon?
Jackie Cummings Koski: I do think the 4% guideline is a great starting point and the 25 times as well as part of that—25 times your expenses—because people generally need something to anchor to or something as a reference point. Because if you’re retiring early—and honestly, if you’re 35 and retiring, that does look very different if someone that’s 55. The person retiring at 55, that’s still pretty early. But even if you’re retiring early, the 4% rule to me still applies.
I think what you have to be mindful of is building in other buffers and looking at the things that’s going to give you a little more room because you don’t want to be so close to the edge. I know I ended up working about two more years past the time that I reached my FIRE number, the 25 times my expenses, because I did need more of a cushion. And I guess one other natural cushion that I seem to see in the FIRE community is most of them do not even count Social Security. That’s a buffer right there, because I was overly pessimistic about it and so was I know a lot of other FIRE people, but we know that it’s not going to completely go away. So that becomes a very powerful backstop in your later years. And that’s a buffer.
And the fact that when you’re retiring much younger, that human capital that I talked about, that is going to be amazing. Like you said, you can only play golf for so long. So, after a couple years or something, even if you plan to not really do much of anything, that is probably going to change very quickly, because you’re not just want to lay on the beach all day long, maybe for a time, and maybe taking breaks. But your human capital is probably going to be put to work in some way that is going to get you an income. I love the idea of volunteering. But if you have a great talent or a great skill and things that you can do that generate an income, that’s a great thing to have as well. So, I believe in putting in buffers, because if you did that straight 4% for 40 years or 50 years by retiring early, that might get a little wonky, a little bit scary. But no one ever really does it in a straight line like that. We know that whether you’re retiring traditionally or early, you got to build in some flexibility and give yourself a little cushion because you don’t want to be stressed out in retirement. The whole idea is that you’re relaxing. So, building in some extra cushions and a few buffers to me will soften the ride where you end up coming out better than you even thought.
That’s how I feel at this point, one, because I didn’t include Social Security, and then two, that I’ve been able to use my human capital to have—it’s been different every year for the last five years I’ve been retired. But there is some income I have coming in and any dollar that comes in from work that I’ve been doing or projects, that’s money that I don’t have to pull out of my portfolio.
How to Factor Social Security Into Retiring Early
Amy Arnott: So how should people think about Social Security if their plan is to retire early? Does it make sense for most people to defer claiming benefits until 70 so that they can get the higher monthly payments or are there people who might want to consider starting earlier with Social Security?
Koski: Well, we know that your Social Security benefit increases the longer you wait up until age 70. But for a lot of FIRE people that haven’t even included it, they may just think, this is icing on the cake, I didn’t even bank for it. So, I’m going to go ahead and get the money at 62, because I didn’t even think about it in my budget. There are some strategies around it. I think because a lot of the FIRE people are pretty young, let’s say 30s, 40s, even 50s, they’re far away from retirement. So, I don’t think that a lot of them have thought a lot about strategies for it. But I’m a little bit older. I’m in my 50s. So, I have thought about it from the perspective of someone retiring early.
And I even did my own little casual research, definitely not to the level of Morningstar, but I wanted to take a case study. What if someone worked for 10 years, because all you need is 10 years to qualify for Social Security, or sometimes it is expressed in 40 quarters. But typically, if you work full time for 10 years, you’re going to qualify for Social Security. That’s really all you need. When a lot of people talk about Social Security, they talk about the 35 years that it’s based on, which is true. But if you have 10 years, and you don’t have the full 35, it’s just going to be replaced with zeros any years. But when I did the math, I took a case study of a person making $60,000 a year, they worked 10 years, and then they stopped working the rest of their life. No income that was subject to Social Security. I applied all the bend points and all the different factors that go into it. And that person, even if they took their benefit at 62, they would still get about $1,000 a month for the rest of their life adjusted for inflation. That’s nothing to laugh at.
So, it’s just interesting how some people think that just because you retire early, oh, you’re really messing up your Social Security. Well, one, most FIRE people don’t include it at all. But two, if you work full time, at least 10 years or more, you’re more than likely get a little something that’s going to serve as a powerful backstop in your later years. So just taking that apart was really helpful to put it in perspective for someone that’s retiring super early.
Covering Healthcare Before Medicare Age
Benz: How about healthcare, Jackie? It seems like that’s a huge dimension of this. And to the extent that you’re comfortable talking about it, how are you covering healthcare given that you’re well under the Medicare age?
Koski: That is a big one, Christine. When I do my talks or workshops, the main thing people are asking about is the healthcare part. It’s very scary. It was scary for me. And the main thing is because in the US, health insurance is so closely tied to your employer. Well, to be honest, there’s a lot of other type of people that have had to think about this too. So, the FIRE community is not the first people that have had to think about it. Entrepreneurs, small-business owners, self-employed people, they’ve had to ask themselves this question. And guess what? They figured it out.
So, for me, I had to do my own research. The Affordable Care Act was something that was kind of on the shortlist. And I had been just in forums and different groups having people either they loved it, or they hated it. And the thing I quickly found out was usually there were political undertones for people that were talking about it and sharing their opinion on whether it was good or bad. So, I finally decided, OK, I’m going to have to do my own independent research and look at this for me. So, I looked at my state, my ZIP code, and my family makeup. And when I did that, I learned all about the Affordable Care Act subsidies, and that it’s based on income. It’s not based on assets at all. It started making sense.
Out of all the choices that I looked at, I ended up going with an ACA plan for my state. I live in the state of Ohio, and they had many great options. They had several different health insurance providers. They had several different plans. I ended up going with a traditional plan. I didn’t stick with the high-deductible health plan, because I was able to get it at a very reasonable cost. I qualify for healthcare subsidies, or the Affordable Care Act subsidies, that is extremely helpful. So, I pay very little each month, almost less than when I was paying for a high-deductible plan when I was working. So that’s worked out pretty good.
I know that it’s a political hot button. So that could certainly change at any time. But you pick your healthcare once a year. So, every year, there’s going to be something different to look at. But right now, that’s what’s been working. And this is my fifth year, and I’ve been very happy with it. It is certainly going to vary by state and to an extent by ZIP code. So, you really have to look at your situation, your family makeup. But I would hear people saying, oh, my gosh, I’m on the Affordable Care Act, and I pay $800 a month. I’m like, wow, that’s a lot. And then, after a few comments, you’ll see that this person has a spouse and four kids, and they live in New York. So, that’s very different than my situation. I really had to look at my own numbers and my own situation. But yeah, that’s what I’ve been doing. I’ve been very happy with it. I mentioned my health savings account. That still serves as a buffer. Certainly, anything can happen with our health. And that’s the bigger picture, our healthcare and proactive wellness. So, if there is something that happens, catastrophic, or have a big accident or have to somehow have a lot of out-of-pocket costs, my health savings account is there to soften that blow.