Katie:

Happy Wealth Planner Launch Week to all who celebrate; the one time a year where I cosplay a tech entrepreneur and I throw my whole being into product design. I guess technically it's more accurate to say that that kind of happens throughout the year, but then this is the week where it all comes to a beautiful culmination point.

In honor of the annual revamping of our most technical, and okay, only product, we decided that a tactical episode was an order. So we're going to talk today about how to think about a truly comprehensive financial independence timeline—and to pat ourselves on the back just a little bit because I think we built one. As a primer for those who are unaware of this product or unfamiliar with this specific feature, the Wealth Planner is the Money with Katie flagship product, the core of which was first created back in 2020.

So it's intended to be a one-stop shop for your personal finances, and particularly one with the ability to translate your current choices and your current finances into what they mean for the future. When I was starting my personal finance journey, I was constantly trying to make sense of the long-term implications of the decisions that I was making. And the first financial independence spreadsheet that I made for myself was extremely rudimentary, but it served the purpose, which was telling me how my spending, my income, my investing, all of these things that I was doing today would likely play out if I just stayed the course. What would happen next over the next several years if I just kept marching down that path? And the most valuable element of that original rudimentary spreadsheet was the ability to just quickly model out changes. Like whether that was understanding how spending more on rent or earning less money did or honestly sometimes didn't really materially impact my financial future.

So back in 2023, I added the first version of that feature to the Wealth Planner. Before that, it was a separate thing entirely and it remained, I would say, mostly unchanged. In 2024, we sort of started beefing it out for accommodating a pension or extra income later in life, but this year we really, really tricked it out.

Welcome back to the Money with Katie Show. I'm Katie and today I hope you hear this and you think that what we have built sounds so valuable that you want it for yourself: it’s at moneywithkatie.com/wealthplanner, but regardless if you are just looking to better understand the factors that impact financial independence so that you can build your own model today I am going to share a lot of detail about how ours works and how we're thinking about the best way to project this type of information into the future.

So for people who are listening to this who have used the 2023 or 2024 versions, our intent this year was to make it a lot more accurate by creating room for way more inputs depending on the situation. Some of the improvements we've made will make some people's timelines look closer than they did before, and it's possible that other feature enhancements will probably make it look farther away, but either way, the results should be more accurate than ever before. And the beauty of having this feature within the Wealth Planner itself, in case it's not obvious, is that it takes your actual data. So anything that you're putting in for your income or your spending or your investing, it's automatically factoring that stuff in.

Let's start with a quick definition of what financial independence is and how I personally like to think about it. So on the most technical level, financial independence is the point at which your investments are safely producing enough income to support your expenses. Sometimes this is called the crossover point, but the basis of the calculation is a general guideline that they call the 4% Rule. So obviously we acknowledge and we support people tweaking their safe withdrawal rate as desired. You do you, but that is to say you now no longer need to work for income if you don't want to because your nest egg is enough, it is producing the income that you need. All of this hinges on your spending, not your income. So you might be earning a hundred thousand dollars per year but only spending $60,000 per year. You are at financial independence when your investments can produce that $60,000 per year figure.

And I think that that might be on some level what attracts me to financial independence ideology as a financial worldview because it does do what I find so much of money advice sometimes struggles to do or struggles to help with, which is defining enough. The concept of enough in capitalism is a little bit antithetical. If you feel contented with what you have or you know that you have what you need and then you stop pursuing more actively, that is in some ways a little bit radical. I know, I just kind of love that we can have a responsible personal finance guideline that helps us ensure our futures, but also acknowledges that after a certain point, you shouldn't keep running yourself into the ground because you have enough.

Okay, we all get to the math of all of that right after a quick break.

So when we were thinking through all of the different inputs needed to calculate a timeline from here to there, even semi accurately, this is what we came up with. I'm going to take you through all the factors. So the first is your current long-term invested assets. So that is to say the money that you have earmarked and invested for the long-term, which excludes money that is set aside for other things like a 529 plan for example.

So this year for the first time, when you fill out your dashboard tab, you're going to tag your accounts with an associated timeline. So whether that's a syncing fund or money you are spending soon or a long-term account for financial freedom or anything in between. And then only the accounts that are tagged as long-term financial freedom are going to count toward that financial independence calculation. This is one of those tweaks that'll probably make existing users' timelines look longer if a substantial portion of your assets are currently earmarked for something other than the long term. So in the past we really didn't have any way of knowing. So we basically looked at all the money that you had invested and we said, okay, if all of that grows unobstructed at the assumed rate of return, it'll be enough to safely support their spending in X number of years. This year we're being more specific about what we're considering.

The next thing that you need to know is your current gross income. That one's pretty simple. And then you need to know your current monthly spending. So relatedly, in the past we used your spending in two ways.

First, we used it to determine what your FI number needed to be. So like we looked at your monthly spending, what you said your life costs on a monthly basis, we just multiplied it by 12 to annualize it and then again by 25 to figure out how large your FI number would have to be such that 4% of that number would produce your annual spending. And obviously we adjusted for inflation and what have you. So for example, if you spend $5k a month that is $60,000 a year, and multiplied by 25 is $1.5 million, so today in 2024 dollars, your FI number is $1.5 million.

But the other way that we used to use your spending number was basically back into how much you were saving because we knew your income, we knew your spending, we could go, okay. The difference then is what they are saving for financial independence, it's their save rate.

But this year, rather than just assuming that any money not being spent was being invested for financial independence, we're actually looking specifically at contributions that are made to accounts that are tagged for the long-term. This was a tweak that we made because of situations in which someone is saving a lot, which makes it look as though they're cruising toward FI, but a substantial amount of those savings are they're in cash for an upcoming vacation or a trip or maybe they're being reserved for something like a house. So we just wanted a better way to delineate between progress toward long-term financial freedom and progress toward your other financial goals.

Okay, moving on. So the next thing that we need to know is your estimated effective tax rate. So we have a sense for what percentage of your gross income you are going to keep and we can tell you more about your tax liability. So technically we are looking at an even more personalized number here because we're looking at your net income after other paycheck deductions too. In past years, folks who were paying for family health coverage for example, would tell us that, hey, I put it in but my income looks a little bit high in this financial independence calculation because my effective tax rate is not capturing the other stuff that is getting deducted from my paycheck that does not go toward investments but is going toward things like union dues or health insurance. So we made sure that that stuff would be accounted for this year.

And so taxes are an interesting element in the financial independence timeline calculation. We basically hold your effective tax rate and deductions steady throughout your working years, but I will note that the gross annual safe withdrawal rate amount, so the amount that we will tell you, hey, this year your safe withdrawal is X, we do not apply your effective tax rate to that because your effective tax rate in retirement is going to depend on what types of accounts you're withdrawing from. So for example, if you are someone who primarily uses long-term capital gains and Roth accounts, your tax rate and retirement is probably going to be far lower than it is now. You are not really going to be paying much of anything in the way of taxes. Whereas if you are someone who is fully and completely withdrawing from pre-tax accounts, your effective tax rate might be relatively similar.

And so I know that this is something that we've gotten questions on in the past, like does the safe withdrawal account for taxes? It does not. The number that we produce for the safe withdrawal is pre-tax. So just keep that in mind. Okay, and the next, and this part is totally new this year, we thought that it would be interesting to include a way that you could factor in temporary major expenses that you might have. So this was inspired by our listeners who have written in about their astronomical childcare expenses, who foresee them dropping off completely in a couple of years. We wanted to be able to factor that into the calculation whether those expenses are happening now or they're about to start. But in any case, they are only contained to a specific and defined period of time that does not have to continue in perpetuity.

For example, maybe right now you are spending $3,000 a month on childcare, so you have an additional $36,000 of annual expenses that are basically going to expire in a couple of years when you're no longer paying for daycare. In order to support that amount of spending forever, you would need an additional $900,000 in investments. Obviously that is going to skew a financial independence number and it is going to skew a financial independence timeline.

But this has been pretty tricky to deal with in the past in the way that the planner used to function and that the calculations used to work because you do want them to factor into your spending now that is $3,000 a month that you are not saving for the future. All that to say we wanted to build in a feature that would allow you to factor them into your spending for a designated amount of time, but then pull them out of the expenses that'll need to be supported later so you're not artificially inflating the amount that you need.

I would say that another way that I could see this applying for people is folks who want to be able to estimate the way increased healthcare expenses in early retirement might not be factored into their expenses right now, but will be for a gap between retirement and the time that you get on Medicare. So if you have temporary expenses that are going to apply in the future and you want to see how that would affect a certain period of years, it can also be used for that.

Okay, and in a similar vein, we need to know about your debt. So think about a payoff period for something like student loans. Maybe you've got eight years left and maybe the payment is $500 a month. If $500 of your monthly spending is a student loan payment, your investments do not need to support that in perpetuity either. So this is another factor that might lower your FI number from what you're calculating from quick back of the napkin math.

And so this year we added a debt payoff calculator that effectively responds to different payment amounts and interest rates in the dashboard tab. And so we're using the payoff data to inform how and when your expenses will be lower in the future based on the debt being paid off. It also factors in mortgage debt. So if you have 15 years left on a mortgage at some point 15 years in the future on that timeline, you'll see your expenses lower by the mortgage falling off.

But another reason I'm excited about the debt payoff calculator, if I can digress for just a moment, is that I think what it's going to be really helpful for is helping people to understand and visualize opportunity costs. So you can put in, okay, I have this consumer loan that I'm still paying off, and the interest rate is 8% and my payments right now are $250 a month. And it's going to tell you, okay, if those are the numbers that you are paying and those are the terms of the loan, it's going to take X number of years to pay it off and this is the amount of interest you're going to pay. So you can just toy around with your payment amount, see how that shifts things, and then make informed decisions like, okay, well maybe I do want to pay that off more quickly, or you know what, maybe I don't. I'm not actually that stressed about it.

Okay, so getting back on track similarly to temporary expenses that you want to support for now but will remove later, you probably want to factor in income from other sources that you might have in the future. So for most people, this is going to either take the form of pension payments, social security benefits, maybe even just gig work. I think there are a lot of people who end up taking part-time jobs when they're retired and you might just want to see, okay, how would a little bit of additional income at some point in the future adjust this timeline?

So in our input section, we now have room for two sources of future income from two people. So four sources of income total with and without cost of living adjustments. And this I think by the way, is a popular question more broadly, which is just how does my pension affect or not affect my financial independence number? How should I think about that?

So the easiest way to quickly determine how much a pension payment or social security income will change your financial independence goal is to figure out what you would need in investments to produce that income. So we're basically doing the FI calculation, but in reverse, you just multiply your annual net income from that source by 25, and that's the number that you can subtract from your FI number. So for example, maybe you have $25,000 a year from a pension that you're expecting that is like an investment account that is worth $625,000. So if you have $25K in net income from a pension, you can just subtract $625,000 from your FI number and the planner will do all of this for you. You just put in the net income and it'll factor it in.

But if you're just kind of doing it back at the napkin, that's how, and I would say that for some of the excessively motivated listeners of the show or users of this product, they will reach or you will reach financial independence long before social security has a chance to lower your fine number. So you might find that entering your future income doesn't actually really shorten your timeline. As we discussed in the social security episode, this can be a little bit more complex because having that income later does technically mean that you'll probably end up with more than you need. We'll link that deep dive in the show notes of this episode, but we're still just trying to figure out how to account for that accurately without undershooting what you will need.

And I think in general, our philosophy is to err on the side of conservative estimates versus aggressive ones. And the last thing to think about for income from other sources is our rental property investors. So if you own rental properties or you plan to someday, you'll also want to consider your net rental income and the expected increase over time. We have a new section for that in the FI tab this year that will take some assumptions about rental property net income into consideration and sort of factor that into the overall picture when let's let that marinate.

We will continue after a quick break.

Okay, we're almost done. We have two more big factors. We've got major expenses and major cash infusions in the future. So rather than a temporary ongoing expense like childcare, this is more along the lines of, okay, you are using $250k of long-term investments to buy a house. Obviously that is going to impact your financial independence timeline. So in our case, in our product, we wanted the ability to account for that upfront. So if you already have that money earmarked off to the side and it's not tagged as money for the long-term right now, it wouldn't have been factored in any way. But if you know that at some point 10 years down the road or five years down the road, you're probably going to want to use a big chunk of your long-term investments for something or you just want to be able to pencil out what would happen if you do, you can factor that in.

Same goes for the opposite scenario like you are expecting or you want to see the impact of a big inheritance or some other windfall like the sail of business and how that might affect the timeline. You can factor that stuff into. I think the major reason that I like this feature is because it allows you to see if the timing of purchases or cash infusions like this actually makes a real difference. Maybe you'll find that just waiting for a couple more years of compounding will materially change the outcome. I was playing around with this during testing and I was actually surprised to the extent to which if you allow your investments to compound to a certain point, you can actually take out quite a bit all at once and use it for something like a down payment and it doesn't really materially change the timeline that you're on, whereas doing it earlier really does. So I think that that's just something to be aware of and something that we wanted people to be able to see for themselves and see with their own numbers.

Okay, last one. You basically just need to know what you're comfortable assuming about the future. And this is in some ways the simplest part of product development and building, but the most important piece of the assumptions that we're making. First and foremost, you have to know what your assumed safe withdrawal rate is. We usually recommend 4% just as that average, but if you're choosing to retire early or you are someone who is more risk averse, you can see, okay, if I put in three and a half percent, how is that going to affect the future plan? How can I plan more conservatively? Another thing that you want to know is how your income will change.

So the default assumption is 3% increases each year, but sometimes when I'm doing my own planning, I'll actually assume a negative change over time, as in I'm going to assume that I'm going to work less and earn less over time, and I want to see how that is going to influence things like a slow burn out of employment.

You'll also need to know what type of investment return you expect to get before inflation in your investments. So we usually say somewhere between 7% and 9% as your before inflation assumed average rate of return for long-term investments. But if you are investing completely differently than, I don't know, total stock market funds, maybe you have a lot of bonds or maybe you really are in a much more conservative fixed income portfolio and you want to see 4%, 5%, you can plan as conservatively as you want based on how you actually invest.

And I would say this element is extremely critical to understand so that you know what you can expect from your long-term asset growth over time. Something that you'll notice if you play around with that return average in the planner is that the difference between assuming a 7% return and a 10% return is astronomical, it will change the entire outlook. So you want to make sure that you are comfortable with the returns that you are expecting to get and that it matches up with the way that you are investing. And so it might be worth saying explicitly, if you are someone who is hopping in and out of the market trying to time the market, you're probably almost certainly not going to get the average return. Getting the average rate of return requires dollar cost averaging and not trying to time the market. And then relatedly, what type of inflation do you expect to see?

So it's not just overall inflation, obviously we don't know, I think it's around 2.6% right now, but you want to kind of get a sense for what type of inflation you expect in your own lifestyle and your own spending. So the default that we put in there is 3% per year, but the thing is certain expenses are going to impact your personal inflation rate more. So if a large portion of your spending, your personal spending is a mortgage payment, that means there's a pretty big chunk of your budget that is mostly protected from inflation. At the same time, when I look back at my own life, my spending does go up every year and it's not necessarily because of inflation, it's because I'm just spending more. So if you want to know, okay, what is this going to look like if I am actually spending more each year as just like a general trend, how is that going to impact things?

And then the last input is the year that you want to quit working otherwise known as the year that you want this timeline to project your income going to zero so that you can actually see how your invested balance will change once your expenses begin being drawn down from them. And so you can see how they'll continue growing as opposed to getting more income added to them. So you just have to make sure that you're selecting a quit year. That's after you are projected to reach FI, otherwise it'll kind of glitch out and it'll look like you're never going to get there. And instead you'll run out of money, which that's not good. No bueno, we don't like that. But I am excited that we built in this drawdown feature this year. In the past we had a workaround formula that you could input, but this year you can basically be like, I'm going to quit working at this point.

You show me Wealth Planner, what is going to happen to my investments based on all my assumptions if I start withdrawing my expenses from those investments and I stop adding money to them? So obviously there are a few shortcomings here both about our model and just in general when you're trying to project FI timelines because ultimately this is an exercise in financial fortune telling. And the primary shortcomings that I would point to with our tool are twofold. The first is a little bit existential, so trying to accurately predict to the future is impossible because we cannot plan for things like job loss or illness or an ahistorically prolonged bear market or other huge circumstantial shifts. And there is just really no perfect way to plan for shocks like that. So the goal is to give ourselves a sense of directional accuracy. Am I generally on track with where I thought I was headed or does something need to change?

The second issue I would point out is more technical, and it's the fact that we can tell you when your gross annual safe withdrawal amount surpasses your spending and signals that you are at FI, but we cannot provide an accurate post-tax estimate without knowing more about the breakdown of the tax status of those funds.

And that got me thinking a little bit more about maximum optimal outcomes. I hate myself, but that was really where my brain went next. It was like, alright, well if we're discussing tax-free withdrawal strategies and we now know our 2025 tax upper limits, let's just briefly revisit while we're on the topic of financial independence goals, what that would look like. So if you're unfamiliar with the general premise of tax and penalty-free early retirement strategies and the methodology that goes along with that, we will link our episode in the show notes.

I think it first came out in 2022. It's also almost an entire chapter in my forthcoming book, Rich Girl Nation. That'll be out on June 10th, 2025. But even if you're not trying to conjure the most optimal drawdown strategy, I still think this is illustrative for understanding how your income is taxed in retirement and the fact that you can exercise more control over your tax liability than you can in your working years depending on how you are setting yourself up. That episode also goes into the early part of early retirement planning. So if the penalty free thing peaked your attention and you haven't heard that episode, you should check that out.

But in 2025, the standard deduction is going to be $15k for singles and $30k for married filing jointly, which means you are effectively guaranteed a tax-free withdrawal on at least that much pretax income, whether via a Roth conversion or direct withdrawal depending on your age.

And this is of course, assuming you have no other income, right? We're talking about early retirement or traditional retirement where all your income is coming from your investments and you are controlling and much you are taking and from where. And then the top of the 0% long-term cap gains tax bracket in 2025 is $48,350 for singles and $96,700 for married filing jointly.

So if we put these two numbers together, this means retired singles can create up to $63,350 of tax-free income from their pre-tax and taxable withdrawals each year and married filing jointly couples can create up to $126,700 of tax-free income from pre-tax and taxable withdrawals. So that means, ergo, the optimal tax-free FI number at least insofar as pre-tax and taxable accounts are concerned is $1.58 million for singles and $3.16 million for married couples in 2025 dollars. So those are the fine numbers where a 4% withdrawal would be totally tax free, assuming you are just talking about pre-tax and taxable money, obviously you could swap out or supplement the taxable money with Roth and then you would have unlimited tax-free withdrawals.

But given the caps on the contributions that you can make to Roth accounts, it's more likely that you would get there with taxable. And so the splits by the way would be about $375K in pre-tax funds for singles and then $750K for couples. And then the majority are like the rest in taxable or Roth. So obviously I just want to call this out. This is the intention with my more general assertion that contributing the maximum allowed pre-tax dollars to accounts like 401(k)s and then investing your tax savings in Roth or taxable funds is optimal after a certain point.

And I guess that point is once you have $375,000 in pre-tax funds if you're a single person or $750,000 if you're a couple, so you basically have to decide for yourself whether or not you care more about saving on your taxes in your working years or saving on them in your retirement years. And this will likely come down to how much you earn. My income tax bracket is in the 30% range. So I have made the decision that it is still more important for me to prioritize pre-tax contributions. Now, even if that ultimately means I have more in a 401(k) plan than I can access tax-free later, that's fine with me.

I guess a few final thoughts. My fascination with financial independence as a concept and the fact that I understand it as a sort of bedrock for all other financial planning kind of belies my origin story in personal finance as a FI/RE devotee. And even though I've left a lot of my other FI/RE beliefs behind, this is a fundamental tenet of planning that I have held onto because it remains, as I see it, the core of the rest of the money decisions that you're going to be forced to make. It answers the biggest personal financial responsibility question of all, which is, what's the point of saving money and why would I save money instead of just spending everything now? How do I define what is enough and understand what my path to getting there looks like?

And I think that that's really, really powerful. So my hope is that after listening to this episode, you will have a better understanding for which factors really need to be considered in long-term financial planning, whether you end up using the 2025 Wealth Planner or not.

But if you would like the planner, it launches on this Friday, November 22nd, and we will link the signup list in the show notes so you can join everyone on the list gets 25% off at launch. And if you're hearing this at some point in the future, you missed the launch, but you have still made it this far, you can use code MWKSHOW for 10% off.

Okay, that is all for this week. I'm very thankful for all of you. I'm very thankful that you listened to the Money with Katie Show, and thank you for spending your time with me and your attention. I know that these things are very valuable and I'm touched that you want to spend them with me. So happy early Thanksgiving. We will see you in two weeks, same time, same place.

Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content officer, and additional fact checking comes from Scott Wilson.