For pretty much our entire lives, Mrs. Vigilante and I have both been pretty frugal. At least by middle-class American standards, which is sort of like saying we’re the thinnest Krispy Kreme regulars. Still, we both always sought financial security, and neither of us were drawn to large purchases by promises of happiness via social status.

But we both have our soft spots. For me, it’s this blog, which currently experiences cash flow on the wrong side of $0. For Mrs. Vigilante, it’s the nesting instinct.1

In relation to her soft spot, we spent a lot of time this year discussing how (and at what pace) to furnish our new house. I figured we could fill the rooms with furniture and the walls with décor slowly, and we could use our limited income to buy more time in the market while we slowly decorated. We could accelerate our coast FI without any real drawbacks.

Mrs. Vigilante was, well, less enthusiastic about empty walls.


Frankly, I enjoy that our entryway celebrates the marvel that is cardboard.

Our disagreement, after the twists and turns characteristic of any relationship argument, led to a conversation about how in the hell our theoretical financial independence plans would actually work, year after year. Would we be able to get our money out? Would we pay too much in taxes? Would we fall behind?

In the least helpful way possible, I pointed to our budget and said: “Look at the numbers! It’s right there!” But while I love spreadsheets, graphs, and projections, no amount of time in Excel can convince Mrs. Vigilante to take any sort of action. She needs another way to understand the real-world impact of those numbers.

It’s not her fault: we all learn differently. For me, I like to categorize data and look at relationships and trends, trying to find the logical connection between every shifting data point and another. For others, like Mrs. Vigilante, the best way to understand a concept is sometimes a thought experiment – playing out an imaginary scenario with all its potential twists and turns, like an epic choose-your-own-story unfolding.

This post is derived from a sort of thought experiment we did together when we were engaged2 to clarify my intentions and convince her that, as long as we stay employed, maintain our health, and temper our spending for a few years, the game isn’t rigged against us…it’s rigged in our favor.

The Game, from Mr. to Mrs.

Imagine that today, we have $1.2M in stocks, all locked away in those tough-to-access retirement accounts.3 We’ve kept enough cash on hand to last a year or two, and we have no debt. How would our finances look? When would we run out of money?

Truly, there’s no way to say. The real value of our retirement accounts each year will vary wildly and unpredictably based on the timing of our withdrawals, market fluctuations, expenses, etc. But our concern is running out of money over a very long period of time, not making sure that we have constant growth. It is the overall trend that we are concerned with, based on average gains, average withdrawals, and predictable variables – not any given year’s losses or gains. We need the growth over decades to match our predictions, not growth in any given year.

So let’s see how the years play out with pessimistic estimates of average performance.4

Retirement Year Uno

We should be able to maneuver through tax laws to avoid paying penalties and significant (or possibly any) taxes on withdrawals from our retirement funds. Roth contributions and your 457(b), for example, can be withdrawn penalty-free for any reason! In any likely scenario with current tax laws, we would not pay higher than about 30% overall on our withdrawals, although it is much more likely that we would pay 0-10% on our distributions from our various accounts, based on clever planning.5

But let’s assume the worst. Let’s assume everything we withdraw from these accounts comes at a 30% penalty/tax. After emphatically damning Uncle Sam straight to hell, we’d realize that if our expenses are about $28k,6 so we need to withdraw $40k to pay taxes/penalties and still be left with the money we need to replenish what we spend.


You making me pay my share??

Let’s assume that our investments will gain about 7% per year on average, and inflation will be about 3% per year. Historically, this is slightly pessimistic; we can expect between 7-10% nominal returns per year – on average over decades – and inflation from 1-5% but generally closer to 2-3%. In this case, pretending that the average happens every year, our $1.2M would grow to about $1,284,000, but we would take out about $40,000 to replenish our cash on hand. This would leave us with about $1,244,000 at the end of Retirement Year 1.

So after one year of spending, we’d have another year of income saved, plus inflation – and then some. (And that’s assuming we have to pay taxes and penalties that, frankly, we won’t be paying!) Our accounts will grow by more than we withdraw. (Actually, they will shrink substantially some years, but the Hulk heals fast. Remember: This is a game of averages.)

Retirement Year Dos

In Retirement Year 2, let’s assume we withdraw an extra $2k, pretending that inflation is that dramatic – which it isn’t, usually – or that we are foolish enough to voluntarily increase our expenses by 8% in a single year. Like we’re buying a new car each year because we spilled a Coke in the last one. Our pessimistic predictions, represented by rudimentary math, would look like this:

$1,244,000 * 1.07 = $1,331,080 – $42,000 = $1,289,080

Our accounts would grow from $1.2M to almost $1.3M in two years, without us adding a single penny. Without working a minute, without exerting any effort other than staying alive and exercising our secret shared superpower – not buying everything!7

And one day, the prophecy will be fulfilled.

We will eventually have a new source of income: a monthly payment of at least $1k from your pension. So, we need $12k less from our accounts to make ends meet. And since we’d pay less super-pessimistic taxes that means we can withdraw almost $13,000 less each year.

So, with your pension, we are withdrawing $27k instead of $40k. Our accounts will snowball out of control, growing far faster than we are withdrawing from them. Also, if we withdraw $40k each year and spend an average of closer to $25k, and if our average tax rate is sub-10% as we expect, we will be left with about $10k to reinvest if we choose in most years.8 So our accounts will grow by $10k – or, more likely, we will withdraw $10k less the following year. If we are truly withdrawing, say, $10k per year, an original investment of $1.2M is enough to last 120 years if there were no inflation or investment returns. But we reasonably expect investment returns outpacing inflation by about 3-4%, so our accounts will not only last but grow substantially, in an exponentially accelerating fashion.


Say hello to compound freakin interest.

Then, we’ll have Social Security. But let’s leave that out, even though our estimated payments will be more than even your pension. And let’s leave out interest on checking/savings accounts as well, because they will not keep up with inflation and will return only dozens or hundreds of dollars a year, if we’re lucky.

This snowball effect we’ll see in our retirement accounts – without Social Security – follows the assumption that we live entirely on our those accounts. It’s assuming that we never work, never sell anything, never create anything, and never find a dollar on the street. It’s assuming that we decide to waste away on the couch for years on end. But that’s not our style.

I blog. If the additional time I can invest in I, Vigilante, without full-time commitments earns us $2k per year,9 we need only withdraw about $8k. If you work very few hours at a daycare as you’d like to, you may make $4k without breaking a sweat. If I practice law part-time, for a firm or by hanging a shingle, I may net $10k without breaking a sweat. We might continue to contribute to our retirement accounts after leaving full time work, rather than withdraw. And we’ll have awesomely free lives, to boot, while others are still working to save up for a far-off future retirement because they spent all their money in the first year of home ownership on $99 handwoven baskets from Int’l Child Labor, Markup & Co.

Security and the Pretenders

There is a great power to having that kind of ever-growing money: security. It is knowing that if you don’t feel like doing something today, you don’t have to. It is knowing that if you lose your job, you don’t have to adjust your lifestyle, beg for work, or fight with your family about spending. It is knowing that if you want to try a new career or take a risk, you can do so without worrying about how you’ll feed your family. It is knowing that if anything should happen to you or anyone else in your family, the others can go on without insurmountable financial burden. It allows so much more time for happiness, and so much less time waking up to an alarm clock for another Groundhog Day-esque experience.

Given our current position – earning way more than we need to spend, having so many things we want to do, and realizing life is freaking short – anything short of this financial independence is unacceptable. Any time we spend money on a luxury – alcohol, restaurants, air conditioning, pretty furniture, decorations, food that is more expensive than another option, extra trips in the car, vacations, movies, and so on – we are pretending that we have that security. We are pretending that we have enough security already that these luxuries will have a net positive affect on our overall happiness. But they won’t, because security is far more important for our happiness given the value of our limited time, and we are giving up some security for a luxury.

Now we don’t know if we’ll die before that security is achieved. Life’s a gamble. So, we sometimes pretend. But minimizing that pretending is absolutely crucial, because otherwise security – and therefore actual happiness, the kind that allows you to fully enjoy those luxuries – will elude us forever. We’ll have lost a game that was, from the start, rigged in our favor. It’s more important that we heed the words of the Oracle:

Don’t save what is left after spending; spend what is left after saving.

  1. Is that politically correct? And how much do we not care?
  2. Stunningly, she still went through with the wedding!
  3. This scenario doesn’t reflect our actual plan, but it’s easy math. In reality, there will be a lower goal, a variety of assets, and taxable accounts, as well.
  4. Note to the Finance Police: I fully understand that nominal returns of 7-10% annually is not “pessimistic,” and in fact exceeds most doomsayers’ predictions for the future. Those historic returns are based on the unprecedented prosperity that capitalism, the Industrial Revolution, and the Informational Revolution have brought to the world’s richest country, which some seem to think has stopped growing. I disagree, and I think humans will continually advance into eternity and become the new gods. But let’s temper both my enthusiasm and your hatred for optimism and  look at the bigger picture here: I am also adding high inflationary numbers, higher than anticipated expenses, and much higher than anticipated taxes. So all in all, this is a pretty pessimistic estimate.
  5. Roth conversion ladder, staying under income tax limits, use of available deductions and credits, saving health care receipts, etc.
  6. Which they aren’t – they should be closer to $25k or under, but for the sake of argument let’s assume we will withdraw more, because things go wrong.
  7. This will be slightly reduced by expense ratios, management fees, trade commissions, etc., but we minimize these with our index funds and ETFs such that we are paying only hundreds or low thousands for the maintenance of our accounts each year. So while these have an effect on us, they will not break us. Just reduce each years’ returns by .05% or so and that will yield a more realistic number. I didn’t bother making this reduction because I’m already using high estimates of inflation and spending increases with low estimates of earnings to a far greater extent than .05%.
  8. Years without dramatic spending increases, like uninsured health issues or uninsured home damage.
  9. Way more than the negative annual profit today! Recalculated, and it turns out this little bugger earns about $120 annually in profit. Look out, Forbes!

2 Comments on "A Rigged Game"

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Mrs. Groovy
You’re painting a totally realistic picture. In year one of our retirement our investments are out-earning our expenses. When the market turns, this may not be the case. But with re-balancing and paying attention we should be fine. I agree with you about not giving up security for a luxury, and furnishing your house slowly. We bought quite a bit of new furniture for our current home, but not all at once. We also decided a dining room set from Craiglist would work just fine, and it has. And sometimes you have to live with pieces before you decide what… Read more »