What should you do upon achieving financial independence? According to JL Collins, it all hinges on your spending rate rather than merely your net worth.
In the second part of our discussion, Collins addresses what occurs after reaching financial independence and considers whether your investment strategy should change once you've "won the game." For instance, a person with $5 million who spends $100,000 annually is in a vastly different situation than someone who spends $200,000 yearly. The former can afford to maintain an aggressive stock portfolio, while the latter needs bonds to stabilize their financial journey.
Collins illustrates his withdrawal strategy using his daughter as a case study. She left the corporate world in her early thirties and now maintains an 80-20 stock-to-bond allocation. She collects dividends from both investments, which amounts to about 2.5 percent of her intended 4 percent withdrawal rate. Vanguard automatically liquidates shares to obtain the remaining 1.5 percent.
We delve into Collins’ perspective on the 4 percent rule, which he considers extremely conservative. He cites Bill Bengen’s research, which indicates that 5 percent withdrawals are successful 86 percent of the time. Collins would embrace those odds to leave a job they find unfulfilling, especially since many financially independent individuals tend to inadvertently generate income.
Our conversation also touches on the challenge of balancing the frugal practices that accumulate wealth with the ability to spend money once it is available. While Collins occasionally flies first class, he opts for a modest vehicle.
He elaborates on why those who are financially independent often remain engaged in work; the issue was never the work itself, but rather the lack of control over it.
Timestamps:
(Note: Timestamps may differ on individual devices due to variable advertising durations. The provided times are approximate and may vary by a few minutes based on ad length.)
(0:00) Introduction
(2:00) Investing after achieving financial security
(5:30) The importance of spending rate relative to overall wealth
(8:00) Short-term vs. long-term financial strategies
(11:00) Gradual versus immediate bond integration
(14:00) The conservative nature of the 4 percent rule
(17:00) The risks of unenjoyable jobs and the 5 percent withdrawal strategy
(24:16) Frequency of withdrawals and dividend distributions
(27:16) Setting up automated share sales
(31:16) Launching a business during financial independence
(36:16) The concept of generating income post-retirement
(47:09) The difference between agency and obligatory work
(50:09) Spending insights for frugally-minded philanthropists
(54:09) The enhanced impact of charity auctions
Resources Mentioned:
How I Discovered the 4% Rule, with Bill Bengen | Podcast
Bill Bengen created the 4% rule. Now He Thinks We Can Withdraw More | Podcast
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What should you do when you achieve financial independence? According to JL Collins, it all hinges on your spending habits rather than solely on your net worth.