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J.L. Collins, Achieving Financial Independence
00:45:59
Financial independence isn’t just about early retirement. It’s giving your future self freedom.
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- [00:01]
JL Collins
I think you're on mute. Workday starting to sound the same. I think you're on mute. Find something that sounds better for your career on LinkedIn. With LinkedIn job collections you can browse curated collections by relevant industries and benefits like Flexpto or hybrid workplaces so you can find the right job for you. Get started@LinkedIn.com jobs finding where you fit. LinkedIn knows how to and he said, you know, when you achieve a certain level of wealth and that wealth is throwing off a certain amount of more money and that money exceeds what you need to live on and then some everything essentially becomes free and that's a wonderful place to be. It was an epiphany for me. I'd never thought about that.
- [01:01]
Ricky Mulvey
I'm Ricky Mulvey and that's JL Collins, best selling author of the Simple Path to Wealth, which was updated and re released this year. He joined my colleague Robert Brokamp to discuss why financial independence means more than early retirement, lessons from past market crashes, and why Collins believes that most investors need just one fund.
- [01:38]
Robert Brokamp
So this is a family show. We'll start with a sentence from your book. Quote, personally, there is nothing I'd rather buy or own than FU money. So what is FU money and what was your path to having enough of it?
- [01:51]
JL Collins
So it's a. Because it's a family book, that's why I call it FU money as opposed to spelling out the word. You know, Robert, kind of a little funny aside, I have had people object to that. I've even had people say I stopped reading the book when I got to that. But I've also had people say, why don't you just use the word? And so anyway, for what that's worth. But yeah, so in my mind I think of it a little differently than I think most people do. So I think most people equate having FU money to being financially independent and that's fine. I've always thought of it as the interim on your journey to full financial independence. So full financial independence is when you have enough that it's your investments are throwing off enough to live on to cover all of your expenses. And FU money is the money you start having the moment you set foot on this path. And every step of the journey you acquire a little more. It's like going to the gym. You get a little stronger, a little stronger financially, a little stronger financially. And during the course of that journey, having that FU money makes you more able and more comfortable to take bolder decisions than you might otherwise, maybe to step Away from a job that's not really working for you, maybe to pursue something else and take a little bit of a risk. So I had started accumulating FU money long before I heard the term. But I first came across the term in a. In James Clavell's novel Noble House, and great novel, and it's part of a trilogy. And in Noble House, there is a character, and her stated goal is to have FU money spelled out. And I thought that put a label on exactly what. What I was after.
- [03:49]
Robert Brokamp
So according to your simple path to wealth, the first step is saving 50% of your income, which is what you did. So tell us about how you came up with that percentage and how you managed to live on only half of what you made.
- [04:01]
JL Collins
Yeah, so I came up with it pretty randomly. So I came out of College in 1972, and there are probably very few people listening to us who are old enough to remember what that. But that was in the midst of stagflation, and it was a bad economy. And it took me a couple years to get my first professional job, and I spent those couple of years doing landscaping to put food on the table and pay the rent. My first professional job paid me $10,000 a year. And I knew I wanted to have this FU money. So I just arbitrarily said, you know, I know I can live on 5,000 because other people can live on 5,000. There's no reason I can't do that. And then I'll divert the other 5,000 to buying this thing that was most important to me. Plus, $5,000 was more than I was making as working in a landscaping crew, and it was significantly more than I'd been living on when I was in college. So living on 50% of my income was a big step up in lifestyle for me. So this was not a problem. What's interesting about the 50% is I get pushback. That's not surprising. But what might be surprising is it comes from both directions. So the pushback you'd expect would be the people who say, well, nobody can actually do that. That's just silly stuff. And to that, I respond, well, I did it, and I know lots of people who did it. I actually now have a book out called Pathfinders that's filled with people who've done it. So I'm sorry, you can't tell me it can't be done. You can tell me you choose not to do it, and I respect that. It's your money. But the pushback also comes from the other Direction where people say 50%. Ja, hell, you're a piker. I mean, I do 60, 70, 80%. What kind of slacker are you? So 50% is just, for me, the sweet spot that gave me the best lifestyle, along with accumulating fairly rapidly what I really wanted. And then, of course, as my income expanded, so did both the half that I was living on and the half I was investing. So, you know, years later, when I was making 100,000 a year, well, my lifestyle had expanded by five times to 50,000. And of course, I was now putting 50,000 towards buying what I wanted.
- [06:22]
Robert Brokamp
The current savings rate in the US now is less than 4%, well below 50%. So I could certainly see many people hearing this 50% and saying, there's no way I could do that. But as you point out, you did it. And your Pathfinders book has stories of about 100 people who are their financial independence by living below their means. So given all the stories you've heard, what does the transition look like from being someone who saves maybe 5% to someone who's able to move up to 50%? Like, what are the first few steps they have to take if they're listening to this interview and like, I love that idea. I'm not there yet. What do I have to do first?
- [07:00]
JL Collins
Yes. So first of all, I would say it is much easier if you start on this path just as you're coming out of school before you have created some lifestyle that you then have to unwind. Right. So that's what I did. And I wrote this book fundamentally for my daughter, who was in college at the time, who was also going to be at the beginning of her journey. So I do have a lot of sympathy for people who come to it at a later stage in life and, and they have created a lifestyle that they become accustomed to that if it doesn't allow them an aggressive savings rate, will prevent them from ever being financially independent. And there's no easy answer to that. It's simply, you're going to have to reconfigure your life so you are living on significantly less than you're earning. And let's face it, as you just alluded to, most Americans are living on every bit of what they earn, and some of them are borrowing money to live on even more than that. So I get that it's hard, and I think it's also one of the reasons that people on this path and who achieve fi are always going to be unicorns. We're not going to take over the world. And that's a controversial opinion in the FI community, because especially new people who come to it. And it just seems so obvious that this is a great way to live and to have the maximum number of options in your life. Well, of course, anybody who hears about this is going to embrace it. But the truth is that buying your freedom is not the highest priority for most people, and it never will be. So I coined a term at one of the chautauquas actually called the tyranny of must haves. So if you talk to people and you say, you know, would you be interested in being financially independent? I don't think you're going to get too many who say no. But then when you start talking to them about the savings rate they're going to need, then you hear things like, well, you know, we have to live in this house, in this neighborhood, and we have to have two least luxury cars, and the kids have to go to these private schools. And so I say to people, the more must haves you have in your life, the less likely you are to achieve financial independence. And in fact, if the number one or maybe the number two must have is not doing that, then you're probably not going to get there. But it's your life. It's your choice. I wouldn't presume to tell anybody how to live their life, but I do hope that if they read my work, at least they know there's something else they can buy with their money.
- [09:43]
Robert Brokamp
And that's a good way to frame it, too. And you do that often in your writing. And that is, you're not. If you are spending less to save more, it's not really. You're denying yourself. You're just choosing to buy something else. You're choosing to buy something which is your freedom, your independence, your optionality. This first occurred to me back when I was an elementary school teacher and I was listening to a radio show by a fellow by the name of Rick Edelman, and he talked about how he was talking to a woman who spent too much money drinking Diet Coke. And he said, you're spending your money on a depreciating asset. Instead, buy Coke stock. Buy something that appreciates in value. At some point, you can stop work or take a break, take a sabbatical, and then, frankly, you'll have enough money to drink as much Diet Coke as you want.
- [10:29]
JL Collins
Well, that is. And that's a very. Robert, that last thing you said. Well, everything you said I agree with. The last thing I think is particularly important because this is the simple path to wealth. And by definition, that means if you follow it, you wind up becoming wealthy. And what does becoming wealthy mean? It means that essentially everything is free. That was a concept that Mr. Money Mustache shared with me. We were in Ecuador for Chautauqua. We were walking to a bodega to buy some wine. He'd been there before, I hadn't. And as we're walking there, I said, hey, hey, Pete, how much is the wine in this place? And he turned to me and said, it's free. I said, pete, come on, man. You know, I know things are inexpensive in Ecuador, but the merchant's going to want us to leave some money behind before we walk out with his wine, you know? He said, no, no, J.L. you misunderstand me. He said, for you and me, everything's free. And now I'm really confused. I'm like, what on earth are you talking about? And he said, you know, when you achieve a certain level of wealth, and that wealth is throwing off a certain amount of more money, and that money exceeds what you need to live on, and then some. Everything essentially becomes free, and that's a wonderful place to be. It was an epiphany for me. I'd never thought about that. And it's also a lesson in that the frugality, if you will, that gets you there, is not necessarily what you need to continue for forever. So my wife and I don't really have interest in very many material things. So we don't inherently buy stuff just because even though we can afford it, we're not interested. But we do still have this habit of thinking, well, you know, this thing costs $300. Should we buy it or not? And inevitably, one of us will say to the other, well, it's free. And then we kind of laugh about it, and, oh, yeah, it is free. And then, you know, it's. That money no longer becomes the option. So there's not a lot we want to buy, but we don't deny us ourselves anything that we do want. For instance, we fly first class just because it makes flying slightly less miserable than it would be otherwise. And it's free for us.
- [12:44]
Robert Brokamp
At this point, you mentioned Mr. Bunny Mustache, big figure in the financial independence movement. I think people who have heard about this, maybe several years ago, it was more fire, right? Financial independence retire early. And it is now, it seems like fi. FI is the preferred acronym. And since you've been a part of it all along the way, you're considered the godfather of FI or of fi. What do you see? As the reason of that transition was that people retired early and realized, this is really boring. Really what I wanted was basically the optionality to do whatever I wanted.
- [13:20]
JL Collins
Yeah, I think that last thing is an important part of it. You know, I started my blog in 2011, and that's when Mr. Money Mustache Pete started his. And his rapidly became far more successful than mine, make no mistake. But he became aware of my work and he liked it. And he reached out and asked me to do a guest post. This would have been about 2012. And the title of that guest post was It's Never been About Retirement. Because for me, first of all, when I was going through my career, I never heard the term early retirement. It wasn't even something that I considered. Sometimes I wonder if I'd been aware of it, would I have made different choices? And I don't think so. I liked my work. I just didn't like to have to do it all the time. So my career was punctuated by sabbaticals between jobs of, you know, I think the shortest was three months. The longest was five years. And that's what that FU money allowed me to do. So that was my take on it. And I've never used the FIRE acronym personally because I think it's very clever. But FI is really what I was all about and what I write about. And it's to that last part of your comment there that it allows you to do whatever you want to do. So I've had conversations with people who show me their numbers, and they are clearly financially independent. They actually could be spending more money given the amount of wealth they had. And they'll say something like, well, but I don't want to quit my job. I like. I like my job. And the same thing. I say the same thing to them. That was your last line that, you know, it doesn't mean you have to quit your job. It just means you get to choose whatever you want to do. And the other thing is, and I think this is a really exciting for this new generation, and my daughter is a case in point. She stepped away from. She's in her early 30s. She just stepped away from her corporate job last fall. I don't know for how long, but she's very engaged in doing other kinds of things that she very much is enjoying. And some of those things throw off some money. So if you are well organized, smart enough, diligent enough to achieve FI or something close to it, and you step away from, from the job, you have the odds of you never doing something Again, are pretty slim. So, yeah, I don't think it's about retirement. I don't think I've ever personally met a young person who achieved financial independence and retired and literally spent the rest of their life on the beach. I mean, I've met a lot of them who spent the first few weeks or even few months on the beach. But, you know, I think most humans are kind of driven to do stuff. And the only problem with work is that frequently in the corporate world, you lack autonomy, and that makes it unpleasant. But if you control your work, if you don't need to do it to pay the rent, it suddenly becomes a much more engaging and joyful kind of activity.
- [16:52]
Robert Brokamp
So obviously, a key component of the simple path to wealth is a high savings rate. But you don't think that money should just go in the bank. It should be invested. And you think that for most people, most of that money should go into the Vanguard Total Stock Market Index Fund. And that's about as simple as it gets. So tell us about why most people really need just one fund.
- [17:13]
JL Collins
So I would suggest all people really need just one fund. So I'll be a little more dogmatic, I guess, on that. So, first of all, the fund that I personally use, that my daughter has used in following in my footsteps is vtsax, which is Vanguard's Total Stock Market Index Fund. I like that fund. I like Vanguard for a bunch of reasons we can get into, But I get a lot of questions around that. One of the questions is along the lines of, you know, I'm with Schwab or Fidelity, and they have a total stock, and I like them. I've done business with them for a while, and I like these guys. And they have a total Stock Market Index fund. Does it have to be vtsax or can I use theirs? And my answer is no. I mean, theirs is fine. A total Stock Market index fund is pretty much a total stock market index fund. The second kind of question I get around this is somebody will say, I'm looking at my 401 and there is no total Stock market index fund option. There is, however, this thing called an S&P 500 fund. Is that okay? And the answer to that is yes, absolutely. That's the fund Jack Bogle himself started with, and that was the fund he used for all of his life. These things are cap weighted, which simply means the largest companies make up the greatest percentage of the fundamental. So the Total Stock Market Fund is largely the S&P 500 fund. I want to say it's maybe 80, 85%. And if you track those two funds performance wise, over time, they track very, very closely. So then the question becomes, okay, why aren't you in the S&P 500 fund? And my answer to that is, well, for the same reason I put Tabasco on my eggs, I like a little extra kick that the small percentage of small cap and mid cap give me. And then the third question out of this grouping is, well, what about the ETF versions? Right. So ETFs are Exchange Traded Funds and VTSAX, the ETF version of that. All these letters I'm going to confuse myself. Is vti? Yes, that's absolutely fine. It's the same portfolio. It's just a slightly different way to own it. If I were coming into this today, I would probably be buying the ETF version. I'm, as I say to people, I'm in VTS X because I'm an old guy. And that's where I started. And there's no compelling reason to change.
- [19:49]
Robert Brokamp
Obviously one reason to choose the index funds is because they're hard to beat. Right. Something like 85 to 90% of actively managed funds underperformed a relevant index fund. So that's one thing. The other thing about it is whether you can do better by picking individual stocks. We hear at the Motley fool talk about that all the time. We think there's a possibility of doing it. But even we at the fool have said from the very beginning the vast majority of people probably would be better off just in an index fund. We even went in our office. When we had an office, we actually had a room dedicated to Jack Vogel. We have a great picture of him standing in front of the Bogle Room at the Motley Fool.
- [20:27]
JL Collins
Oh, that's awesome.
- [20:28]
Robert Brokamp
And if you're going to invest in individual stocks, it certainly makes sense to track your returns because if you're not outperforming, why bother with all the time and effort? Now you're someone who, you have said, if I remember correctly in past interviews, you were a stock picker. You did invest in actively managed funds. That's in fact how you achieved your financial independence. And you did it through a good part of your life, but eventually you just said, why am I doing all this? Why don't I just stick with the index fund? Was it a matter of you just tracking your returns or was it a matter of just saying, like, the return on effort here is just not worth it?
- [21:02]
JL Collins
Yeah, so you covered a lot of ground and that's great stuff. So I will Start by saying when you say 85, 90%, the index outperforms 85, 90%. That's like every year. But if you go out five years, it becomes even worse for the active side if you go out 10. In fact, if you go out 30 years, it's less than 1% outperform, which is statistically zero. Right. So I started investing in 1975. That's when I bought my first shares of stock, which were Southern company in Texaco, if anybody cares. And that coincidentally was the same year Jack Bogle launched Vanguard and started the first broad based low cost index fund that us retail people, which is just you and me and the average person could participate in. I didn't know that at the time. And even if I had known it, I wouldn't have been wise enough to embrace it. And the reason I know that is because in 1985, 10 years later, when I did first start hearing about index funds, I wasn't wise enough to embrace. Still took me another a decade, decade and a half to get there. And so the question becomes, well, why? Why does it take so long if it's such a good thing? And I think you touched on it, it's not like stock picking doesn't work, you know, if you do it well. And you and I talked offline before we began recording and I mentioned that, you know, I came across the Motley fool in the 90s and very much enjoyed the content. And I was still a stockbricker in those days. If you do it well and with discipline, picking stocks, or for that matter picking active mutual funds that are run by stockbrickers, it'll get you there. It's not like it doesn't work. It does work. And by the way, and I'm sure you can relate to this, there are few things in life more intoxicating than finding a company, looking at the stock, pulling the trigger and then having it work, I mean, that is a wonderful feeling that I still miss. So I get it. The only thing is that it doesn't work quite as well as indexing. And it's not like the gap is huge, but it is there. And so while it took me a long time, I finally came to the conclusion, well, I'm doing a lot of work and frankly I enjoyed it, but it was starting to get old after a few decades of doing it. I'm doing a lot of work and I'm getting good results, but with no work at all, I could get better results. And so when that light bulb went off, then I slowly made the transition.
- [23:56]
Robert Brokamp
One point you make in the book is that the value of just buying a total stock market index fund is not only helping you decide what to buy, but also to a degree, what to sell. Because index funds are, as you say, self cleansing.
- [24:10]
JL Collins
Right.
- [24:10]
Robert Brokamp
Explain what that means.
- [24:12]
JL Collins
So I'm very proud. That's a term I coined actually, and I'm very proud of it. So if you. Well, let's go back in history. Back in the late 60s, early 70s, there was a concept floating, and this is before index funds were around, and there was a concept floating around called the Nifty 50. And the idea behind the Nifty 50 is they were the 50 top companies in the United States. And the idea was you could buy these 50 companies, put your stock certificates in the bank, cause back in those days you got paper stock certificates and then you were done. You didn't have to worry about anymore. Well, the problem is that companies have lifespans. And so the Nifty50 were filled with companies like Polaroid and Xerox and Sears and, you know, companies that were absolute powerhouses in the day that probably a lot of people listening have never heard of. So if you're going to be in an active stock picker, the moment you buy a stock, you have to be thinking about when are you going to sell it. And you don't want to sell it too soon because you might miss the run up. And if it drops, well, that might just be a temporary dip and as it goes on to greater things, or it might be the beginning of the end. So that's a constant bit of monitoring that you have to do. Back in the day before index funds, the idea of a, of a diversified portfolio, as I learned it, was you pick about eight industries, maybe 10 at the outside, and within those industries you pick one or two companies because nobody can effectively follow more than 15 or 20 separate companies. And if you do that, you're across say eight industries and you're carrying 16 stocks. You're diversified. Well now with a stroke of a keyboard, I can own vtsax and I own a piece of every publicly traded company in the United States. And everybody from the factory floor to the CEO is working to make me richer. And some of them will succeed. And because it's cap weighted, they will rise to the top and others not so much. And if they don't, they will fade away. I don't have to predict which one it is that's going to do that. And it's kind of a rigged game in that, you know, the Ones that fade away, the most they can lose is 100% and they usually fade off the index before they get there. But that's the worst. The ones on the way up can gain 100% or two or three or a thousand or ten thousand. So you know, and that's the self cleansing process I talk about. And Robert, the other thing I'll add to that is it also applies, and this is a question I'm getting a lot these days, also applies to the sector that is leading. So right now tech has been dominating. And one of the criticisms of these funds is, well, it's really just a tech fund because it's the Magnificent Seven are so dominant. And that's true, but in the way I look at it, that's not a bug, that's a feature because it's that self cleansing process that has brought them to the top. And one of the few advantages of being an old guy is that you remember different times. And I can remember when financials were at the top, when energy was at the top, when consumer staples were at the top. So not only do I not know how long Tesla for instance will do great, I don't have to worry about it. If they continue to do great, I'll benefit from that. If they slide away, then I'll own the replacement. I also don't have to worry about how long tech will dominate. As long as it dominates, I'll benefit. If it slips away, I also don't have to worry about what's coming up behind it because I'll own that. So I don't have to predict any of these things.
- [28:18]
Robert Brokamp
In your book you include charts showing the long term upward trend of the US stock market. It goes up to the right. But if you're closely, there are times when stocks have gone up and down, but basically been flat maybe for a decade or more. 2000, 2013, late 60s, early 80s. And then of course there was what you call the big ugly event, the Great Depression. Stocks drop in 1929, dropped 90% and really didn't recover to the 1950s. So what's your advice for people who look at those periods and are anxious about putting all their savings in the US stock market?
- [28:52]
JL Collins
Yeah, so let's look at the Depression first and then let's look at the first decade of this century. Cause I think those are two good illustrations. Right, so when people say that the market dropped 90% and didn't recover to the 1950s, they are talking about the absolute peak in 1929 and then coming all the way back, but if you'd been investing throughout the 1920s, you weren't buying those shares at the absolute peak. So it's a little misleading. But let's just take that 90% as the reality and let's imagine that just before the crash you had a million dollars invested. And then that million dollars has now become $100,000. And that's a very bad day. But the depression was also deflationary. So that means your hundred thousand dollars now has a lot more spending power than it did before the market crash. So it's not quite as bad as it looks. Now, let's suppose that you were also one of the fortunate 75% who were still remained employed. So famously in the Depression, the unemployment rate was 25%, and that's pretty damn terrible. But 75% of people just kept working. And if you were fortunate enough to be in that majority and you continued on something like the simple path which requires you to continue to buy shares, you would have spent the 1930s acquiring shares at bargain prices. And when it eventually turned around, and it took a long time, make no mistake, but it didn't, by the way, it was not an on, off switch. It, you know the market, and I forget the exact pattern, but it spiked up around say 33 and then again in 35. And it was very volatile in the 30s. It would have been a wonderful buying opportunity if you'd had the courage and the discipline and understood that the market eventually would recover. So let's go forward to times that maybe more people can relate to. So in 2000, the market crash, the tech crash, and it went down, if memory serves me, about 46%. And then the market went nowhere for about a decade. And then we had the debacle in 0809 that brought it down another 56%. And I think most people looking at that would say, well, I wish I was on the sidelines, but if I'd been following the simple path to wealth, I would have been continuing to invest in that. And my answer to that is yes. And for a decade you would have been accumulating shares at what turned out to be bargain prices. And then you would have been well situated for the 15 year bull market that followed. So as long as you have a long time horizon, bear markets and crashes, even if they're a decade long, are your friend. They allow you to acquire shares at a bargain price because you are continuing on that path. So I think one of the most important things for people to understand is that corrections bear markets crashes are a Perfectly normal part of the process. Eventually the market turns around and continues its relentless rise. And if you stay the course during those drops and continue buying, these things are a blessing for you.
- [32:27]
Robert Brokamp
For some people, obviously they're getting closer to or in retirement. You I guess could consider yourself in that category. You are in your 70s, you do think it makes sense to have some money in other funds. Tell us a little bit about your wealth preservation portfolio.
- [32:43]
JL Collins
Yeah, so in my world it's not a function of age because as we talked about earlier, there are people in the FI community and following the simple path who retire in their 30s, right? And then some of those people turn around maybe five years later and they go back to work. So the wealth accumulation is when you have earned income flowing in. And if you're following the simple path, you're taking a big chunk of that earned income. As we talked about earlier, I chose 50% and diverting it to buy your freedom. And you do that by buying these low cost, broad based index funds. When you step away from that earned income now you want to live on the portfolio. And stocks are volatile, make no mistake. And most people would like something to smooth that volatility. And that's the role the bonds play. So now you add bonds to the portfolio. I like the Total Bond Market Index Fund and Vanguard's vbtlx. And what percentage of bonds you choose is kind of up to you based on how troubled you are by that volatility that stocks provide. So the more bonds you have, the smoother the ride. But they're also drag on your performance. So personally I tilt very heavily into equities like 80, 20, 80% equities, 20% bonds. For somebody who's more conservative or maybe has barely enough money invested for it to throw off at 4% what they need to live on, they're probably going to want to be a little more conservative, tilt a little more towards bonds. You never want to go, in my view, below 50% in stocks because if you do that, you have lost too much of the engine of growth that stocks provide. That is what allows your portfolio to survive for decades. And you can see this clearly if you look at the Trinity study and that looks at different allocations over 30 year periods. So personally I wouldn't go below 60% in stocks, but never below 50. That's kind of how I look at it.
- [34:54]
Robert Brokamp
That's a good segue to the next topic. You mentioned the Trinity study and what that did basically was look at what's a safe withdrawal rate in retirement that came out, I think, at first at 1998. Before that, four years before that, came a study from Bill Bangin in the Journal of Financial Planning, also looking at safe withdrawal rates. Both of them basically cemented the 4% rule in the collective consciousness of investors in terms of how much you can safely take out of your portfolio and be reasonably sure it'll last as long as you do. You talk a good bit about it in your book. What's your take on the 4% rule?
- [35:33]
JL Collins
I think it's a great guideline. Right. I think. And I use, as you point out, I use it in the book as a barometer of whether or not you are fi. So let's suppose you need $40,000 a year to live on. If you multiply that by 25, it will give you the amount that you need to have invested, which is a million dollars. Or you can look at the other direction. You can say, I've got a million dollars and 4% of that is $40,000 a year. So that's how much I can spend. I think that's a great guideline. It's also a very conservative guideline, and that's a point that the Trinity study illustrates. It's also a point that Behnken makes himself. In fact, actually, I think, if my memory serves me, the number he came up with was 4.2%, a little higher. And he's even been on record of suggesting that that might be a little bit too conservative. So one of the great pushbacks in recent years has been is 4% too much. And there's been all this angst about, you know, should it be 3.92, 4, 6, 978%? You know, and it's just. It's like theologians used to discuss how many angels could dance on the head of a pin. It's just kind of silly stuff. I would never say start withdrawing 4%. Set it up to adjust for inflation, which is what the Trinity says suggests you can do, and then forget about it. And I wouldn't do that for two reasons. The less important reason is the fact that about 4% of the time it fails, you will run out of money after 30 years. It's not perfect. And you certainly don't want to run out of money. So you want to pay attention in case you get a bad sequence of returns. Risk, which is just the market's against you in the early years. That's one of the key things that might lead to it failing. You're going to want to make some adjustments. But the other reason the larger, the more important, more compelling reason in my mind is if you look at the Trinity study, you see the vast majority of time, not only does your money last, if you're pulling that 4% adjusted for inflation, every year it grows, and in many cases it grows to pretty spectacular levels. So your million dollars at the end of 30 years is 2 million or 4 million or 6 or 8 or 15 million. And the advantage of paying attention is presumably you want to enjoy that money as you go along. Right. So I think 4% is a great guideline for knowing where you are financially, how thoroughly fi you are. You know, if, if you only have to draw 2% of your portfolio to meet your needs, then wow, you're, you're golden. And by the same token, I've had, people have come to me, Robert, and said, jl, I've got a million dollars and I know I can spend 40,000, but I need 50,000 and I am in a soul crushing job. It's killing me, man. What do I do? My answer to those people is, you know what? You walk out of this meeting that we're having and you go resign. Because you look at the Trinity study and the Trinity study will tell you that a 5% withdrawal rate, which is what gets you 50,000 out of a million, has an 86% chance of success. If I'm in a soul crushing job, I will take those odds, thank you very much, and I'm gone. And then the second thing I'll say to people is if you are uncomfortable pulling that 5% because you're conservative, do you think there is something you could figure out how to do during the course of a year that would throw off 10 grand to make up the difference? And I've yet to find anybody who is capable enough to put themselves in this position who said, nah, I don't think I could do that. They all, it's like a light bulb goes on and they say, yeah, I'm pretty sure I could do that. And I probably have fun doing that too. Right. So yeah, that's how I think about it.
- [39:39]
Robert Brokamp
Yeah. I think it is important to know that the safe withdrawal rate research really was a worst case scenario. Right?
- [39:45]
JL Collins
Yes.
- [39:45]
Robert Brokamp
It's what survived the Great Depression, it's what survived the high inflation of the 70s. And if you historically followed that rule something like 95% of the time, you died with more money than you started.
- [39:59]
JL Collins
Retirement with and considerably more in most cases.
- [40:03]
Robert Brokamp
Yes. And I think the average withdrawal rate, if you looked at all 30 year periods since the 1920s, somewhere between 6 and 7%. So it certainly makes sense to be very flexible with your approach to it, for sure. Let's move to a final question here.
- [40:19]
JL Collins
Sure.
- [40:20]
Robert Brokamp
In your book you wrote, quote, one of my few regrets is that I spent far too much time worrying about how things might work out. It's a huge waste. It's a bit hardwired into me. Don't do it. So did this concern about the future influence your approach to money? Was it part of the reason why you felt the need to save so much? And to the extent that you no longer spend time worrying, how were you able to get over it?
- [40:44]
JL Collins
Yeah, I don't know if it's genetic or if it was learned. My mother was a terrible worrier. And so I don't know if I inherited the genes from her or just the maternal influence. And it kind of ruined her life. But, you know, in her life there were, you know, there were some significant things. You know, my dad was a pretty successful guy. He was over 40 when I was born, but he was a cigarette smoker. And the thing with cigarettes is they kill you slowly. And before they kill you, they debilitate you. And he was self employed. So as the cigarettes robbed him of his health and his ability to work, it also took my family from very comfortable circumstances to very uncomfortable circumstances. So that also profoundly influenced me. My dad put both my older sisters through college, I had to put myself through college. Not because he was unwilling, they were just unable. And so that kind of scarred me. But if you put a plan in place, like the simple path to wealth, to build your wealth, to build your financial security, you shouldn't have to worry about that stuff. And yet. So when I talk about worrying as such a waste of time, that's what I'm referring to. You recognize that we live in a risky world, but there are things you can do to mitigate that risk. And financially, you do that by building your wealth. And I think the simple path to wealth is a wonderful way for people to do that. But then stop worrying about it. One of my favorite changes in the new edition of the book is we now have two case studies. And the new case study is the story of my friend Tom. Tom was a client of mine in the 1990s. Very smart, savvy business guy in the advertising world. But Tom had a run of really bad luck. He had a couple of expensive divorces. He got involved with a financial manager who just savaged his wealth. And Tom wound up at the age of 62, broke. He lost his house to foreclosure. He lost everything financial. He took Social Security at 62, which means a smaller check, but you do what you got to do. He had a very small pension from one of the companies he'd worked for. He was unemployable at that point. At that age and that business, Nobody wanted an ad executive who was 62. But Tom is also the single happiest person I've ever met. I've never met anybody where things financially went so bad, and yet he's the single happiest person I met. He's got the best attitude. He is a pleasure to be around. So he now has a job in the Henry Ford Museum. He lives in the Detroit area, where he works on the farm that they. They have a farm there where they do things the way they were done in the 1800s. And it's an actual operating farm. And people like Tom dress in period clothes. They do actual farm work, and they engage with the tourists. Well, you know, Tom is outside doing physical activity. He's getting healthy. Tom is one of the most charming people you ever meet. So he's three years into a relationship with a beautiful new woman. You know, Tom doesn't have very much financially. But you know what? It doesn't take much to pay the rent, put food on the table, and to live a good life. And one of the downsides of this FI community I've come across is there are just too many people who achieve financial independence, you know, sometimes to the tune of several million dollars. And they're worried that one misstep will mean they lose it all. And that's not gonna happen. If you had the wherewithal to get to where you are, it's gonna take a whole lot more than one misstep to derail it. So relax, realize money isn't everything, Think about Tom, and also feel comfort in the fact that your money will probably be there for you.
- [45:03]
Robert Brokamp
Well, J.L. this has been a great conversation. Thank you so much for joining us.
- [45:07]
JL Collins
Great questions, Robert. I really enjoyed it. Thanks for having me. It's a pleasure to be on the Motley fool, where I was once a participant back in the day.
- [45:27]
Ricky Mulvey
As always, people on the program may have interests in the stocks they talk about in The Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure. Please check out our show notes. I'm Ricky Mulvey. Thanks for listening. We'll be back on Monday.