All models are wrong, but some are useful.

George E. P. Box

Knowing a time of arrival is key to arranging any complicated journey. An estimated timeline for reaching financial independence is no different.

It is important psychologically because knowing provides a different perspective on choices and work life into the future. Understanding potential timing is also important at a practical level as there are a range of actions it makes sense to take prior to reaching financial independence, and potentially choosing to retire early.

This exploration began over three years ago, with an initial objective of building portfolio of $1 476 000 by July 2021. Since that time progress has occurred and goals have evolved, enabling bringing forward the achievement of this first goal.

Part of the function of this record is to have a history of this evolution, to serve as a reference point through the journey. Another, more outward-facing, purpose is to discuss the specific issues encountered in the middle and later stages of the journey – which can be different from those encountered in the earlier stages.

Since the significant equity market falls across the early part of this year it has been increasingly clear that my original timeline for reaching my financial independence goal may need adjustment.

This post discusses the significant impacts of market movements, how I am approaching reviewing the expected remaining length of the journey, and shows some early results of this approach.

Fixing coordinates – the remaining distance on the portfolio journey

The current target timeline for achieving the portfolio goal is July 2021. Following the falls of early 2020, the achievement of this target looks difficult. Further market declines would only increase this challenge.

The chart below illustrates the remaining distance to travel – the deficit or ‘gap’ in nominal dollar terms – to the portfolio goal of $2.18 million measured since the start of the year.

As can be seen, the portfolio came to within around $250 000 of the target in the middle of February, however rapid declines over the next few weeks increased this deficit to the portfolio goal to nearly $700 000.

The subsequent recovery has decreased this gap to the target, but not fundamentally altered sheer scale of the task of reaching it by July next year.

To put it in clearer perspective, achieving the goal would require uninterrupted average growth of around $36 000 per month in the portfolio, emerging from what has already been a swift recovery from initial market falls. This outcome is not impossible, but this required growth figure is around twice the simple average monthly growth over the period of this record, and well above the median increase.

Taking cross bearings – methods of estimating a new timeframe 

In previous reviews of how long it would take to achieve target portfolio objectives, I have used three alternative measurement approaches. These were:

1. Long-term linear trends of past progress – a simple trend-line forward projection based on portfolio growth across multiple periods (e.g. since 2007 and December 2016);
2. Historical monthly averages  – assuming future growth equal to the average total monthly portfolio growth since December 2016; and
3. ‘Brute force’ progress – assuming no portfolio growth, but taking into account contributions and estimated distributions.

Each of these are imperfect approximations and projections. They simply cannot fully account for the ‘real world’ return sequencing risks and volatility certain to be encountered in the medium-term. They also do not account for annual deviations in distributions, the impact of extra savings from past changes to the levels of emergency funds, or a dozen other complicating factors.

Further, and even more critically, the data from the period that is used for methods #1 and #2 above is drawn from a phase of unusually strong equity market growth. Applying these averages does not reflect the potential for the future path of market growth to look different, and entirely fail to match that encountered across this period.

Lines of position – estimates of new portfolio arrival dates

Yet with these flaws and limitations the three approaches still present at least the potential boundaries of an expected time of arrival at the portfolio goal.

Applying these today leads to estimates of reaching the portfolio goal between October 2021 and May 2023. Overall, the median and average of these multiple approaches falls around May 2022, almost a full year beyond the current timeline.

Depending on whether average progress since 2007 or 2017 is used as a measure makes a relatively small difference to the May 2022 outcome. Whilst being almost a year later than the current target, this new indicative timeline is still around a year ahead of previous targets set in both 2018 and 2019 for reaching my ultimate portfolio destination.

These shifts reflect the inevitability that with the portfolio being significant at this stage of the journey, the timeline for meeting the target is more likely to be affected by market fluctuations over the next two years than day-to-day changes to saving and investment efforts.

The wind rises – impact of portfolio movements later in the journey

This is entirely the opposite position to when I was in the early and middle phases of the financial independence journey.

Volatility experienced just this year alone has seen a month of gains in excess of $100 000, and losses of over $200 000. Another source of volatility is Bitcoin, where changes in price can easily result in a movement of $30 000 to $40 000 per month in the portfolio. Whilst individually volatile, with gold it plays a role in reducing volatility at the overall portfolio level.

As I have observed – barring significant changes to the allocation of the portfolio that would lower diversification, reduce expected returns and potentially create longer-term income adequacy risks, there is a limited amount I can do about this volatility. That is, if one does not count regular re-reading of stoic philosophers.

At the beginning of January I noted that a 33 per cent equity market fall with no offsetting gains could push out the target date to 2023. This was less prescience or precognition than mental preparation advocated by the likes of Marcus Aurelius’ Meditations.

So the portfolio target will remain an important guidepost, even as I recognise that a sequence of ‘good’ or ‘bad’ months in the market, or changes in my career, could easily affect this specific plan and timeline.

Bending towards port – different perspectives on volatility

Falling out of this volatility is a question – what will it actually mean to pass the financial independence portfolio number?

My current answer to that is still being formed. As the portfolio progresses one measure I have paid increased attention to when thinking about this question, however, is the ‘implied withdrawal rate’.

Mathematically this is the rate resulting from dividing the target spending benchmark ($87 000 in current 2020 dollars) into the current value of the portfolio (around $1 670 000 at time of writing).

The result of this – measured on a weekly basis in the five months since January 2020 – is illustrated in the chart below.

As the mathematically inclined will immediately note, this is simply a partial rearrangement of the earlier chart that focused on nominal dollar distance to target. Yet it also reframes the journey and task in a subtle way.

Sizeable movements in the portfolio in nominal dollar terms become relatively smaller shifts in the withdrawal rate implied if the target income was withdrawn from the current portfolio. Currently, this implied withdrawal rate sits at about 5 per cent, a rate well above that considered ‘safe’ by most studies (pdf), and yet, more viable levels remain well in sight.

Time of arrival – defining the journey end-point

Ultimately, the challenge of estimating when the portfolio might meet the goal is a function of being relatively closer to the end of the journey, than in the middle of it.

This is a fortunate position to be in even in normal conditions, as market waves either push progress of the journey onwards, or break against the portfolio. In the current global economic circumstances arising from the corona virus pandemic, this good fortune is even more keenly felt.

The past few months have reinforced that the key ancient virtue needed to interact with modern markets is humility. Taking a lead from that wisdom, the potential for the remainder to the year to look different from models, expectations or smoothed averages is high.

For this reason, whilst already reaching this rough approximation of the impact of the events of the past three months, I will not be formally updating my timeline until January 2021, as part of a normal annual cycle of reviewing the portfolio goals and approach.

At that point, time and tide may tell a different tale.