The True Test of Financial Freedom

Many people, in pursuit of financial freedom, place all their focus on accumulating assets, yet overlook one important lesson that comes after the goal is reached: how to spend. Accumulating wealth is only a process; the true test lies in whether, once the numbers reach the target, you possess a matching capacity of mind to enjoy that wealth. The ultimate purpose of a capitalist is not to watch the numbers grow without end, but to convert them into the value and experience of a life.

Slaughtering Your Own Hen vs Borrowing the Bank’s Hen

Selling stock to fund withdrawals shrinks the mother hen, whereas pledging against your holdings to fund withdrawals lets the assets stay in the market and keep compounding. The former consumes wealth; the latter lets wealth pay the bills of daily life on the investor’s behalf.

This logic can be extended into a discipline for how to spend, but you must first distinguish the nature of the expense. Ordinary living costs should be covered by stable cash flow and the annual drawdown rate; large necessary expenses are the ones worth comparing paying cash, pledging, or low-interest borrowing for, along with a monthly-payment stress test; and non-essential luxury consumption should first be confirmed not to break your allocation or your defensive lines. Only under the premise of a large expense with sound cash flow does the following sequence of “the three-tier order in which the rich spend” apply to which funds to draw upon:

1. First tier (pledging): spend the money you do not, for the moment, need to touch your principal for. As long as the maintenance ratio stays safe, cash borrowed through a securities-backed loan can be rolled over — borrowing new to repay old, never repaying the principal over the long run — enjoying a lower repayment burden. But a securities-backed loan is not free money. It is collateralized by your core assets, and carries interest, a maintenance ratio, and the risks of forced liquidation and rollover; break below the margin-call line and you will still be liquidated, so any borrowing must hold the five-times-asset defensive line (pledging ≤ 20%, initial maintenance ratio about 500%).
2. Second tier (personal loan / mortgage): spend the money that is cheap in cost. When your pledging capacity is limited or you would rather not touch the mother hen, drawing on a personal loan or mortgage at an interest rate of 2.5% to 3% is still reasonable leverage, since it sits below QQQ’s long-term return of 12%.
3. Third tier (your own cash): only as an absolute last resort do you use your own cash. Why does cash rank last? Because cash carries two more important missions: the “life-saving oxygen” of an emergency reserve, and the “counterattack ammunition” for buying the dip in a big crash. To spend your cash is to give up both of these defensive mechanisms at once.

Here is an example. When a person with NT$1 million in cash who wants to buy a NT$1 million car already possesses sufficient assets and a stable salary, that person can compare the impact of “paying cash outright” versus “low-interest installments” on cash flow, defensive lines, and investment positions, and need not necessarily pay in full at once. But one boundary must be held: consumption-type borrowing cannot be justified merely by the “QQQ long-term return minus loan interest” spread, because the long-term average return swings violently while the car loan’s principal and interest are fixed each month, and the two do not sit on the same line. The premise of any borrowing for the sake of consumption is that “a stable salary can cover the principal and interest on time,” and it must not compress the emergency reserve, the short-bond defensive line, or future borrowing capacity; if the monthly payment would cause strain, it is better to lower the price of the car than to shoulder consumption leverage just to preserve an investment position.

Expanding the Capacity of Mind So Living Costs Refill Automatically

As the compounding effect ferments, the speed of asset growth often outpaces expectations. It is like a spring that never runs dry: you do not pump from the spring itself (the principal), but draw off the fine trickle that seeps out beside it (pledging). As the asset base keeps expanding, the capacity of mind for spending must rise along with it. Once the system starts up, it runs on its own. The only thing the investor has to do is learn to trust it — and to allow oneself to spend.

The Daily Practice of the One-in-Ten-Thousand Rule

For the investor emerging from the long inertia of thrift built up during the accumulation phase, “expanding the capacity of mind” is a psychological undertaking harder than it sounds, so one can borrow an extremely easy-to-execute daily rule to practice it — the “one-in-ten-thousand rule” (the 0.01% rule) proposed by personal-finance writer Nick Maggiulli in “The Wealth Ladder,” whose mathematical baseline descends from William Bengen’s 4% rule. The concrete method: take stock of your current total assets (including investment positions), work out what one ten-thousandth of that is, and treat any single extra purchase within that amount as “a psychological exercise that will not affect your overall assets,” spending it freely. For example, with total assets of NT$10 million, one ten-thousandth is NT$1,000, and each day you allow yourself to “spend a little extra” freely within a range of NT$1,000:

• Upsize the McDonald’s fries from medium to large
• At Bafang Yunji, order the fresh-shrimp dumplings instead of the plain shrimp ones
• Upgrade the breakfast soy milk to a fresh-milk tea
• Take a taxi for a trip you would otherwise have walked or taken the bus for

These tiny luxuries of NT$50, NT$200, or NT$500 have, mathematically, almost no impact at all on NT$10 million in assets. One premise must be made especially clear: this rule is designed for the accumulation-phase investor who “still has employment income.” What it governs is the ceiling of “recreational add-on” spending — money outside your salary that can be spent without guilt — not a retirement withdrawal rate. One ten-thousandth times 365 days in a year comes to roughly 3.65% annualized, which is merely “the ceiling of what can be drawn from the year’s natural asset appreciation.” Its meaning lies in treating each day’s small purchase as a psychological desensitization exercise, not in forcing yourself to spend to the limit every day; Nick himself likewise sets this threshold for the group that “still has active income.” When you truly retire and lose active income, what you draw upon is still the 2% safe withdrawal discipline consistent throughout this book — the two belong to different life stages and must not be mixed.

The value of this practice at the psychological level far exceeds the math — it forces the investor to convert the self-perception “I am the master of money, not its slave” from an abstract belief into a concrete behavioral reinforcement, 365 times a day. Only a person who can recover a sense of “control” and “worthiness” in spending can, upon retirement, truly execute a 2% withdrawal without anxiety, and truly take accumulated assets and exchange them back for quality of life and freedom of time.

The 10+5 Dual-Engine Tactic as a Backup Plan for Retirement Withdrawals

For the investor who is extremely averse to debt, or who, on account of age, is unwilling to bear high volatility, this “10+5” QQQI dual-engine tactic is one rescue option for retirement cash flow — but it is not CLEC’s standard retirement mainstay. If your assets have already reached 50 times annual spending, keep the focus on a 2% annual drawdown rate, a short-bond defensive line, and holding the core index; only when assets are insufficient, and you are averse to pledging, yet need stable cash flow, do you evaluate this plan.

Suppose you need NT$600,000 a year in living expenses and have prepared 15 times that, meaning NT$9 million in retirement funds. Step one: put 10 years of living expenses (NT$6 million) into QQQI, which qualifies for tax reclaim. Conservatively assuming a 10% yield, this NT$6 million produces NT$600,000 in cash flow each year, perfectly covering daily expenses. Step two: put the remaining 5 years of funds (NT$3 million) into the standard CLEC formation. QQQI is responsible for paying the bills of the present, while the core assets are responsible for powerful offense and for fighting long-term inflation. Use a clear 10 years of cash flow to lock down short-term risk, and let the remaining funds run free in the market.

For retirees who find it hard to bear QQQI’s relatively high Beta volatility, one can compare across three common “index-plus-options” cash-flow tickers. The yields and Beta values below are compiled from CLEC videos (00515 / 00538 / 00541) and will shift with the market, distributions, and fund holdings; the actual figures are subject to the issuer’s latest Fact Sheet:

The choice among the three is jointly determined by “volatility tolerance” and “yield need”: QQQI is the standard option for the 10+5 tactic; JEPQ is a downgraded substitute for QQQI, sacrificing 2%–3% of yield in exchange for roughly a 30% reduction in volatility; and JEPI is the most conservative option, suited to elderly retirees for whom even JEPQ feels too volatile, but with the lowest yield, and with its underlying tracking retreating from the NASDAQ-100 to the S&P 500. When Taiwan tax residents subscribe to any of these three, they must go through a sub-brokerage firm holding “QI status” in order to obtain the tax-reclaim benefit on the capital-gains portion of the distributions. For those in the young accumulation phase, applying any of the three is not recommended under any circumstances.

▲ Figure 25-1 A comparison of three distribution tickers, where the higher the yield the greater the volatility, and retirees pick one by their tolerance

QQQI can play a key role in a retirement cash-flow plan in part because of its tax design: a fairly high proportion of its distributions is classified as ROC (Return of Capital; in certain years this has reached as high as about 97%, though the actual proportion varies with the fund’s tax classification for the year and the official announcement of distribution sources). The principle is that QQQI generates cash flow by selling covered calls and through index-option spreads, and under US tax law this kind of income is classified differently from traditional cash dividends, with a portion often listed as return of capital. For Taiwanese investors: when you subscribe to QQQI through a Taiwan sub-brokerage firm holding “QI (Qualified Intermediary) status” (such as SinoPac, KGI, or Fubon), 30% tax is first withheld by the US side in the month of distribution, and in years where the distribution is classified as ROC there is a chance to reclaim most of it (in individual cases as much as about 94% has been seen, pressing the effective tax rate down to about 1.8%); but the proportion actually reclaimable is not fixed, and must be judged by the brokerage, the 1042-S, and the fund’s tax classification for the year, and should not be treated as guaranteed.

A note on positioning: QQQI is in essence “trading upside potential for stable cash flow.” In a bull market, because the covered calls keep selling away the upside, its capital appreciation will clearly lag a pure index (00662); moreover the overseas withholding tax cannot be reclaimed until March to May of the following year, so there is roughly a year of idle-capital cost. This plan is restricted to retirees (those with assets below 25 times annual spending, forced to raise their withdrawal rate); those in the young accumulation phase are strictly forbidden to apply it, or they will seriously sacrifice long-term compounding growth.

Trusting Safe Withdrawal So Wealth Keeps Growing

To be able to expand your spending without misgiving, the confidence comes from a sound and trustworthy withdrawal strategy. As long as you keep each year’s spending within a safe drawdown rate of 2% of total assets, you can greatly raise the probability that “the money will never run out” (this is a discipline of a high margin of safety, not a market or legal guarantee), and you can also let the remaining assets keep enjoying long-term compounding in the market.

So after you spend 2% of your assets each year, you will still grow fourfold. And if the market is good, it might grow sixfold or eightfold — this is the code to getting rich. (Video 00466)

The data reveals a startling difference: taking NT$30 million in assets and drawing NT$360,000 a year as a trial calculation, after 30 years the net assets under “pledged withdrawals” will exceed those under “sold-stock withdrawals” by a considerable margin — somewhere between tens of millions and over a hundred million, depending on the return assumption. This is the power of keeping 100% of your assets rolling in the market. Trust the system, and the starting capital can even roll out a fund passed down through generations. Set down the miser’s obsession, and asset appreciation will forever outpace the individual’s rate of spending.

The scenario retirees most dread is that “the stock market happens to crash in the very year of retirement.” For this, the CLEC system has two withdrawal-defense plans set side by side — one the “ultimate conservative version (a 15-year cash cushion),” the other the “capital-efficiency version (three layers of cash flow)” — and readers can choose by their risk tolerance.

The ultimate conservative version is the mainstay approach of the CLEC canon: reserve 30% cash outright as a “death-defying token” (when assets reach 50 times annual spending, 30% roughly equals 15 years of living expenses; if assets are only 33 times, 30% roughly equals 10 years — 30% is the allocation ratio, the 15 years is the result under 50 times, not a fixed equation). Under the 50-times / 30% scenario, even if the stock market were closed for 15 years you would not need to touch any equity position — extremely conservative, maximizing survival safety.

The capital-efficiency version, by contrast, breaks retirement cash flow into three layers running in tandem:

• Layer one (the first 3 years): reserve a 3-year cash cushion. However fiercely the market falls, during this period you need not touch any equity position
• Layer two (year 3 to year 10): pledged borrowing (strictly no more than 20% of assets). Even if the three years of cash run out and the market has still not recovered, you can keep living on pledged borrowing
• Layer three (after year 10): wait for the market to come back. Historically the longest underwater period for the major stock markets has reached about the 15-year scale (the actual time to recovery varies by ticker and by whether dividends are included); for the long-term holder, so long as you can hold on through it, the wait is usually rewarded

The advantage of the capital-efficiency version is that “the cash position need only be 3 years,” so the remaining principal can be fully invested in the index to enjoy compounding, maximizing capital efficiency; its drawback is that years 3 to 10 depend on pledging to live on, which requires very strict adherence to the discipline of “pledging no more than 20% of assets” (corresponding to an initial maintenance ratio of about 500%, that is, the five-times-asset defensive line), and requires the psychological fortitude to hold up through a continuous borrowing period as long as 7 years. The advantage of the ultimate conservative version is that “you can hold up through 15 years without using any borrowing tool”; its drawback is that the 30% cash position drags down the overall return. Practical advice: the newly retired, those of ordinary psychological fortitude, and those facing retirement cash flow for the first time should adopt the ultimate conservative version (15 years of cash); those with extremely deep faith in the CLEC system, whose pledging discipline has been proven, and who possess extremely high psychological fortitude may adopt the capital-efficiency version (3 years of cash plus pledging plus waiting for the market to return). Neither is absolutely right or wrong; there is only the choice of risk tolerance.

After setting down the miser’s obsession, a deeper layer of awakening is to redefine “money” as “a tool for converting spiritual energy.” Teacher James once used a piece of hard truth to strike directly at the traditional Chinese obsession of “only saving, never spending, leaving it for the descendants”:

In the end, before we leave, it is only an inheritance for the heirs, and to you it is actually garbage, of no consequence. So even if you have tens of billions or trillions, if you can spend it within your own lifetime, that is in fact the most ideal state of “the person in heaven, the debt at the bank.” Why not turn the garbage into family affection now? Why not exchange today’s garbage for the spiritual energy of your life? So we must use money to exchange for family affection, to raise our spiritual energy, to let the people in our home live better, and to do good learning ourselves. This is the greatest meaning of money, not endlessly accumulating assets. (Video 00694, short-form)

“The person in heaven, the debt at the bank” is the true ultimate state of the “Buy, Borrow, Die” strategy (never sell — borrow against assets, pass on at stepped-up basis) — not to accumulate wealth into a heap of cold numbers left for the descendants to fight over, but to elegantly convert those numbers, while you still live, into time spent with family, into raising your own learning, into experiencing the world, and into the spiritual energy of improving the quality of life of your loved ones. A practical caveat must be added: this is a figurative metaphor, not a case of debt automatically vanishing — after death, liabilities still have to be handled through the estate, the collateral, insurance or trusts, and inheritance procedures, and poor planning can instead leave the strain to the family, so Buy, Borrow, Die must be paired with a complete arrangement for succession and taxes.

When assets reach 50 times annual spending, and compounding can already refill the 2% withdrawal automatically at a rate of 10% a year, to keep hoarding and not spending, to keep suppressing your quality of life, is in essence to give up money’s most precious function — and the spiritual energy thus forsaken is something no amount of inheritance can refill for you after death. In this level of awakening, “spending” is no longer consumption, but an ability to truly cash out assets into the meaning of a life.