Savings & Returns Needed
Starting point documented, now what? Well, we will need to save about $140k per year at an average return of 5.5% for 12 years in order to achieve our goal and get to $3.1 million (adjusted inflated $2.2 million in today’s dollars), with $360k investible assets as a starting point by the end of 2016 (on track for that).
You know, 5.5% return did not seem unreasonable at all too long ago, but these days, I am thinking we are lucky in the 3-5% return range. I may have to make adjustments to the plan along the way to stay on track, lower my retirement expense expectations or work longer. Womp. I guess there is always this extreme... (kidding!).
This also assumes that we will have $140k to save and invest yearly and our employment situation and expenses are sustainable until then.
Because life and circumstances change, this plan will be adjusted as needed. You will get to come in that journey with us, if interested.
How will my husband and I accomplish this?
Here is the current plan. For 2016, the goal is to end the year with $360k assets and establish our baseline (the year we decided we are working formally towards financial independence). For 2017, this is how we plan to achieve our yearly goal:
- Max out both 401k plans ($36k)
- Retirement company match ($16.8)
- Max HSA ($6.75 (company adds 1k of that))
- RHSA ($1.5 (750 of that is company matched))
- Brokerage Account ($70k)
- Bonus saving ($9k)
Total investments 2017: $140,050 ($121.5k from our own pocket, rest company matched).
Currently we are at around $240k base salary plus $30-40k on variable comp, yearly (combined). Note that this excludes company matches and benefits (insurance, etc).
The one area we will need to focus on the most is our spending. Looking at 2012-2014ish expense reports (that I used to track on an excel sheet but without having any financial goals per se), we were spending over $100k a year each year.
Wow! That included two car purchases, a home purchase (that needed furnishing), a big move, solar panels (5kw) and private tuition for two but that is still a little ridiculous. What were we doing?!
I noticed 2016 started off in that direction expense wise. Thankfully, we quickly intervened and adjusted expenses (thanks to all the FI blogs out there for ideas!) and are on track (though barely) to end 2016 with under $80k in expenses. Mint.com tells me we spent $41,373 from Jan-June 2016 so in order to meet our goal by end of year we need to tone it down a tad more.
The goal for 2017 will be to keep expenses under $75k, inclusive of $10k for travel. At least we are done with private schools, that should help!
This is all doable (if nothing majorly unexpected happens) but definitively a stretch!
When creating our financial independence (FI) plan, we looked at many variables and assumptions. I will list and explain my thoughts on each below while providing helpful links for your own research on the same.
1. The Number: You heard it before. What is ‘your number’ to become financially independent? For us that number currently stands at $2.2 million dollars in today’s money + our paid off home (assuming $300k min when selling then). We aim to save 65-75+% of post tax income to achieve this goal and use a more conservative withdrawal rate assumption than often advised.
2. Inflation: Sadly, inflation needs to be considered too, womp, womp. In 12 years, assuming a 3% yearly inflation rate (may be a little high, who knows, given the crazy world we have these days) we would need $3.1m to have the same purchasing power of $2.2m today! Here is one of my favorite simple calculators if you want to check your own numbers.
3. Yearly Expenses: When we retire, we would like to have $75k a year for spending, in today’s dollars. This will be the equivalent of about $107k a year in 12 years with the same 3% inflation assumption.
4. Life Expectancy: Who knows. I am just going to go with ‘have enough money until we are both 110’ as worse case scenario. Not planning on leaving inheritance to kids either – sorry kids, enjoy your bucket full of loving memories and lessons learned instead!
5. Social Security Benefits: While most experts I have read believe that by the time my husband and I reach regular retirement age there will still be some SS funds available (even if at a reduced benefit amount) and we will make some adjustments to fund the program, I am not counting on it, at all. When it comes to our own retirement safety net, it seems “I am the master of my fate, I am the captain of my soul.” – William Ernest Henley.
6. Health Insurance: Another unknown, especially as we plan to be nomads. The only planning done for this so far is to try to remain healthy and also assume that, while our kids expenses will go down after they are on their own, our health costs may go up. We think this is a wash and assuming we will spend the same in retirement as we do in our accumulating years.
7. Withdrawal Rate: I am not going to write about the 4% rule, since it has already been documented extremely well in many places. Here is an example and a different perspective here. Our approach will include three guiding principles: a) starting guideline at 3 – 3.5% rule (vs 4%), b) start our first couple of retirement years in a lower cost of living area (which may require only 2-3% as starting point), c) watch the market and make adjustments when the time comes.
8. Tax Code Assumptions: We will split our investments in tax sheltered accounts (IRAs, 401k accounts) and post-tax brokerage and savings accounts. We hope that tax rates remain relatively the same and that we can still use the IRA to Roth laddering conversion strategy in order to be able to minimize taxes when we are done working. Two excellent posts on the topic can be found here and here. These are big ‘ifs’ however, given our current country’s debt burden and other pressures, so we will have to wait and see.
9. Investment Allocations & Fees: I like simplicity and follow a very basic investment strategy. Like most FI bloggers I am partial to index funds from vanguard. I plan to hold about 80% of our assets in stock index funds and 20% on bonds and or alternatives. I aim to have fees, on average, under .06% and will consider them within my withdrawal rate strategy each year. Those can really add up!!
10. Rent vs Buy: We currently own a home (paid $240k in 2013, mortgage balance $115k, August 2016) and aim to finish paying off it off when we reach financial independence. At that point we plan to sell and be renters for life. Why? Go Curry Cracker already stated it well, so if you are interested check it out directly. I also really enjoy this article on the same topic by jlcollinsnh. We are not interested in buying real estate for resale or to rent – we have done both things before on a small scale and, while profitable if done right, we and are not interested in the work involved. Thumbs up to lazy investing!
11. Debt: We are assuming we will be completely debt free by the time we retire. Currently, mortgage and the (unnecessary) car I recently brought are our only outstanding debt. That said, we have plenty of years to go, an aging house and growing kids! We started adding a small savings cushion for home repairs and unexpected things, so let’s hope that this covers it should we need to go there.
I had a pretty sweet life so far with a great combination of hard work, play and travel. Now, my focus has turned to being financially independent as soon as I can (while still living in the now) so I need to save a ton of money diligently and invest simply (index funds, low cost) with patience for about a little over a decade. To get me there, I am tracking my progress diligently, which you can see here.
To keep me even more motivated and engaged, I asked to be added to the Million Dollar pledge from Budgets Are Sexy. Let’s do this!