Welcome to the culmination of a week of numbers! On Monday, we took a look at the historic spending of the Banks family and emerged with an ideal early retirement budget of \$51,300 with an after-kids budget of \$47,000. Remember that these numbers are all based on maintaining our current lifestyle in our current home in Alaska. Moving will most likely decrease those needs, but since we have data about what we currently spend, we’ll build projections based on the life we currently live.

It is also helpful to know that we make a combined \$87,000/annually pretax. Though our tax liability is low because we have three children, etc., I do have to pay self-employment taxes because I work as an hourly, contracted employee. Also, Mr. T’s health insurance payments, etc. get taken out of that \$87,000. Not counting our extra 401k contributions, we make about \$75,000 after tax. This also doesn’t include the PFD for us or our children.

On Wednesday, we looked at the three numbers most retirement calculators either make you guess or assume itself (be sure to check the assumptions when calculators don’t ask for them!). In that post, we learned that Mr. T and I are comfortable counting on an annual inflation-adjusted 4% return on our investments and planning for a 3.5% withdrawal rate the first year of retirement and continuing to withdraw that same amount of money each year (adjusting for inflation).

Potential Plan #1: The Employee Retire Early Plan

An easy way to calculate how much you need in retirement is to multiply your annual spend by 25. That assumes you are cool with the 4% rule. If you want to plan on 3.5% withdrawal rate, multiply by 28.6 (I know, not nearly as awesome, and is actually more like 3.4%…). Based on that basic calculation, Mr. T and I would need about \$1,467,000 to retire. Yikes! Doable eventually, but yikes! Let’s look at how long it would take to get there. Figuring that we’ll max out our Roth IRAs and Mr. T’s 401k (which we are not currently doing), that assumes we can save \$29,000 a year. Using my favorite basic compound interest calculator, I know we can reach that goal by 2042! Yikes! Mr. T can retire from work with medical benefits in 2039 – so, that would be LATE retirement! Not what we’re going for. Now let’s consider if we can somehow add \$1600 a month on top of maxing out Roth IRAs and the 401k. Now we’re looking at saving \$48,200/year.* If that were possible, we could make it in 2035! 4 years early! Now consider that we will have a paid off mortgage by the end of 2019, so we can put another \$2000/month toward savings for a total of \$72,200** starting in 2020 – That extra \$24,000/year gets us to that \$1,467,000 by 2031.

But, thanks to two-phased thinking by Our Next Life, what if we included the drop in monetary needs after the kids leave? We’ll start those calculations when Lui hits 20, just to be safe. That would mean after 2034, our annual projected needs drop \$4,300/year. Using Excel to calculate how much we would need to retire in 2022 (our current goal) based on spending \$51,300 until 2033 and then dropping to \$47,000, and using a 4% market return (after annual spend), we would need \$1,170,000. Returning to our magic savings numbers of \$48,200/year savings from 2016-2019 and then \$72,700 from 2020-2029, we could retire with over \$1,170,000 by 2029!***

Potential Plan #2: The Forced Entrepreneur Plan

Let’s start out by looking closely at the savings plan we mentioned above. We have \$70,878 in investments right now. If we save \$48,200 from 2017-2019 and then save \$72,700 from 2020-2022, here’s a table, based on a 4% annual market return on what we can predict to have at the end of 2022.

 2016 \$70,878.00 2017 \$123,945.12 2018 \$179,134.92 2019 \$236,532.32 2020 \$321,081.61 2021 \$409,012.88 2022 \$500,461.39

Now, of course, the market could tank all of those years or perform way better than a 4% average. But based on a 4% return rate model, we’re on target (assuming we can hit those savings goals) for over \$500,000 by 2022 (the original goal).

Sticking with the 2-phase model, and sticking to our 2022 date, we return to our original plan, which involves leaving work in 2022 and starting something ourselves. Mr. T and I are wannabe entrepreneurs. We have a ton of ideas but no risk. We want to set ourselves up financially to be able to make safe entrepreneurial bets. So, let’s look at the original plan of \$500,000. What if we quit working in 2022 as we said, and never again added any more money to those accounts? But, what if we planned to not touch them until age 60? Assuming a 4% return, that \$500,000 would be \$1,140,000 by the time Mr. T turns 60! Actually, we could start withdrawing in 2041 (when Mr. T is 58) when our portfolio is \$1,013,000 and have that money last (withdrawing \$47,000 and assuming 4% market return after that) past my 100th birthday!

That leaves us with a 19-year period without funds with two phases of spending: \$51,300 from 2022-2034 and then \$47,000 from 2035 (until we die, but for the purposes of this window)-2041.

Consider us ending 2022 with a paid off house, \$500,000 in investments we don’t touch until 2041, and three years worth of living expenses (rounding to \$154,000) in a brokerage account. The \$500,000 would cover us from 2041 until death and the \$154,000 would last through 2025.

The goal for this plan would be to have something up and running that we enjoy that could completely cover our spending by the end of 2025. Ignoring markets completely because the money wouldn’t be in them, the venture (or many ventures) would have to make a total of \$790,700 (9 years spending \$51,300 + 7 years spending \$47,000) if starting to pay for expenses in 2026. Yikes! No pressure. We have 16 years to make that money and enjoy the adventure that entails.

My plan has always been to retire early. Mr. T is on board, except his “retire early” has always been “become self-employed”  though he, too, likes the idea of never having to work for money again. This entrepreneurial plan sets us up for the long run with the original \$500,000 and a paid off mortgage. It adds \$154,000 to cover three years of living expenses while we get something up and running that we want to do.

This would be closer to the Coffee Sippers’ Fully-Funded Lifestyle Change or, for us, a Partially-Funded Lifestyle Change.

Potential Plan #3 – The Risky Child-Centered Plan

A large kink in the 2022 or later plan is that Penny is done with elementary school in four years–summer 2020. If we want to do something crazy like travel the world for a year with the kids, put the kids in school in a different country, etc., I feel like middle school for Penny would be the ideal time. Middle school is horrible. And by the time high school rolls around, she may want to be leading a more “normal” life. I want that to be mostly up to her. But the point is, summer of 2020 would be the ideal springboard time into a new, crazy life. Based on our above savings chart, we would have a paid off house and only \$321,000 in savings.****

Part of us just wants Mr. T to quit in the summer of 2020 and be crazy for the three years of Penny’s middle school. I would probably continue to work since I actually love my job and can work very flexibly from anywhere and only 10-15 hours a week. I don’t make nearly enough to cover our current annual expenses (I make less than \$20,000/year), but that would at least cover over 1/3 of those expenses. And if we left he country, we might be able to live on just that. Then, in 2023, when she’s slated to start high school, we can either jump into the entrepreneurial thing with both feet or have Mr. T get another regular job (less likely). Penny graduates in 2026. Time is running out with her. We have only 10 years left! Part of the passion behind early retirement is allowing more possibilities for our children.

Recap:

1. Option 1: Work as we currently are and retire with some ridiculous amount of money to cover all of our expenses forever sometime between 2027-2029.
2. Option 2: Stop working in 2022, have a paid off house, \$500,000 in investments that we don’t touch that will cover all of our expenses from 2041-death. Have 3 years of living expenses that will cover 2022-2025. Hustle to be self-employed to cover all costs between 2026-2041.
3. Option 3: Hustle as hard as we can to have a paid off house and as much savings as we can (\$321,000+ predicted) and start a new life in summer 2020 when Penny is done with elementary school. I would continue working (earning between \$15,000-\$20,000/year) for some period of time and we would figure out the rest as we went.

Maybe the markets will help us significantly in the next four years and we could hit one of the other targets by summer 2020. Remember that the 4% market return we’re using to calculate is based on the average of the worst years of the history of the market cutting out the top half of market earning years, so it could very well do better than that, but the market is due for a good nosedive, so I don’t want to count on it.*****

Other than the progress bars on our blog sidebar, all of these plans require the same action: try to cut down expenses where we can, pay our mortgage quickly, and save as aggressively as possible.

Which plan would you spring for? Why?

*Contributions from Mr.T’s employer are about \$800/month. \$48,200 is my savings goal for 2017 including those employer contributions. I hope to be contributing \$1500 to Mr. T’s 401k by the end of 2016, max out both of our IRAs for the year, and then add the extra \$1600/month in 2017. It’s a bold plan, but I think we can do it. This plan also means decreased living expenses which is a great thing. So we may re-calculate the numbers in a year or two and see where we stand.

**This amount is insane. We only bring home \$75,000/year! That would mean our expenses would be WAY down. But remember, these savings amounts include the contributions from Mr. T’s employer. We’ll see if we can do it!

***In reality, \$1,000,000 and a paid off house would most likely last us indefinitely and we could hit that based on the previously-mentioned savings plan by 2027. But we also want to have a good, solid buffer to help the kids through college, buy a house in a more expensive area if we need to, etc.

****In either of the previous plans, we could plan to spend summer of 2020 and perhaps other summers after that living in other countries and then return for the school year if we want to be less drastic and risky.

*****Using the median market return of 7%, we could have \$545,000 by the end of 2022, break \$1,000,000 in 2026, and have over \$1,500,000 by the end of 2029!

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1. #### Fervent Finance

I run through scenarios like this every once in a while. My main two are (1) bust my butt at my job and never have to work again if I keep at it for another 7-10 years, and (2) quit in 3-5 years or so, save a much smaller nest egg and then fill the gap somehow with entrepreneurial activities. (1) is currently winning but I could easily be swayed 🙂

As for your choices I think they’re all great. I think you’ll know which one to pick as time goes on 🙂

• #### MaggieBanks

Exactly! There’s still a long road ahead of us and the steps to get there are all the same… so we’ll just keep on keepin’ on (and secretly hope the markets return 13% for the next 5-10 years!).

2. #### Harmony Smith (@CMK_Harmony)

You have options, which is always a good thing. We are going with something similar to your Plan #2 – because of our debt, we’ll never be able to reach full retirement early. We already have one rental property, which will help cover our living expenses between when we start our semi-retirement and before we arrive at full retirement. Have you considered investing in property?

• #### MaggieBanks

We’ve considered renting out our current house if we ever moved, but I don’t think we would invest in real estate beyond that. My parents rented out a house when I was little and it was an absolute nightmare. They would call and threaten them sometimes… we had to hide a few times and pretend we weren’t home. They stole all the lightswitches, etc. when they finally got them to leave. It was terrible. When I see the numbers, I’m tempted, but then I remember I’m too much of a chicken to actually do it! 🙂

3. #### ambertreeleaves

The question you ask is on the mind of most FIRE fighters! I analyze it almost every day.

The current plan is to keep working till 2029 and never work again. This is the baseline. Everything we can do to improve is a plus, a serious plus!

an intermediary plan is to go freelance at some point in time and tax optimize in a better way our income. As an employee, I have very limited options. This is not ideal, as I still trade time for money. My hope rests on serendipity to find a business to run as a side hustle.

Time will tell

• #### MaggieBanks

We’re hoping for that same serendipity! Obviously if we have something running that covers our annual expenses and we enjoy it, we’ll take that plan!

4. #### The Personal Economist

I love your scenarios. I have similar ones. I’d err towards option 2, but try to start the side hustle now so that a) you have extra income coming in and b) it won’t be so scary to but the bullet. You never know you might be able to do it earlier.
Another thought – have you considered working more hours when your youngest goes to preschool/school? My youngest is now 6 and that is what I have done (I essentially work school hours) so it still maximises your time with the kids when they aren’t at school but you you are fully utilising the time when they have to be at school.
Funny I came to the same conclusion when I did these types of scenarios, it is a bit of an anti-climax in the analysis, you just gotta keep doing what you are doing ?

• #### MaggieBanks

Yes! I’m hoping to keep my current job and just be able to increase my hours when the kiddos go to school – but I do still have 3.5 years before Lui goes to school! Our plans obviously include no work or salary increases – maybe those will tip the scales to earlier!

5. #### Ditching the Grind

Wow! Very impressive running the numbers for these scenarios. I know you’re being super conservative to be safe, but I wouldn’t sell yourself short on your ability to make extra money now and in the gap years. You guys are smart and with some calculated risks, I bet you can bring in some extra cash in unexpected ways.

That being said, I like both 2 and 3 (obviously). Assuming you start building the foundation for some side income now, I think they both sound super exciting!

• #### MaggieBanks

Right. None of these calculations consider any pay increases or side incomes in the next few years. The ideal scenario would be to hit that 1.4 million by 2020 – ha ha ha. The real plan is just to hustle hard for the next four years and see where we’re at in 2020 and what we want to do at that point. If nothing else, I want to just move to the UK for a summer between school years. That wouldn’t be super disruptive but would still be a crazy experience for my kiddos.

• #### Ditching the Grind

I love the idea of a little bit of work, just enough to pay the bills, mixed with a healthy dose of exploring and new experiences. That way you can get a taste of ER without depleting your funds.

• #### MaggieBanks

I love the idea of having enough to cover us from “Traditional” retirement age until death and then spending less time working on earnings until then as well. Or, maybe our entrepreneurial idea will rake us in 1.4 million in a year and we can call it! Ha ha ha. We have no desire to do something on that large of a scale!

6. #### our next life

I love these explorations. Obviously I vote for the options that get you some freedom sooner, even if you need to do some self-employment or part-time work in the meantime. Another thought: can you work on the earnings side more? Especially once all the kids are in school in a few years? That seems like the biggest way to up your savings, especially since you’re already pretty optimized on expenses. I keep thinking you could save faster if you leave AK sooner rather than later, but obviously you do get lots of good life vibes there in addition to no state tax and the PFD. But even while some of the kids are home, could you explore other side hustles that wouldn’t take a ton of time away from them? I know it’s entirely possible to retire early with a five-figure income, but man, making more money sure helps a TON.

• #### MaggieBanks

My personal goal is for us to have something up and running by the time Lui heads to school in 2019. If we don’t have anything up and running by then, I’ll just increase my hours at my current job… so I will definitely plan on more income once all the kiddos are in school all day. And maybe leaving Alaska is in the cards sooner rather than later… but we’re not ready to do that yet! We’ll just keep plowing ahead and we’ll probably do one of these complete analyses every couple of years because things change.

7. #### TheMoneyMine

Ha, all these projections, I’ve done these a more often than I should have, are we all numbers-nerds? hehe
It’s good you have several options on how to approach it and I also like the idea of self employment instead of ‘early retirement’. Our careers are working well for now so we’re just riding the wave but ultimately, investing your own time in your own business is what I see being the most fulfilling ‘job’.
I also don’t think the market will return 7% / year and I’m currently using 5% so we aren’t too far apart on that one. We’re currently looking at buying a house for rental purposes to increase these returns (and diversify and learn something new).
It’s good to think about options upfront. As time goes, you’ll already know which one to go for (and maybe a 4th option will appear!).

• #### MaggieBanks

Thanks for weighing in Nick! I agree with you – as time goes on, we’ll either have it all clear up as to which direction we should head or even more options will open up! I already can’t wait! (I need more patience, obviously)

8. #### Mr. SSC

Thanks for the mention and sorry for running so late with a comment – bug was running around the house this weekend, and were it not for some work deadlines, I’d still be home asleep… Ugh…
I like the options, except number 1, it seems to be the odd man out, but 2 and 3 both seem like winners. Like Nick pointed out, and we’ve also come to discover, you will have many more options appear, and disappear on your way down this path. I mean looking back at what our “plan” was, it went from moving to Couer D’Alene, tor ealizing that may be too much of a shock, so definitely going to VA/NC TN tri-state area but definitely buying a house. To realizing renting for a few years would de-risk our mountain living experiment, and now scrapping VA/NC for a few years and NOT buying a house, but rather renting, and then maybe settling in the mountains or following the original plan of settling in VA/NC after that for the kids formative school years of Middle and High school. So many plans, so many options. 🙂

I’m excited to see what you guys end up with, and reading about it as it morphs into whatever it will ultimately be.

• #### MaggieBanks

I agree that being so early on the journey means none of these things will be the end journey! But it’s good to recalculate and having something to plan towards. And I love that no one wants us to keep working for 13 years! Yay community of freedom! I’m already excited to see how far we can get in 1-2 years and recalculate again!

9. #### Jen@FrugalSteppingStones

I really need to run our post-kids grown up numbers and add in the 529s our in-laws have been funding. The Mister will be actual normal retirement age by the time our 2 year old is graduating high school, and we want me to be ready to retire early at that point. That is 16 years from now, when I am 54 and he is 64. I’m not sure he will really retire (he loves his work) but you never know.

For that matter, I need to run numbers that include building a house with an in-law suite to accommodate our parents living with us, which is high likelihood of happening.

• #### MaggieBanks

I love running numbers in ALL the scenarios… super geeky, I realize! 16 years feels like so long – our plan is out that far as well. But the journey should be exciting!

10. #### Leo @ GOE

I would go for option 3. My main reason would be to spend more time with the kids while they are growing up. It’s financially risky, but time with your kids is priceless.

• #### MaggieBanks

I agree with you. And I’m totally heading in that direction, but I’m going to let our kids choose. If they want to move elsewhere for a year, we will. If they want to stay here for schooling, then we’ll take big trips during the whole summer and/or holidays. If that extends our final retirement date, so be it!

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