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.
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.
- 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.
- 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.
- 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!