“You should structure your finances so that you can leave work at the earliest possibility” – Mr. 1500
The accumulation phase is full of assumptions. Will I get a raise each year? Will I get a bonus? Will any financial emergencies come up (I’m looking at you tree!)?
All three of these have the potential to alter goals set in the previous year . I make assumptions so that I can plan, so that I know generally when I can retire.
Last year, I received no raise and a drastically reduced bonus. We altered the plan but then exceeded our financial goals due to increased business income.
This year, I received a reduced raise and reduced bonus. I was expecting better than this. I should have been more conservative with my estimates but I’m a dreamer! Now I am struggling to decide whether I should adjust my savings estimates or just go for the original goal.
Over the last couple of months, I have been working one or two days each weekend to get Mr. TJL’s commerce website online. I am a total novice, so it has been an arduous slog and I am still probably a month or more from finishing.
However, once the art site is live, we can work to promote his business and possibly make up for the lost (I never had it in the first place!) income on my end.
There are somedays I wonder if I am making this all too difficult. Four more years seems like an eternity one day and then too fast (slow down!) the next. As I have written before, we could retire today if we wanted to accept certain compromises like selling our house and not paying for our child’s college education. For now this plan remains a catastrophic option, like in the case I get fired.
The better plan is to invest aggressively until we fill each of our financial buckets. Because we will retire at age 45, we will not have immediate access to all of our retirement funds. Thus it is important to fill each of our accumulation phase buckets appropriately. Each bucket will fund a portion of our 55+ year retirement.
The fully funded goals represent the minimum balance in each account on the day we retire.
Early Retirement Bucket
Early Retirement (ER) income will fund ages 45 through 59 and will be drawn from a variety of sources:
- Vanguard Brokerage fund. We invest primarily in low-cost index funds (VTSAX). This means that we are 100% invested in stocks. Fully funded goal: $304,424
2. Rental Income. Once the mortgage is paid off, this property will produce at least $7,200 cash flow annually. The goal is to pay of the remaining $66,653 by 2021.
Both the Vanguard funds and the rental income will serve as the primary source for living expenses until we can access the 401k accounts the year I turn age 59 ½.
3. Roth IRA. We are 100% invested in VTSMX . No more contributions will be made to this account. We will leave it to grow and then use it for Roth conversions upon retirement. Fully funded goal: $7,000
4. Traditional IRA. We are 100% invested in VTSAX and meet the maximum contribution limits. All funds in this account will be incrementally converted to the Roth IRA each year after retirement. Fully funded goal: $50,000
All IRA funds are allocated to college education costs for Little Miss TJL. However, upon financial emergency these can also serve as back up funds.
5. Cash and cash equivalents. Cash is held in regular checking and a high interest savings account through Capital One 360. Fully funded goal: $48,000
Cash will serve as a buffer in the inevitable event of a few bearish stock market years.
6. Health Savings Account. We meet the maximum contribution limits and spend none of these funds. During early retirement we should be able to purchase catastrophic insurance to keep our costs low and pay the majority of our expenses with this account. In addition, any medical expenses we pay out-of-pocket now can be reimbursed at a later date from this account. Fully funded goal: $48,000
The first 14 years of early retirement also hold real promise for extraneous part-time income. Mr. TJL will still be creating and selling art (just try and stop him!), and I will likely find work that interests me as well. As my time opens up so will opportunities. When I consider this, I often wonder what in the hell I am waiting for!?!
Traditional Retirement Bucket
Traditional retirement income will fund the rest of our lives from age 60 through eternity. The funds will be drawn from primarily one source (plus anything left over from the early retirement bucket).
- 401k. Upon retirement we will roll these funds into a Traditional IRA. These funds will be left to grow until age 59 ½ . Balance at this age will be slightly over $1MM assuming a 7% earnings growth. Fully funded goal: $480,000
Income during traditional retirement will be supplemented by rental income, Social Security and a small company pension.
Ultimately, our cumulative bucket goal is $937,424. This value represents a safe withdrawal rate of 3.5% from our cash and investments. A SWR of 3.5% gives me some piece of mind that our savings will last over 50 years. However, it is more important that each bucket is full prior to early retirement since our income depends on different sources at different ages.
The above chart shows our current progress vs. the fully funded bucket goals. In total, we have $440,872 of the total $937,424 needed, an equivalent of 47% to the financial independence goal. Each bucket is also charted.
The 401 k contribution and the H-S-A contribution are automatically deducted from my paycheck each month. It is extremely unlikely that we will fail to reach these bucket goals.
The riskier buckets include the Early Retirement (ER) bucket and the rental house payoff. Our net savings rate will have to remain very high (60-70%) to reach these goals but there is reason to believe these goals are realistic.
Our track record shows that we have been consistently achieving a high saving rate each month for the last two years.
We started aggressively saving in April of 2015. In addition, that year we eliminated private mortgage insurance by paying extra principal to our primary mortgage, we paid off the car, and we paid off all of our student loans.
2016 was the first year when all of our extra income went to savings and investments. We saved over $80,000!
Despite the setback in pay raise and bonus amounts for 2017, we aim to exceed $80,000 in investment contributions again this year.
At this rate and with a little help from the markets, we should be able to meet our financial goals.
BUT, what if we don’t fill the buckets entirely before age 45? There are a couple of flexible options, depending how far away we are from meeting our goals.
- Stop contributing to the 401 k the last year of work and divert the savings to one or more of the taxable early retirement accounts. The early retirement years are the riskiest in terms of running out of money. As it stands now, we could stop contributing to the 401k and still have plenty for traditional retirement. We only keep investing in the 401k because of the
Side rant: Donald Trump has forever ruined the word tremendous for me.
2. I could plan to work part-time in the first few years of retirement. There are plenty of jobs that could be really fun and a refreshing change of pace. One job that springs to mind is entertainment event jobs, I could go on the circuit!
3. We could reduce our retirement spending to just the essentials for the first couple of years.
4. I could work my soul sucking corporate job longer. Definitely a “no other options”, last resort.
Honestly, I will probably retire at 45 no matter what and just be flexible from there.