Three years ago, we started an action plan to retire in early 2021. Today we are nearly 60% to our goal. Over the next two years we aim to save an additional $175,000, invested in low-cost index funds (we use Vanguard). The final year of work (2020) we will continue to max out our tax-deferred accounts, will build a cash buffer and pay off the mortgage on our rental property. The cash flow from this property will supplement our early retirement.
There are only a few steps to achieve financial independence quickly:
- Decrease spending to less than 50% of your net income
- Invest the remainder in low cost index funds
- Project retirement spending and when your investment income reaches 25-33x the expected expenses, retire.
As part of our pre-FIRE preparation, we are attempting to find the base level for our annual spending. Ideally, this amount should be $36,000. To date we have not reached this goal. With a little financial planning, we should get close. Here is our financial plan for 2018.
Spend $36,000 or less
In 2017, we spent a (projected) total of ~ $40,000. The overage was due to a large unexpected expense in January when we chose to cut down a large spruce tree for safety reasons. This cost us over $3,000. Because we are diligent savers and do not live paycheck to paycheck, this expense was easily covered but caused us to bust our 2017 budget of $38,000.
Despite being over-budget by $2,000, we attained a net savings income rate of nearly 70%!
In 2018, a budget of $36,000 should be attainable although we might go over again if we tackle a few house projects. As long as we meet our savings goals, I am content to spend on maintenance items while I still have an employer-sponsored income.
We stuck pretty close to budget in 2017, going over by just $85 per month. For 2018, I have adjusted a few line items slightly to reflect actual spending patterns.
In February, I switched phone carriers from AT&T to Consumer Cellular. The service remains unchanged but my bill was reduced by $30 per month. The 2017 estimate for phone service was too low. The 2018 budget reflects reality with this new carrier.
I have allotted more for household spending and less for groceries to reflect what we have been spending in these line items but the total remains the same. Honestly, this is where we overspend our monthly budget the most. I don’t mind going over budget if there is a good reason like personal enrichment or fun. Nevertheless, I strive for a lower spend to challenge myself to spend more wisely.
My “insane drive to work” gas costs have decreased with the addition of another commuter. An increase in gas prices could affect this line item.
I negotiated a lower internet price this year. It is good through October 2018 when I will renegotiate with our internet provider.
In 2017, we exceeded our yearly budget by nearly $3,500. Nearly all of this was an unexpected tree expense, although we also spent a little more than expected for medical expenses. Otherwise, we stuck close to the budget. No major fails here.
For 2018, I have decreased the car expenses since I dropped the coverage on our vehicles to liability only. In addition, registration costs continue to decrease each year as the cars age.
Health insurance costs increased by $9 per month this year. Starting in January, we will pay $91 per month for a high-deductible consumer health plan for family of three. I contribute the maximum* to a health savings account (HSA) as part of this plan but do not withdraw from this account to pay medical expenses. Instead, I budget $500 for out-of-pocket medical expenses.
*The IRS has increased the contribution limit to $6,900 for 2018.
I eliminated charitable giving. I feel a little bad about this, but there are some major projects I would like to get done and some of the money will come from here.
Our family has stopped skiing as much as we used to, so instead of purchasing season passes, we budgeted $240 for winter activities. This gives us some flexibility in case we would rather rent snowshoes or go cross-country skiing than downhill ski at a resort.
I increased the vacation budget back to our normal vacation spending, BECAUSE I NEED THIS.
Overall in 2017, we overspent by about $400 per month. In 2018, total expenses should be closer to $3,000 per month.
Optional maintenance budget
Income through Mr. TJL’s business, part-time work and garage sales is considered extra. If we earn extra income this year, we will re-wire the electric service to the garage. It is estimated to cost $3,000. This would qualify as a business expense and is a tax deduction.
We also need to paint the architectural shingles on our house. We plan to do this project ourselves in order to become DIY badasses and to keep the costs between $500-$1,000.
Contribute maximum to tax-advantaged accounts
A high-savings rate is key to our success in being able to retire at 45! In combination with keeping expenses as low as possible, we take advantage of tax-efficient investment accounts now while our income is high! In addition, we take advantage of my employer’s generous match and contribution to the 401(k) and HSA accounts.
For 2018, the IRS has raised contribution limits to the 401 (k) to $18,500 and the HSA to $6,900.
401 (k) = $18,500
Employer match (10% of base salary) = $11,620
Traditional IRA = $5,500
HSA = $5,550
Employer contribution to HSA = $1,350
2018 Total pre-tax savings = $42,520
Contribute to taxable accounts
Vanguard Brokerage account = $43,675
All leftover money is invested in VTSAX. The fees are very low and the performance generally mimics the S&P 500 index.
The amount contributed to this account is highly dependent on my yearly bonus, tax return and merit raise. It could vary by up to +/- $5,000.
2018 Total after-tax savings = $43,675
2018 Total savings = $86,195
That’s the plan. Spend $36,000 and save $86,000. Now for the execution.
Do you have a financial plan for 2018?