My plan for early retirement / financial independence

[FrequentFlyer9000]

Perhaps this will be helpful in getting someone else started on the same path. This will be a four part post.

There are the main things to consider:

1. How much money do you need per year to be "financially independent"?
2. How much money in the bank do you need to be able to live off of returns?
3. What kind of lifestyle do you need/want? What are you willing to sacrifice?
4. What is your backup plan in case you want additional income after reaching independence?

Let's tackle each one step by step:

How much money do you need per year to be "financially independent"?
Here is how I figured it out:

A: Figure out your baseline budget.

• Think about your expenses. What do you consider a "baseline" spend per day that you need to get by without really cutting important things? $10? $20? $40? $60? This does not include gifts, vacations, big purchases such as a car or furniture, etc.
• Give yourself a baseline budget to "test" - if you decided you can live off of $40 a day for baseline budget (this is high, but totally acceptable), then multiply by 30 and give yourself a monthly target of $1200 (30 days x $40).
• Track all of your expenses using a handy smartphone app, every day, for a few months - ideally a year. It becomes second nature. At first it was such a weird feeling, but now I just type the expense into my phone every time I take my wallet out. I use the "Spending Tracker" app, but I'm sure there are other good ones.
• How realistic was your target? Are you able to get close to it on average across 12 months? If you find your actual baseline spend is way higher or lower, adjust accordingly. It is a fine line between really penny-pinching and not being a wasteful idiot. For me, it was cutting back on ordering food for dinner and starting to cook 90% of days. It saved me tons of money, but my lifestyle didn't really diminish at all. So be smart about what you cut - don't kill yourself and stop enjoying life at all.

B: Figure out your recurring expenses. This isn't part of the baseline because for the most part you cannot control it, but it is something that is spent each month. Note that some of these may go up or down - you can always downsize your place or move to a cheaper state after retiring (do you REALLY need to live in the city when you don't work and commuting doesn't matter?, etc.). Or you may have to spend more on health insurance after retiring due to lack of employer insurance, etc. Examples:

• Mortgage
• All types of insurance
• Gym membership
• Online services (Netflix, Spotify, etc.)
• Utilities (incl. internet, phone, etc.)
• Transportation (gas for commuting / subway pass / monthly train pass, etc.)
• Other

C: Think about how much "big stuff money" you need. This one is trickiest. If you want to spend $5000 on vacation a year, budget for it. If you want to have $10,000 available to buy random things, upgrade a car once in a while, etc., budget for it.

So here is how it might look, all added up:

• A: Baseline Budget - $1200 a month, x 12 = $14,400 per year
• B: Recurring Expenses - $1600 a month, x 12 = $19,200 per year
• C: Big Stuff / Fun Stuff / Vacations / Money to Burn - $1000 per month = $12,000 per year
• Total: $3800 per month = $45,600 per year

Okay, so that's $45,600 per year. In the next post, I'll look at how to determine how much you need in the bank to get there, what kind of tax tricks you can use to give as little as possible to the government, and what kind of investments you may want to consider to maximize the return on your capital.

 

[Matt]

Perhaps this will be helpful in getting someone else started on the same path. This will be a four part post.

There are the main things to consider:

1. How much money do you need per year to be "financially independent"?
2. How much money in the bank do you need to be able to live off of returns?
3. What kind of lifestyle do you need/want? What are you willing to sacrifice?
4. What is your backup plan in case you want additional income after reaching independence?

Let's tackle each one step by step:

How much money do you need per year to be "financially independent"?
Here is how I figured it out:

A: Figure out your baseline budget.

• Think about your expenses. What do you consider a "baseline" spend per day that you need to get by without really cutting important things? $10? $20? $40? $60? This does not include gifts, vacations, big purchases such as a car or furniture, etc.
• Give yourself a baseline budget to "test" - if you decided you can live off of $40 a day for baseline budget (this is high, but totally acceptable), then multiply by 30 and give yourself a monthly target of $1200 (30 days x $40).
• Track all of your expenses using a handy smartphone app, every day, for a few months - ideally a year. It becomes second nature. At first it was such a weird feeling, but now I just type the expense into my phone every time I take my wallet out. I use the "Spending Tracker" app, but I'm sure there are other good ones.
• How realistic was your target? Are you able to get close to it on average across 12 months? If you find your actual baseline spend is way higher or lower, adjust accordingly. It is a fine line between really penny-pinching and not being a wasteful idiot. For me, it was cutting back on ordering food for dinner and starting to cook 90% of days. It saved me tons of money, but my lifestyle didn't really diminish at all. So be smart about what you cut - don't kill yourself and stop enjoying life at all.

B: Figure out your recurring expenses. This isn't part of the baseline because for the most part you cannot control it, but it is something that is spent each month. Note that some of these may go up or down - you can always downsize your place or move to a cheaper state after retiring (do you REALLY need to live in the city when you don't work and commuting doesn't matter?, etc.). Or you may have to spend more on health insurance after retiring due to lack of employer insurance, etc. Examples:

• Mortgage
• All types of insurance
• Gym membership
• Online services (Netflix, Spotify, etc.)
• Utilities (incl. internet, phone, etc.)
• Transportation (gas for commuting / subway pass / monthly train pass, etc.)
• Other

C: Think about how much "big stuff money" you need. This one is trickiest. If you want to spend $5000 on vacation a year, budget for it. If you want to have $10,000 available to buy random things, upgrade a car once in a while, etc., budget for it.

So here is how it might look, all added up:

• A: Baseline Budget - $1200 a month, x 12 = $14,400 per year
• B: Recurring Expenses - $1600 a month, x 12 = $19,200 per year
• C: Big Stuff / Fun Stuff / Vacations / Money to Burn - $1000 per month = $12,000 per year
• Total: $3800 per month = $45,600 per year

Okay, so that's $45,600 per year. In the next post, I'll look at how to determine how much you need in the bank to get there, what kind of tax tricks you can use to give as little as possible to the government, and what kind of investments you may want to consider to maximize the return on your capital.

Welcome to the forum- glad to see people thinking like this- will jump in with some comments once I see more from you and how you seek to achieve your goals in the next post.

Cheers
Matt

 

[credipig]

I'm about to retire from the Air Force. The pension will be my greatest source of income. I also have investments with Vanguard. Most are in retirement accounts; some are in regular taxable accounts. When planning my retirement budget, I found some very helpful resources on Bogleheads. Specifically, I found a safe withdrawal rate to be 3%. While, traditional thinking leans towards 4%, I want to have wiggle room, and the possibility of leaving a good sum of money for my heirs. I am 44 and plan to retire next year maintaining my current standard of living. Keep in mind though, we've saved pretty aggressively through the years.

I found these links to be helpful:
http://www.bogleheads.org/wiki/Safe_withdrawal_rates
http://www.mycalculators.com/ca/retcalc1m.html

 

[JoeK]

I'm glad you posted this, because I'm aiming for early retirement and spend a lot of time thinking and planning about this stuff.

I'm currently 34 and had a bit of a late start in terms of being financially responsible. I spent most of my 20s spending everything I earned. Finally a few years ago I started getting things together - investing as much as possible, cutting down on unnecessary expenses, etc. I discovered the amazing blog MrMoneyMustache.com and it revolutionized my thinking on a lot of these things.

Around the same time, I also discovered the concept of investing in dividend growth stocks. It was like a light bulb went off for me as I realized this, in combination with lowered spending and living below my means, would be the true path to early financial freedom.

My current goal is to completely stop working before I reach my 50th birthday.

I track all my expenses and budget using You Need a Budget (YNAB) and have been doing so for the past year. Based on last year's spending, my family of 4 (2 adults, 1 toddler, 1 newborn) spends about $40,000 per year in after tax money. This figure includes the insurance and tax portion of our mortgage but not the principal and interest portion. Thus, it is a rough approximation of what we could live off if we were completely debt and mortgage free.

The variable factor here that is tough to predict is the spending on the kids will change as they get older and require different things. Still, $40k after tax per year seems a good number to shoot for as a baseline. I figure as I get closer I can refine it a little more.

Thanks to the preferential tax treatment of qualified dividends, being married, once I quit my job I can earn up to about $76k (from memory, that figure may be slightly off) in dividends per year without paying any federal taxes.

Based on my average portfolio yield of 3.5%, I would need to reach roughly $1,150,000 to achieve my goal of $40k+ in annual dividend income.

100% of my Roth IRA and taxable investments are in dividend growth stocks. Once I quit my job, I will roll over my 401k into an IRA and invest all those funds in dividend growth stocks as well, and then start 72t early withdrawals from the 401k/IRA (the 72t eliminates the early withdrawal penalty).

I figure through a combination of 72t withdrawals and my taxable account it should not be too difficult to hit 40k/yr by my mid-late 40s depending on how things go at work (promotions, etc). I'm not entirely sure what to do with the Roth IRA. My wife and I max it out every year, but the early withdrawal options are fairly limited. I guess it will be nice to have an extra buffer and then if we don't have to touch it, we can have some bonus travel/fun money or just live a little more luxuriously once we hit 59.5.

 

[JoeK]

Sorry for the double post, but that last one was a bit rambling so wanted to keep this one on its own. I just wanted to add that http://dinkytown.net/ is a great resource for crunching some of the numbers on this stuff - 401k savings calculator, 72t withdrawal calculator, and so on. They have about a million different financial calculators on the site.

 

[Matt]

I'm glad you posted this, because I'm aiming for early retirement and spend a lot of time thinking and planning about this stuff.

I'm currently 34 and had a bit of a late start in terms of being financially responsible. I spent most of my 20s spending everything I earned. Finally a few years ago I started getting things together - investing as much as possible, cutting down on unnecessary expenses, etc. I discovered the amazing blog MrMoneyMustache.com and it revolutionized my thinking on a lot of these things.

Around the same time, I also discovered the concept of investing in dividend growth stocks. It was like a light bulb went off for me as I realized this, in combination with lowered spending and living below my means, would be the true path to early financial freedom.

My current goal is to completely stop working before I reach my 50th birthday.

I track all my expenses and budget using You Need a Budget (YNAB) and have been doing so for the past year. Based on last year's spending, my family of 4 (2 adults, 1 toddler, 1 newborn) spends about $40,000 per year in after tax money. This figure includes the insurance and tax portion of our mortgage but not the principal and interest portion. Thus, it is a rough approximation of what we could live off if we were completely debt and mortgage free.

The variable factor here that is tough to predict is the spending on the kids will change as they get older and require different things. Still, $40k after tax per year seems a good number to shoot for as a baseline. I figure as I get closer I can refine it a little more.

Thanks to the preferential tax treatment of qualified dividends, being married, once I quit my job I can earn up to about $76k (from memory, that figure may be slightly off) in dividends per year without paying any federal taxes.

Based on my average portfolio yield of 3.5%, I would need to reach roughly $1,150,000 to achieve my goal of $40k+ in annual dividend income.

100% of my Roth IRA and taxable investments are in dividend growth stocks. Once I quit my job, I will roll over my 401k into an IRA and invest all those funds in dividend growth stocks as well, and then start 72t early withdrawals from the 401k/IRA (the 72t eliminates the early withdrawal penalty).

I figure through a combination of 72t withdrawals and my taxable account it should not be too difficult to hit 40k/yr by my mid-late 40s depending on how things go at work (promotions, etc). I'm not entirely sure what to do with the Roth IRA. My wife and I max it out every year, but the early withdrawal options are fairly limited. I guess it will be nice to have an extra buffer and then if we don't have to touch it, we can have some bonus travel/fun money or just live a little more luxuriously once we hit 59.5.

Ironically my post today on the site was 'should I go for the Ferrari'
http://saverocity.com/forum/threads/should-i-go-for-the-ferrari.75598/

The premise of it was what should we aim for for FIRE - should it be enough of a nut to kick off the $40K, or should it be more, so that you can do more discretionary things too? I used the Ferrari as a half joke (I wouldn't mind having one) but more accurately might be saving for your kids college education - how does that fit into your plan?

 

[Badassity]

I'm glad you posted this, because I'm aiming for early retirement and spend a lot of time thinking and planning about this stuff.

I'm currently 34 and had a bit of a late start in terms of being financially responsible. I spent most of my 20s spending everything I earned. Finally a few years ago I started getting things together - investing as much as possible, cutting down on unnecessary expenses, etc. I discovered the amazing blog MrMoneyMustache.com and it revolutionized my thinking on a lot of these things.

Around the same time, I also discovered the concept of investing in dividend growth stocks. It was like a light bulb went off for me as I realized this, in combination with lowered spending and living below my means, would be the true path to early financial freedom.

My current goal is to completely stop working before I reach my 50th birthday.

I track all my expenses and budget ...

You're way ahead of so many. Don't knock yourself out and forget that.

After recovering from being completely irresponsible with money, I remember poring over my spending at your age, trying to figure out where to cut so I could save more. Then one day I realized I was saving a lot already and could stop stressing out about it. At the time I didn't know about FIRE and thought I would just work until my full pension kicked in. My only goal was saving for something completely ambiguous.... Maybe just to have alot of money??!

Once FIRE caught, it seemed I was unstoppable. You've got a concrete goal early on. That's pretty cool at your age.

 

[Badassity]

Perhaps this will be helpful in getting someone else started on the same path. This will be a four part post.

There are the main things to consider:

1. How much money do you need per year to be "financially independent"?
2. How much money in the bank do you need to be able to live off of returns?
3. What kind of lifestyle do you need/want? What are you willing to sacrifice?
4. What is your backup plan in case you want additional income after reaching independence?

Let's tackle each one step by step:

How much money do you need per year to be "financially independent"?
Here is how I figured it out:

A: Figure out your baseline budget.

• Think about your expenses. What do you consider a "baseline" spend per day that you need to get by without really cutting important things? $10? $20? $40? $60? This does not include gifts, vacations, big purchases such as a car or furniture, etc.
• Give yourself a baseline budget to "test" - if you decided you can live off of $40 a day for baseline budget (this is high, but totally acceptable), then multiply by 30 and give yourself a monthly target of $1200 (30 days x $40).
• Track all of your expenses using a handy smartphone app, every day, for a few months - ideally a year. It becomes second nature. At first it was such a weird feeling, but now I just type the expense into my phone every time I take my wallet out. I use the "Spending Tracker" app, but I'm sure there are other good ones.
• How realistic was your target? Are you able to get close to it on average across 12 months? If you find your actual baseline spend is way higher or lower, adjust accordingly. It is a fine line between really penny-pinching and not being a wasteful idiot. For me, it was cutting back on ordering food for dinner and starting to cook 90% of days. It saved me tons of money, but my lifestyle didn't really diminish at all. So be smart about what you cut - don't kill yourself and stop enjoying life at all.

B: Figure out your recurring expenses. This isn't part of the baseline because for the most part you cannot control it, but it is something that is spent each month. Note that some of these may go up or down - you can always downsize your place or move to a cheaper state after retiring (do you REALLY need to live in the city when you don't work and commuting doesn't matter?, etc.). Or you may have to spend more on health insurance after retiring due to lack of employer insurance, etc. Examples:

• Mortgage
• All types of insurance
• Gym membership
• Online services (Netflix, Spotify, etc.)
• Utilities (incl. internet, phone, etc.)
• Transportation (gas for commuting / subway pass / monthly train pass, etc.)
• Other

C: Think about how much "big stuff money" you need. This one is trickiest. If you want to spend $5000 on vacation a year, budget for it. If you want to have $10,000 available to buy random things, upgrade a car once in a while, etc., budget for it.

So here is how it might look, all added up:

• A: Baseline Budget - $1200 a month, x 12 = $14,400 per year
• B: Recurring Expenses - $1600 a month, x 12 = $19,200 per year
• C: Big Stuff / Fun Stuff / Vacations / Money to Burn - $1000 per month = $12,000 per year
• Total: $3800 per month = $45,600 per year

Okay, so that's $45,600 per year. In the next post, I'll look at how to determine how much you need in the bank to get there, what kind of tax tricks you can use to give as little as possible to the government, and what kind of investments you may want to consider to maximize the return on your capital.

Looking forward to part II!

 

[JoeK]

Ironically my post today on the site was 'should I go for the Ferrari'
http://saverocity.com/forum/threads/should-i-go-for-the-ferrari.75598/

The premise of it was what should we aim for for FIRE - should it be enough of a nut to kick off the $40K, or should it be more, so that you can do more discretionary things too? I used the Ferrari as a half joke (I wouldn't mind having one) but more accurately might be saving for your kids college education - how does that fit into your plan?

It's a very good question, and I'm glad you started a separate thread for it - I've replied there with some of my thoughts. I've deliberately avoided the saving for kids' college question. I am still undecided on if/how/to what extent I want to do that. Probably worthy of its own thread at some point.

You're way ahead of so many. Don't knock yourself out and forget that.

After recovering from being completely irresponsible with money, I remember poring over my spending at your age, trying to figure out where to cut so I could save more. Then one day I realized I was saving a lot already and could stop stressing out about it. At the time I didn't know about FIRE and thought I would just work until my full pension kicked in. My only goal was saving for something completely ambiguous.... Maybe just to have alot of money??!

Once FIRE caught, it seemed I was unstoppable. You've got a concrete goal early on. That's pretty cool at your age.

Oh, I'm definitely not stressing about it. I feel like I have a solid plan in place and I am in a good place financially.

When I hear about people at work talking about how they have nothing saved outside their 401k, or being in credit card debt, or how they just bought some new gas guzzling SUV so they can have the privilege of $300+/month car payments, it kind of brings me back to reality, as sometimes I forget what it was like to make those kinds of financial choices, even though I myself was there not too long ago.

But these are people in their 30s-40s-50s continuing to make these same choices, and as a result they'll have to work until they are 65-70. No thanks! I value my time way too much and I'd like to have it back to myself again while I'm still (semi-) young.

 

[Matt]

It's a very good question, and I'm glad you started a separate thread for it - I've replied there with some of my thoughts. I've deliberately avoided the saving for kids' college question. I am still undecided on if/how/to what extent I want to do that. Probably worthy of its own thread at some point.

I actually wrote it before I read your reply.. hence the 'ironic' part Though I like the idea of keep the concepts distinct in term of threads too.