This is part 2 of my early retirement plan. You can read Part 1 here.
Expected Budget for Early Retirement
I have toyed around with an expected budget for my early retirement plan, both initially and once our two children are out of the house. While I can’t say that there is a big drop between the former and the latter, the distribution moves from food and activities for the kids to more travel and discretionary funds for us as empty nesters. Since that leaves quite a bit of a cushion, if our investments have a bad year, we can easily dial back the spending to preserve more capital if needed (or work a few hours a month to offset some costs).
Again, the point is we have many more options to choose from since we won’t depend on either (or both) of us working 40+ hours a week to pay a bunch of fixed costs like a mortgage and other debt. The tentative budget in today’s dollars looks something like this (not including college savings and mortgage which are treated differently as short-term expenses):
|Forecasted Monthly Expenses||Cost|
|Food and household goods||$800|
|Property Taxes and Home Insurance||$300|
|Utilities and cable/cell phones||$350|
|Health Insurance costs||$350|
|Car Maintenance and Repairs||$100|
|Gas (mostly local trips)||$125|
|House Maintenance and Repairs||$200|
|Kids Clothing, Supplies, Etc||$200|
|Total||$3,450 per month|
There are many very frugal people out there trying to reach financial independence that would say this is extravagant. There are also many people out there that would say “where is the credit card payment” and “that is not enough in category X.” I consider myself a moderate in terms of frugality. Because we will have the mortgage nearly paid off and no other debt of any kind, we have more breathing room in the monthly budget. Remember, this is not our current budget; it is our projected early retirement budget in 8 years. A lot can change between now and then, but this is what I came up with given the current information I now possess.
As I mentioned in my solar power article, one of the ways we have tried to reduce our future expenses was to purchase a solar power system now and enjoy the cash flow that it frees up over the next 20-25 years. Combine no electricity bill and no mortgage and close to $1,500 a month of expenses disappear each month.
I also tried to plan ahead by refinancing to a 15 year mortgage a few years ago, as mentioned in my financial highs and lows article. I will have just under 5 years left on that mortgage when I “retire” in 2022. That is close to $80,000 outside of the property taxes and insurance portion. I haven’t decided what to do with the remaining balance. I could start paying a little more now so that the balance will be smaller. I could pay off the balance with some of my retirement savings after I call it quits, or I could just factor in the payments for the first couple of years.
As of now I as have just left the payments in my early retirement model. A lot could happen in 8 years, but I know getting rid of that mortgage or any new one would be a big priority of mine. I don’t want the added burden of a mortgage payment (or any car, credit card, or other debt) when I retire. I want to have zero money owed to anyone. Currently the mortgage would be paid off by age 50 at the latest, I can handle that conservative assumption for the moment.
College for the kids
The dilemma of saving for college funds versus early retirement is one I hear about a lot. My opinion is you have to save a solid financial footing before you plan on helping your kids (who may not even want to go to college). To strike a balance, we have been contributing $2,000 per year for each kid into a Coverdell ESA account. It is different from a 529 college savings plan because I can choose the investments. The accounts are with Scottrade, so I mostly have them in low cost index funds. At this point, all of the rest of our savings are going toward our retirement.
We might add 529 plans as other people give them college money (grandparents or birthday gifts), but for now I think $2,000 a year is plenty. Each child would have about $56k in their account at age 18 assuming a conservative 5% return.
Based on my calculations, we might be able to give some additional tuition assistance when our boys reach that age if they don’t have enough scholarships or grant opportunities. I have currently planned to give each kid about $8,500 a year of support during college, escalating about $500 each year. That amounts to almost $110,000 if each kid takes 5 years to complete a degree!
I let it be such a large number so that I can be realistic about helping them out later on without compromising my retirement cash flows. Who knows, it may need to be higher at that point. Let’s be honest, it will definitely be higher than what I am estimating. I don’t feel obligated to pay for 100% of their college educations, however.
Hence, I would expect them to work part time during school and also the summers to cover the rest of the costs (and take applying for scholarships seriously). My parents let me get away with not working in college due to my large amount of scholarships (both of my sisters did work during college) and I always felt like I missed a chance to save some money up during that time.
Student loan debt
My student loan debt was minimal from my graduate degree and I eliminated it a several years ago. My wife’s are almost gone now, too. We have been paying about 8-10 times the minimums and have about 6 months left to get it completely erased. For some reason, making those extra-large payments gives me a sense of accomplishment that we are eliminating that debt quickly. Obviously the retirement budget does not include paying any student loan debt (ours or for the kids).
Unless your rates are below about 4%, you need to consider student loans as an emergency and prioritize paying them off. Don’t buy a car, don’t take an expensive vacation, put it all towards the student loans. Freeing up that cash will let you invest more later on in taxable or retirement accounts. Just be sure to move it over in your budget and not let it become spending money when the debt is gone.
Social Security and Pensions
Neither myself or my wife have a traditional pension, but social security is also due for some change or overhaul. On the one hand, that just makes it easier for us to plan by not having any pensions. On the other hand a fixed expected cash flow would be nice. You just have to decide if your former company (even if it’s the government) will live up to their promise in 20-30 years.
There is a lot of fear mongering out there around the solvency of the Social Security system. I won’t go into that other than to say that in 2030 or so when the program goes into the red there will still be money flowing in as well. Based on that, I believe a cut in benefits is the most likely scenario. I have chosen to have about 70% of our projected benefits included at age 67.
Many people leave Social Security out of the equation entirely when planning for early retirement. It’s really up to you, but it could be a bigger factor if you have started saving later in life and will need some extra cash flow.
There are many factors that could affect my journey to financial independence and early retirement. I try to be conservative when I update my model, but you just never know. There are several areas I did not mention that help keep the number from being too aggressive, but I don’t want this article to be a novel so I will just leave those details out. I think the more you use a financial budget, the more likely you are to be in tune with forecasting some of the finer points of your situation.
I don’t plan on buying any vacation properties, extra vehicles, or anything like that once we are financially independent. I do plan on some additional travel, but those costs are mostly covered by the reduction in expenses related to working everyday (gas, business clothes, etc). Plus, with the flexibility of almost 100% vacation days, we can choose our travel destinations and dates around the best deals.
Any questions about my plan? What are some of your goals and plans for retirement?