My Early Retirement Plan (Part 2)

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 Insurance $125
Car Maintenance and Repairs $100
Gas (mostly local trips) $125
House Maintenance and Repairs $200
Clothing $ 50
Miscellaneous Entertainment $300
Kids Clothing, Supplies, Etc $200
Kids Activities $200
Travel Expenses $350
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.

Mortgage

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.

What Else?

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.

Ebates Coupons and Cash Back

Any questions about my plan?  What are some of your goals and plans for retirement?

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7 Responses

  1. Harry says:

    hi, thanks for sharing your plan. i am thinking through my own.

    will you have to pay any taxes on the money you draw out of your investments?

    assuming you will pay some then you will probably be drawing at least 4% of your investments annually
    my understanding is that if you plan to do that for more than 30 years you face significant risks the money will run out.

    can you say more about the investment policy you will use and how you plan to deal with ‘sequence of returns’ risk?

    • vawt says:

      Some of the funds are in Roth IRAs, but the largest portion is in tax deferred accounts. I plan to do a Roth conversion ladder at lower tax rates once I am no longer working. If my wife continues to work, we won’t be touching the funds, but could still be converting it. I hope to have at least 1-2 years in cash right off the bat to help avoid drawing down investments as well.

      The timing of the returns is one of those variables that is hard to predict. I would probably consider working part-time if we started to have poor returns early on.

      As for the investment policy, I will try to keep my diversification across industries and investment types. I may also look at getting more exposure to REITs or other alternative investments not so directly tied to the US stock market.

      Thanks for you questions!

  2. Harry says:

    Thanks. Its not clear to me when I would be ‘in trouble’ when drawing 4% and would need to think about working. Especially since I need the principle to last much longer than 30 years and that who knows if the future will be like the past in terms of equity returns.
    I’m looking into understanding this. This was interesting and gave me some pointers and things to think about: http://radicalpersonalfinance.com/73/

  3. Jase says:

    Can I ask why you won’t consider buying a vacation house/etc in the future? My wife and I are planning to be FI and are looking at buying two houses, one in each hemisphere. We will live between the two and rent them out when we aren’t living there.

    I’m interested to hear your opinion on this and why you aren’t considering it. Is it for the liquidity/flexibility or lack or hassle or something else? Thanks!

    • vawt says:

      Good question. Generally, I would lean towards renting or finding good vacation deals as it would most likely be cheaper given the property taxes, upkeep, property management fees, mortgage, insurance, etc. I think if it was in a locale that assured me a high rental rate and high occupancy rate, I would consider it. For those that buy a vacation home, visit it for less than a month a year, and don’t maximize its value by renting it out, they are a bad idea (same with timeshares).

      That being said, if you find a great deal you could end up in a great situation with two properties increasing in value. I think the great thing about early retirement is you get to define how it looks for you. If you plan to spend considerable time at both locations it could make a lot of sense. Especially if the second location is in a lower cost country than the US.

  4. Suzanne says:

    I guess I’m one of those readers who wonders about your unprojected/unexpected costs. Maybe I’ve missed something, but I don’t see anything budgeted called “medical and dental expenses”– other than the cost of medical insurance. As we get older, we tend to need more maintenance, kids included, and these unexpected medical costs can cause severe cash flow problems at midlife–especially when they are not covered by insurance. My daughter and her husband have had their share of these– sports injuries and unexpected things like gum disease can create havoc. My second concern is that I see plans to retire early, however, most dedicated savings is in restricted accounts, which will trigger penalties for early withdrawal if you need those to live on pre age 60. Are these two items (unexpected medial/dental and early withdrawal penalties) in your budget? There are so many potential pitfalls as we age — I retired this year and am in a good position, however, I have found that it is the unexpected–in particular things like constantly changing tax codes– that can cause us to fall short of the mark. Please know that I heartily applaud you and other personal finance bloggers for your rugged independence and for stressing the need to save big and for as starting as soon as possible. A life-long habit of fugality is the best insurance policy and hedge against legislative changes that plague the modern saver. Learning NOT to count on government programs and planning your future wealth independent of these programs is clearly the best strategy. So kudos to you for creatively embracing reality by planning for the needs of your future selves.

    PS: I would also be sure to stress to your children that you EXPECT they will go to college in the least amount of time possible, in deference to your budget and their own future well being. Both of my younger siblings went to college on full 4 year (tuition) academic scholarships at state schools and both were able to finish a BS in 3 and a masters in the 4th–thereby squeezing every last drop out of that gift. They have both prospered far more than their age-mates–and retired before I did, probably due getting a head start at the job market and learning early in life about making every penny count.

    • vawt says:

      Hi Suzanne- Thanks for the great comment! To answer your question the health insurance costs include visits and is somewhat based on us either self-insuring, getting an exchange product at a discount because of our now considerably lower income, or having access to insurance from part-time work. Aside from that, I planned significant resources for house repairs and upgrades that could be diverted to health care if needed.

      I plan to do a Roth conversion ladder for several years and will also have a couple of years of cash in the bank. In addition, we will also have more than six figures in our Roth accounts where contributions can be withdrawn penalty free at any time. I also have a deferred compensation plan that I can set up to either pay out right when I retire or delay to any date I want. I might cash it out and take the tax hit all in the first year (before starting the Roth conversions) or let it continue to grow for a few years.

      Good point about college. It will be made clear to them that the amount saved is all they have. If they get done early, they get to keep the surplus.

      Thanks again for the thought provoking questions!

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