There’s a LOT of different advice and theories on this magical “retirement number,” but as we alluded to in yesterday’s post, there’s one that gets passed around quite a bit amongst the early retirement crowd. And to be honest I’m liking it the more I come across it :)
It goes like this:
You can retire safely when you have 25x your annual expenses invested in income generating assets (which assumes a 4% withdrawal rate annually from these investments to live on – another general rule people tend to agree on)
Notice this all relies on your EXPENSES – not your income, like a lot of calculations use. That’s the part I like the best since a) you have the most control over it, and b) it just seems to make the most common sense – doesn’t it? You’ll also remember this was the “financially independent” section of the PF Score chart yesterday too @ number 25.
But alas, it’s no easy feat. Do-able, sure, but not easy. How many of us even have 1x our annual expenses invested?? I’ve got 6 and 1/2 but I can’t touch most of it! Haha… (more on that below)
Note too that this magical number only includes “income generating assets.” Things like stocks, bonds, CDs, businesses, real estate, etc. And not your personal residence as it does not give you cash every single month as much as we wished it to. That means the future looks even farther for the majority of us looking to stop hustling soon :(
The other month a commenter here asked me if I was serious about retiring once I hit the million dollar mark in 7-8 years, and while I wish I could have said yes, the truth is I still wouldn’t be close. At least not with the way my life and net worth is currently structured (though I still want to hit $1 Million regardless! ;)). And that’s mainly because of two parts:
- Our monthly expenses are still way too high ($5,500), even though we’ve cut out a lot and have since stabilized (pumping out babies is keeping us on our toes though! ;))
- My investments aren’t in easily accessible accounts. Meaning, I can’t touch most of them until I turn old and gray and ready to retire the “right” way according to the gov’t ;) Which was all fine and dandy when originally setting up all these accounts (I didn’t want to be tempted to pull from them!) but now that we’re talking about reaching the end goal sooner, we’ve put ourselves into an interesting pickle.
According to this retirement rule, I’ll need approximately $1,650,000 stashed away ($5,500 x12 x25) in INCOME-PRODUCING assets if I want any reasonable shot of retiring in the near future. I’d call it “early retirement” if I could, but it just may take me until my 60’s to hit it! ;)
But, that’s only if things remain as they are today.
There are ways to knock this number much lower:
- I can reduce expenses even more
- I can invest a lot more money (as time goes on)
- I can start converting some of these accounts to work more in my favor (see Mad Fientist’s post on the Roth IRA conversion ladder) and I can get better at tax hacking (see Go Curry Cracker’s post on never paying taxes again)
So, it’s not *hopeless* per se, but it’s also not very close still either ;) For the first time since starting this blog though, I feel like I’m starting to “get it” and understand more of the realities with retirement. My bubble’s been officially popped, and I’m now floating down from La La Land into the dark and serious “real” world, haha… But a world I very much need to know if I want change to come sooner.
That’s what I’ve been thinking about lately, anyways… The overall picture of retirement, and badly admiring those frugal rock stars who figured it out many a moons ago! It’s no wonder the Mr Money Mustaches and JL Collins of the blogging world are getting so popular – they speak the truth and show exactly how it can be done!
Unfortunately they just don’t DO IT FOR YOU, those bastards ;)
Photo cred: Alaskan Dude
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The 4% withdrawal rule (or 25x calculation as other people know it) is a good starting point to figure out how much money you need to retire. But I don’t think its an end all be all. There are ways that you can work the system so that you can fly in under that 25x target.
For example I plan to have enough assets to retire in about 11 years. While I’ll be drawing down from some accounts that accessible before age 59-1/2, others I won’t be taking withdraws from at all until I finally do reach age 59-1/2. During that time those untouched accounts have the potential to practically double in size, which will then help to fund the rest of my retirement from age 60 and beyond while the ones I’ve been using will be somewhat exhausted. I have this all laid out (with numbers and figures) in a blog post – email me if you’d like me to send you the link.
That’s pretty much what I’m planning to do MMD, except I haven’t got round to writing a blog post about it yet, I’m writing it all up as we speak tho!
One thing about your personal residence, I think this does need factoring in some how into the calculation. At some point your house will be paid off, so your expenses will drop considerably (from what they are right now anyway, all else being equal) as you won’t be paying a mortgage anymore.
This is clearly not an insignificant effect, if you are paying $1200 a month on your mortgage when it’s paid off your needed retirement nest egg all of a sudden drops by $360,000 (using the 4% rule!)
Not many blogs I’ve seen on the matter of FI have dealt with this fact head on so far, but again I have one in pipeline which I shall publish soon which will attempt to do so and factor it into the 4% rule.
I mentioned the need to factor expenses you won’t have at retirement into the PF calculation on yesterday’s post. (comment 68 & 69)
It raised my PF from 10 to 16.6! Now that looks MUCH better. :)
All great points, guys! I’m (obviously) pretty new to this “retire early” thing, but I’m soaking it all in from y’all :) Love all these questions and tweaks – thanks so much for taking the time to throw them over.
25x is probably a bit too low. Your monthly expense usually increase every year and you need a bit more cushion. I’m shooting for 30x and then the missus can retire. :)
I also think having money in retirement account is a good thing. You don’t want to withdraw too early. We are still young and can make money with alternative careers. Let’s keep the retirement account stashed away until we really need it.
Your retirement accounts are not untouchable. There is the 10% penalty for early withdrawal, but check out 72(t) and 72(q) to avoid it in certain circumstances. It’s restrictive, but could be the ticket!
What? Really?? I’ve never even heard of those – cool!! On my list to research, you’re awesome :)
I learned about them when I used to work at an investment company. I saw only a few clients who were using it while I worked there, and I can’t think of any clients at the accounting/tax firm I’m at now that are using it. The restrictions keep people away from it, but I suppose that’s the point!
SEPP is my backup plan if things don’t work out in early retirement ;)
I think one aspect of the conversation that is missing here is the very concept of retirement itself: what does it mean to the individual? I think some become so focused on retiring early they forget to think about what they would do in retirement. I was between jobs for three months last year and nearly went insane out of boredom… so I know I would probably keep a part time job of some sort that I enjoy fully. So that is retirement for me: working part time on my terms, likely seasonally. This reduces the amount I would need in savings as my “retirement” would still have income (my wife plans on doing the same). Its important to define your retirement prior to working incredibly hard to achieve it.
You bring an excellent point and I experienced a near identical situation. After all the stuff was fixed around the house and the garden plan implemented, there was an eerie feeling of emptiness without goals to shoot for and boredom was a real threat. Financial Independence is the foundation we are all striving for as we follow these blogs and work our budgets. Retirement is an entirely different stage that requires planning and as you mention has different perspectives and definitions.
I have a pretty good ad from Citi Bank from a few years back that said, ” being wealthy is not about having money, it’s about not worrying about money”. This is the foundation being FI. Trading time for money at a really good job that one enjoys is achievable.. Why retire if one enjoys the job, the people, the products and is aligned with your own mission and goals?
I’m with ya, boys. To me it’s all about having the money to do whatever I please – work, or no work – without worry. Similar to that Citi ad (brilliant, btw!). I’ll never stop doing *something* so I’m not concerned with that, but I also don’t want my somethings to need to produce any income either, so it stays outside of my retiring calculations since it would all be extra.
Where do you plan to store the retirement money that you will need before 59.5?
I’m still trying to figure that part out myself, haha, but from what I gather just a straight up investment account :) The trouble I have is that I’m so used to maxing out the benefits of the retirement accounts that it would hardly make sense to go around that and do the other, ya know? So in a way I just need to make like DOUBLE income so I can first max out the tax benefits of the retirement accounts, and then fill up my other accounts… I’m still rather new to this “early” retirement game ;)
Once your wife starts working just invest 100% of her income and you’ll be there in no time flat! It’ll be pretty sweet :)
Yes, I know! That changes everything, doesn’t it? :)
The thought I always have when I see calculations like this is…how does someone that’s 22 and starting out know how much their expenses are going to be 40 years down the road so they know how much to save for retirement? Retirement savings analysis is one of those things you have to do periodically and figure out (given what your financial picture is at that moment) if you’re on track or not.
Yeah, I don’t have a good answer for that one… I agree you do have to work with what you’ve got at the current time, and then tweak as the years go by like you mention, but if you’re retired at say 35, it’s def. gonna be different at 65! That whole medical part is a totally different beast in itself. Though, even if you retire at 65 you may not even know what’s to come so I guess you just do your best to gauge and then hustle your ass off until you hit your best goal?
The short answer is, you can’t know for sure. But it’s a good guideline. Check out Modigliani’s “Life Cycle Hypothesis,” which won him the Nobel Prize in economics — the gist is that our consumption patterns generally go down as we age.
Scott Burns, in his blog over at http://www.assetbuilder.com has also discussed this several times in the past.
Thx for the links!
A little passive income like rental real estate might help accelerate (took me 3 times to spell that right) the timeline, particularly if you’re comfortable with debt and can keep enough emergency savings to weather those busted heaters and stuff. You and I both know that real estate investment is not the pie in the sky that many people hold it out to be (mmmmm…. pie….). But particularly if you’re willing to take the extra risk of buying rental property with a mortgage, a few rental properties can close the gap a bit.
Like I mentioned yesterday, I’m way below the 25x in accounts that would be available w/o penalty. But the hustle is on.
I have no idea what my expenses will be when I’m older…so it’s hard to plan for that. WE just save and invest as much as we can at this point. We’re also making great progress in paying off our rental properties and they will be paid off in around 11 years when we are about 45. Then we will have an extra 2K in income which will get us to retirement that much faster.
Holly, if you own 3 paid off houses in 11 years, hang up your hat and go relax on a beach somewhere for a few months. You will be done!
Like a few others have touched on J, you could possibly get around some of the restrictions with a 72(t) or 72(q) and avoid the tax hit. That said, doing some Roth conversions will help as well. Assuming you do hit the early retirement scene, would you still work at some level, like a part time or seasonal basis?
Yeah, never even heard of that 72-stuff, definitely interested in learning more :)
As for working – yup, I’ll always be tinkering with something no matter when I “retire.” The difference will just be I do it mainly as a hobby vs. business. If it happens to make me extra money, great! (And, odds are it will) But really I’ll just do it to stay active and engaged.
These are concepts I’m exposing my children today, so I they begin to work they have the possibility of starting early and not having to work for 35 years of their lives. I’m assuming the calculation would have to factor in some type of inflation or cost of live adjustment over the years. Or does it assume the investment performance will be greater then the 4% withdrawal?
Some of the articles about this stuff go into it pretty well and includes inflation stuff, but I can’t recall the details at the moment…
We are doing something similar to what Holly is doing – we are saving and investing as much as we can so that we can reach financial independence. Luckily, our expenses aren’t too high, but we also don’t have kids yet so I don’t know what my magical number is!
My husband and I could make it with less than $1,000,000, but like you we’re in a pickle in that all of our money so far is in retirement accounts. It didn’t matter back when we assumed we’d never be able to retire early, but now that I’ve learned more and realized we could perhaps retire around 50 (and I want to do even better than that), we need to start looking at other options. Even though we probably don’t “need” $1,000,000 (and I’m so glad to know that), I still want to shoot for that number just to say we did.
As others have mentioned 72T (SEPP withdraws) from IRAs will get you about 3% out of an IRA penalty free each year (you have to continue the withdraws till you hit 59 1/2, but there is no restriction from reinvesting back into another IRA if you have earned income). Also roth conversion laddering works well too if you have 5 years of expenses in either ROTH contributions or taxible accounts. you can roll say 30k each year into your roth from an IRA, which becomes available to withdraw penalty free 5 years later.
Thanks–I will look into that.
I freakin’ love our community! So many smarties up in here!! (And congrats on all your success too, Jen. A great problem to have!)
Thank you! And I agree–great community. I’m rather new to the personal finance blogosphere, and I’m learning so much.
I think it’s important to understand the difference between current expenses and expenses in retirement. By the time I retire, my son will be out of the house (at least he better be), my house will be paid off, and my student loans will be gone. This eliminates a minimum of $2k in expenses/mth. Plus, I won’t have Roth contributions to worry about. That’s another ~$900. Take out all those things, and I’m down to $840k. That’s a highly reachable number. Current projections put that about 5 years out. It would be nice to think that’s enough, but I think I’ll still shoot for my $4M number.
@ Slug Totally agree! Since my family has reached early retirement at 37 our expenses have dropped substantially!
2 cars, are now 1 (think car payments if you have them, gas, insurance)
2 cell phones, are now 1
We travel hack-Hotel stays during Mon/Tue/We/Thurs are way cheaper than Fri/Sat/Sun
House paid off
Shorts and tee shirts here! No business attire needed.
No more 401K’s/IRA’s etc.
If I could do it all over again. I would have not invested more than the company match in my 401K/ as I now have money I need to access. Sure I could usa 72(t), but I want it all NOW to invest it. Maybe for someone who might be at the point where they can max out there retirement accounts, you might not want to do that. Looking back I should have put in ONLY what my employer matched in my 401K, maxed out my IRA and purchased investments (rental properties) with my saving surplus. I think this is better approach than waiting until you are almost dead (59.5) to touch these accounts.
The biggest takeaway for me is, that once you retire, you have the TIME to enjoy and take advantage of all the inefficiencies.
holy damn… you guys are GOOD. Just trying to take all this in and process – it’s so different than I’m used to seeing/doing! Haha….
@Will, what about the added tax burden? Not only will you lose your ability to write off up to 17500 or your income, you’re now taxed more and it *can* lead to less cash in your pocket each month.
The hardest part to FI is being able to bloat your taxable accounts. The government does not really make ER that easy!
You say you amassed a large portion of your retirement money in the proper retirement accounts. Well think about this for a second.
Lets say you decide you don’t want to touch those accounts until the standard 59 1/2 years of age and you wanted to retire early at 45 or 50. Lets also assume that once you turn 59 1/2 that those accounts have grown to a point that can support your lifestyle in retirement 100% or more. If that is the case all you really need is the money to get you through 10-15 years of “early retirement” until you turned 60. Different account for different phases of your retirement basically.
Something to think about anyways,
Very true indeed – good point!
Oh man, you’re so far ahead of me! I’m aiming to retire in 20 years or so. I just came up with this plan a few months ago, and our net worth is still negative!
The question I always have whenever this question comes up revolves around the word “safely.” What does safely mean? Being able to get by if life transpires perfectly? No financial problems ever, no matter what issues crop up in my old age? What if I retire at 60 but live to 100…does that longevity change the equation? There are so many variables to consider that make it difficult to project how much I’ll need in the future. Not saying we shouldn’t plan, just that the unknown creates quite the challenge.
For sure. But as you mentioned, we still need to plan :) I guess it wouldn’t be the worst if you enjoyed 60-something years financially free and having the time of your life only to realize you’re out of money at the end. I feel like you’d have figured it out somewhere in the process though and then tweaked stuff to adjust if you’re smart enough to get to that point already?
Have you considered what your expenses will be once your debt is gone? That might make you feel a little better. Though, I do agree that kids do throw a wrench into the early retirement thought process. We pay 1/3 of our income in daycare, that is a major expense. I just have in my head that I can retire in 25 years, once the kids are out of college (I plan to have one more).
I did not take that into consideration, but now I’m going to in my mind and see what that looks like :)
I am so screwed. I am in my late 40s and I am still a negative number. I will leave the negative and become a 1 in 2015.
But you’re working on it now and pushing forward!! That’s something to be proud of! We’re all in different phases, ya know? :)
Once you’re done with your mortgage (2 of them?) you will be in a much better position! Not having to pay rent/pay a mortgage drastically reduces your spending. On top of that, your kids will be a bit older and will be going to school for free (assuming public school at least). If we didn’t have daycare/rent we would be around $30k spending a year.
I know, man… I can’t wait!
I want 100K after tax… we’re currently on approximately a freedom 45 plan. However, that requires not procreating, which as you’ve mentioned can be pricey. As long as we continue to aggressively save, we would be fine if anything went wrong long before we hit 4.5M! Our expenses are slightly less than half of that, for now.
Not bad at all! And the beautiful thing with kids is that they improve your life way more than any monetary losses :) (At least if you’re a “kid” type of person – I know they’re not for everyone)
It’s a tricky thing to calculate. We are planning on utilizing rental property income for a part of it, so that further complicates the matter. (I think our lazy math is to subtract the net rental income from our expenses, and then take that figure and multiply it by 25 or 30).
As you noted though, the easiest way to make progress is to reduce expenses. Much easier to reach financial independence by that route, than to try to keep expenses where they are and to just acquire another $1M or $2M.
Wow, that’s a wake up call. Because of our very high mortgage payments (Silicon Valley style), our first and second mortgage plus property taxes and insurance alone add up to over $4300 per month, meaning with no other expenses of any kind (impossible, I know), we would need $1.29 million! Clearly we’re officially “house poor.”
And to think I was feeling pretty good earlier today * sigh * The timing is not right to sell the house just yet, so I’ll pay off that last credit card and start looking at paying down that HELOC.
Principal payments on your house are technically savings, not an expense even though they are required outlays (interest and property tax certainly are expenses though). So looking at your real monthly expenses helps make your situation look better.
And if you retire after your house is paid off, you lose that huge chunk in the expense category too – as others have mentioned :)
‘The number’ is an almost weekly topic of discussion/debate in our household. My wife would scoff at the 25x rule–I think she’d want more like 60x. For me, I think something like 35x would make me comfortable. It all depends on some critical unknowns of course: how many years you have to live, what return your savings will earn, future tax rates, future inflation, etc. My wife tends to assume ‘worst case’ for all of these; that’s why she ends up at 60x. I guess that reflects her biggest fear regarding retirement–ending up on the street. :)
I guess that’s safer than having a wife that’s the complete opposite and cool at 1.6x ;)
The one important note about your primary residence is that after you have it completely paid off, it goes to work for you by LOWERING your expenses, thus lowering that number you have to reach. So it isn’t an asset in that it is generating returns right now, but it is an investment that starts paying off big in 30 years (or fewer depending on your strategy).
Exactly. Our paid off town house would sell for ~300k, but would cost us $1800+ to rent a similar place. 1800*12 – 4k tax/hoa/insurance/maintenance = $17600 a year, plus conservative 2% value growth, means we are earning ~7.6% on our home. Of course you could make an argument that i could have invested most of the cash and earned higher then the 3-4% in interest i would pay (bumping overall return slightly above 10%). But overall 7.6% very low risk return is pretty great!
Yes, love it Dave! Y’all are smarty pants up in here – that never even crossed my mind until today :) (well, it had a couple of years ago when I was working on paying off the mortgages completely, but not in terms of early retirement stuff.)
I think it is impossible to determine an exact number of what you will need in 20+ years when so many factors can change like healthcare expenses, tax rules, etc. The best way that I advise clients on retirement is to live “smartly” while they are working by banking and investing as much as they can. Evaluate retirement scenarios every few years to make sure they are on the right trajectory and then as they approach retirement decisions do a more in-depth analysis. I have seen too many 60+ year old clients work to get to a “number” for retirement only to reach that number and realize it was a flawed goal because factors had changed.
Hopefully they felt good reaching it eventually though, before getting back to work? ;)
I like looking at retirement from an expenses point of view as opposed to an income perspective. Nice work J!
Wow, quite an eye opener for me and quite depressing..so thanks for that. But seriously, I think I can get there before I’m too old to actually enjoy retirement. That’s the key, right? Having enough money so you can enjoy a long retirement, but not being so old that you’re glued to the lazy-boy.
Super interesting stuff. I don’t plan on retiring early but I still like reading about retirement and getting a general idea of what I’ll need to do to get there.
Depending on your retirement strategy, your principal residence CAN be used to generate income in retirement for you.
One of the books I liked about retirement was “Live Rich, Die Broke” by Stephen M. Pollan. The short strokes are that you gradually convert your assets into annuities as you approach retirement age thus giving yourself a guaranteed income stream that you can’t possible outlive.
This also applies to your principal residence as an asset by obtaining a reverse mortgage. Thus giving you an additional income stream that lasts until you pass on.
I may use this as part of my retirement strategy as I don’t have any heirs anyway. And why not live as well as you can while you’re here and leave nothing when you’re gone?
Even if I did have heirs, I wouldn’t want them to put off doing for themselves because they are waiting for me to kick the bucket.
Granted interest rates will have to come back up before annuities are attractive in this scenario. And if I’m able to retire early, I’ll have to set aside money to live on until I’m old enough to make converting my assets to annuities pay enough of an income stream. But hey, I’ve got another 14 years to go before I plan to retire anyway.
All that pretty much went right over my head, but it did sound good reading it :) I don’t know the last thing about annuities…
In a nutshell, an annuity is a type of reverse loan. You loan an amount of money to a financial institution, and they make payments back to you over time.
The difference between an annuity and a simple reverse loan is that you get the payments as long as you live.
A geek with a pocket protector and slide rule figures out how long someone in your agegroup and gender should live and the amount you get is adjusted according to that (and long term interest rates of course – which is why annuities aren’t all that attractive at the moment). The older you are when you purchase the annuity, the more you will get per month.
Say you’re a 72 year-old female and you pay them $30,000. In return, they pay you $225 per month until you die. If you live for more than about 14 years, you will have made more than the $30,000 plus interest.
The up-side is that you could live a lot longer than expected and recieve a lot more money that you would have gotten from a normal interest bearing investment. And the income stream is guaranteed for life, so you can’t out live the income.
The down-side is that you could die the next day and the financial institution gets to keep all the $. On average, the financial companies work it so they make a small amount of profit and all the people dying early and late more or less balance out. It’s another way to pool risk like insurance.
Ahhhh VERY interesting! Thanks man – nice and easy to understand now :)
I almost spit my coffee out on this one too, haha… “A geek with a pocket protector and slide rule figures out how long someone in your agegroup and gender should live”
We are in a similar position. Our paid off rental home, my old 401k, and our Roth IRA’s make up the majority of our net worth. We’re investing in stocks as well to help bridge the gap between early retirement and 59 1/2. But we are still a while out since we still have a $203k mortgage on our current $265k home AND we aren’t putting as much into the stocks as the Roth IRA’s so far. We’ll see where we stand in 5 years or so…
I like planning out how much money you need based on your expenses rather than income, but it’s still harder than it looks. Expenses obviously don’t stay the same, and may increase over time (health care costs etc..). Either way is kind of aiming for a moving target IMO.
Yeah, that was my biggest takeaway with this stuff lately too – basing retirement calculations off *expenses* over income, which a lot of calculators tend to focus on. I agree it doesn’t necessarily make it easier to track, but it def. makes a lot more sense, at least to me.
My issue is estimating my expenses in the future. Our current non-debt monthly expenses are low, right around $2,000. However, in our thirties we will probably be ready to procreate and I might even want a house. While we plan on continuing the minimalistic lifestyle after the debt is paid off, I have no idea how to reasonably estimate this stuff.
A few months ago, I thought early retirement was crazy. And now it is becoming a goal (although I’m having a hard time admitting that out loud!). Weird how a few events can completely change your financial belief system!
Agreed :) And the most successful people are usually the ones that are great at adapting and being flexible in life too. So as long as you’re always at least *open* to the idea of change, it should help you reach your end goals even sooner. Whatever those may end up being at the time :)
We are just now getting to the tipping point with our retirement savings. We have been saving around 10% of our income for retirement monthly, but in the next two months we will have paid off all our debts and our retirement savings percentage will go up to about 35% and hopefully we can increase it from there. Our goal is to have about $70,000 annual income in retirement, right now we are on track to get there when I am 55. Here’s hoping that we can get there even earlier!
Man, that 10% to 35% jump is going to be incredible!! And all cuz of your GameChangers brotha – love it!
Nobody’s ready for you to stop hustling just yet, J$ :)
Thanks very much for the shout-out, by the way. It’s always a thrill to be mentioned here so much appreciated!
I saw a few people in the comments recommend 72(t) as a way to access retirement account money prior to standard retirement age. While that’s a good method for accessing that money early, I think the Roth IRA conversion ladder strategy is better in most cases because it’s a lot more flexible (if you’re interested in reading more about 72(t), Roth IRA conversion ladders, and why I think the conversion ladder strategy is better, check out this guest post I did for JL Collins – http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/).
No matter what method you choose, the important thing to remember is that money in retirement accounts is not locked up until 59.5 so you might as well take advantage of the tax breaks you get for contributing to tax-advantaged accounts now while you can!
Thanks for that link, brotha. And for just creating your blog in the first place! I can’t tell you how eye opening a lot of this stuff is for me, and a huge part of that is because of you. I was even talking to one of my consulting clients earlier this week and she was mentioning your site and that it was worth of my Rockstar Finance project, and told her that yes – yes it is! And has been included a few times already, hehe… Just goes to show your message is getting out there, my man. Hope you continue with it as well once you hit ER once and for all :)
I don’t think you can save your way to retirement. It’s good to save but one medical crisis even with the new health care change can wipe you out. How do you protect your savings from predators? When you save everyone wants to take it away from you. You are punished for being frugal. It doesn’t appear that we will have the health care and social security net that our grandparents have. We don’t have pensions. I think in addition to putting money in the stock market and bonds via mutual funds of 401ks and IRAs we need to figure out a way to produce income that is indexed to inflation. We also need to protect ourselves from deflation as our government prints more money that becomes worth less and less the more they print. It’s a thorny problem. Everyone needs to think of their own solutions.
Yup. And one of our solutions here is to bank and save/invest as much as we can to better prepare ourselves ;)
You can’t always predict what will happen to you in life. But what is the alternative? My alternative is to either save/invest or do nothing.
It helps to be prepared, having a safety cushion of some kind can help you bounce back from whatever life throws at you. It also helps you to be an educated consumer, that is why I still continue to read personal finance books and pf blogs, even though most are repetitive.
One of the reasons why I became very interested in PF is because I was DISGUSTED at the banking industry for how they deceived people. Yes I know people acted irresponsibly before the great recession, but at the same time it didn’t help when the banking industry goaded them and misled them. To most people going and learning about pf is like learning a foreign language.
I know that is how it was for me, but you take one small step at a time. Let’s say tomorrow Jane Doe tomorrow needed an expensive life or death surgery that costs $40,000 (yes there are surgeries that are this expensive) and Jane Doe has $60,000 in emergency savings. Jane has her surgery, pays her medical bills after whatever her insurance pays out and still has enough savings.
Her savings helped her from becoming bankrupt. Honestly from what I have seen in most of my friends and my parents friends lives, the people who are usually broke are broke from not having a safety cushion and ignoring financial advice and from spending their money foolishly, and from not carrying insurance.
You also don’t know how the work world will treat you. Many employees have been made redundant once they reach their fifties. Ageism is an ugly thing but its real and it happens. Sometimes people are forced into retirement because of a disability. Life is very beautiful but life can be also very cold and cruel.
Having a safety cushion can help ease the cruelties of life.
Agreed 100%! And it also helps you *emotionally* too than just financially. It’s amazing how nice it is to not have to worry about money as much when you’ve got a little stockpile going… Gives you mad confidence too!
I haven’t got this all fleshed out, but I’m going for an MMM approach:
No debt – Pay off house
Own rental outright – Pay off
Save up about $800k
The 800k pays for our expected monthly expenses ($2.5k-ish), and the rental pays for any extra needed.
With depreciation and all the other deductions for rentals, we should be able to have very little profit reported, plus Roth Conversions and Tax Harvesting as mentions, should enjoy quite the lifestyle with very little takes paid.
Now to figure out how to take our 25 year plan and condense it into 15 or less….that’s the challenge!
I do like the idea of having no mortgage which cuts out the #1 major expense. If only I can find an area to settle down in!
This makes me feel like I’m further away from early retirement. But, If I can get my expenses down to 25k a year that’s only $625k I need in income producing accounts… Hmmm…. Sounds easier than it probably will be. But I want to hit that million dollar mark sooner rather than later. Always work to be done.
I think you are in better shape than think, Señor Money!
Take away the mortgage payment and your number goes up. Also a mortgage free house is an asset, since you are not paying any housing costs, cuz you know, there is no maintenance ever… But you could always think of it as you sold your house, invested the proceeds in the stock market, and then rented it back from yourself
You should definitely max out your investment accounts first. Tax the tax advantages while you can. That is part of the key of the ROTH IRA Conversion ladder that is mentioned by Mad Fientist and in my Never Pay Taxes Again post you linked to (Much thanks for that!) As others have said, it is possible to get that money without penalty, it just takes some understanding of the rules
These are all good problems to have :)
Indeed they are, good sir :) Thanks for the boost this morning!
Another tool I had not seen before! That is about what we calculated (roughly) so they line up (still need to work out even fancier tools for more data).
We also need to come up with a pre-59.5 age system. We have Roth contributions which are penalty free, HSA for medical expenses/premiums (then can be used for any expenses after 65), and we can access our 457b’s as long as we quit our jobs, but it will have a 10% penalty prior to 59.5 plus regular income taxes. We are maxing six accounts (two Roths, two 457b, two HSA), then our work gifts us a 401a. Then a 403b is just sitting there (no contribs). I have been wondering lately if we need to put additional money somewhere that is not a retirement vehicle, but can still grow!
Oh wow, you’re the queen of maxing! Work it, girl! :)
I don’t know if I truly need a million to retire. The industry says you need $500,000 for a “bare bones” retirement, $1-2 million for a middle-class retirement and $3-4+ million for a luxe retirement. I hate most retirement advice especially when they say that we all need 80-100% of pre-retirement income.
These numbers just are very overwhelming and make me want to throw these books across the room. I mean I don’t do that obviously but its how I sometimes feel. These numbers are huge and scary. It makes me wonder if other people put off saving for retirement because they feel the same way that I do.
I have been reading some books about people that criticize that you need a million dollars to retire. The critics say that this million dollar idea if a sham for people to keep working longer than you should and that the people who truly benefit from it is the financial industry and government (because the more you make, the more you get taxed).
I read how the Canadian prime minister retired this year and died in less than a month. What really helped me is reading Jeff Yeager’s “How to Retire the Cheapskate Way” and he asks you to do an exercise of EVERYTHING that you like to do, then attaching dollar signs to it.
You can get fancy by adding “Dollar Store cheap” or “Saks Fifth Avenue” expensive, or you can come up with your own system. I did this exercise and it was eye opening. After doing this exercise, I felt absolutely RELIEVED. I have read MANY books on PF from famous authors.
This exercise from Yeager’s book has helped me more than any other books have. I don’t work for the guy, I’m not his friend or anything. I only know of him from reading his book. Anyway, that bit of advice helps keep my momentum to save and invest for retirement.
Very cool! I’ve heard of Jeff before (and believe we’ve corresponded?) but haven’t checked out his book yet. All I know is that there’s one main variable with retirement that’s pretty much in our control more or less. And that’s with our “expenses.” A million dollars can last a lifetime, and more for the more frugal, and it can be frittered away within years if your lifestyle is high. So I never pay too much attention to those retirement calculators either other than just for pure entertainment (they are fun to take, if you’re a financial nerd like us :)). I plan on having much lower expenses during retirement age if I can help it – though of course not everything’s in our control as you mentioned with life.
Ah, J$, thank God you are FINALLY talking about Early Retirement on BudgetsAreSexy!! I remember emailing you months – a year? — ago and being all like, “Where’s the retirement button” [as part of your home page] ??? And just when I thought you — and all of the commenters — couldn’t GET any more coolio… :)
Also, that “estimate retirement money needs by expenses, not by income” is freekin’ genius. Totally adopting that from now on! !! Keep rockin’ it, J!
connieK., age 44, who’s just OBSESSED with [early] retirement planning :)
Haha hey Connie – I DO remember that convo actually :) I tend to jump into things full throttle once they “sink in,” and the idea behind early retirement is slowly sinking in more and more as the weeks pass. I’m learning so much about it all and excited to get my $hit together!