Today I wanted to give you some insight into the financial process I went through to decide I had enough to retire.
We’ll review the budget I set up (both income and expenses) and I’ll give commentary on where I stand now and some steps I’m planning.
We will cover them from a pretty high level (no one wants to go through a line-by-line budget) but give enough information so you all get a good sense of the numbers.
General Retirement Budget Thoughts
Before we get into specifics, let’s review a discussion I had with some readers.
One asked me what took me so long to retire and I replied:
I took so long because I was a glutton for punishment!
Seriously, I always thought retirement would be at:
1. $4 million net worth
2. Generating $100k per year in income from assets
After doing the math, I found that $80k per year was enough and I was already generating that! So that’s when the light bulb went off!!!
Another reader then asked:
You’re at 80% of #2, can you say if you reached 100% of #1 before retiring?
To which I responded:
I can not say that, no.
But retiring with your assets able to create enough income for you to live on (without spending any of the assets) is a function of:
1. Amount you have saved
2. The return rate you get to produce income
So if you have $4 million and can earn 3%, you’re going to turn out $120k per year.
If you have $3 million and can earn 4%, you get the same amount ($120k per year).
Of course you have to deal with what assets you have access to if you’re below 59 1/2 and have a good amount in retirement funds, which is an issue for me.
So in that case, you can have access to $1 million and if it earns 8%, you earn $80k per year.
I wanted to include this discussion because it really does get to the heart of the matter.
People with all sorts of combinations of net worths, incomes, and expenses can retire as long as the numbers above add up.
I could do a gazillion combinations for you to demonstrate the principle but I think you all likely get the idea.
My Plans Limited My Thinking
Along these lines, I had always thought that I needed $4 million and $100k to retire. Since I was short of both of those goals, I couldn’t retire.
So why those numbers? Because they were nice, round figures, they seemed like way more than enough, and I’m a classic over-achiever. That’s it honestly. I wish I had a much better thought out answer, but I don’t.
In essence they were really arbitrary numbers that I picked out of thin air.
But as my job situation intensified, I began to question whether they were valid or not. Once I broke through the mental barrier that meeting those numbers was not a prerequisite to retire, I was free to question just what the right numbers were.
I started by developing a general, 30-year budget, a simple estimate of expenses and income. This showed that I likely had enough to cover expenses on the income I was earning.
But even if I had to draw down my assets, the amount needed each year would be so minimal that the assets would last for decades after my death.
I then went deeper and more specific.
I developed a line-by-line budget, by month, for the rest of 2016 and all of 2017. I have 20 years of expense information in Quicken plus a pretty good handle on what we do (and can) spend on various items, so this was rather easy. And for a numbers geek like me it was fun too! 🙂
I had to make several assumptions, of course, but I knew what I had was directionally correct. It also identified areas where I might be able to decrease expenses or increase income to improve on an already good position.
The budget was based on cash flow. I began with cash positions. Then each month I added income, subtracted expenses, and was left with a month-ending cash balance that carried over and started the next month.
Note that this did NOT include spending any of my retirement investments or even my brokerage funds, which are the bulk of my assets.
So here’s how we netted out:
- Beginning cash balance: $156k (this was in a couple checking accounts and three savings accounts)
- Aug-Dec 2016 Income: $41k
- Aug-Dec 2016 Expenses: $76k
- End of 2016 cash position: $121k
Major impacts in 2016 included:
- $28k to buy my daughter her car
- $3.5k for vacations (of which we’ll likely spend $1,500 at most)
- $2k for an estate plan I’d like to update
- $1k for some outside landscaping which we’ll likely defer to next summer
The numbers for 2017 looked like this:
- Jan-Dec 2017 Income: $99k
- Jan-Dec 2017 Expenses: $97k
- End of 2017 cash position: $123k
Major impacts in 2017 included:
- $9k for medical costs and insurance
- $5k for a vacation(s)
- $8k in a “plug” income number that I have to earn somewhere before the end of 2017
Many of you are likely interested on the income breakdowns. Here are the specifics for 2017:
- Rental real estate: $66k
- P2P interest: $13.2k
- Blog earnings: $3.6k
- Dividends: $8k
- “Plug” earnings: $8k
A few thoughts on all this information:
- Overall, the income I’m able to generate is covering all my expenses with no need to draw on any savings or other assets. Cool!
- I estimated low on the income side and high on expenses. If things go well, I could have $10k in extra income and $5k less in expenses, so the swing could be quite dramatic.
- The rental real estate and blogging numbers have upside. Real estate could be $10k higher by itself, but that would be the max. I already make the listed amount blogging as my former site is chugging along after all these years. So with focusing on it more and ramping up ESI Money, I could be well above $4k combined.
- Even the “plug” number has upside. I could get a teaching job, do a bit of consulting, or whatever and make that up in no time. Or I could let it be $0 and take the difference needed from my savings. It’s not that much. It also isn’t budgeted until the last four months of 2017, so I have plenty of time to make it up if I choose to do so.
- The dividends are simply what my brokerage account churns off each year. Instead of reinvesting the dividends I just selected to receive them.
- The P2P numbers represent an 8.3% annual return which looks like the neighborhood I’ll settle into as an average for 2017.
- One concerning issue is that so much of my income is coming from one source. This wasn’t that much different than when I was working (it’s just that the source was my job), but I had a significant backup then (rental real estate). I don’t have a significant backup now unless you count my assets. So I’d like to develop a source or two that delivers at least $20k extra each. Blogging could be that as could working 10 hours a week. I’ll keep you posted on how that goes.
- As for the changes we made, we did decide to forego some spending. We cancelled a cruise we had planned for January as it was going to be pricey and we’ve been on several before. We gave away stuff and created better storage in the house to open up our garage and negate the need for a shed. And the landscaping is something I’ll tackle on my own next summer (now that I have time) and likely spend $200 versus $1,000.
So that’s it for now. We’ve set the budget and we’ll see how it plays out over the next year and few months.
I’ll do regular updates to let you know how things turn out.
Mike H says
Great breakdown, ESI. I do like it that the rental income and dividends should in theory at least keep pace with inflation.
I’d be cautious about chasing yield in dividend stocks to try and retire with less by pumping up the cash flow as those high yielding dividends tend to get cut pretty often as the burden on cash flow is too high for the business to have spare cash to reinvest and thrive.
Jon @ Be Net Worthy says
Great data ESI, thanks for sharing! What’s interesting to note is that your income is only going to go up once you reach traditional retirement age and start drawing social security and maybe even a pension. Plus, you’ll have easy access to all of our tax-deferred accounts. I can’t imagine any of your current income sources would dry up in retirement except for your “plug” number and maybe the blog will fall off.
How do you feel about your income going UP in several years? Do you think you should be spending more now?
I think spending is at the right level — it’s pretty high after all! 🙂
There are still many things in flux so I’ll let them sort themselves out over the next few months and reevaluate at the beginning of the year. At that point I’ll do a budget re-cap for everyone.
I won’t be taking SS for 15 years, so that’s quite some time…
Interesting game plan. I think you give a good example of how to generate income in retirement without touching assets. I know it will evolve as more variables are worked out but you are showing that your retirement is not the ridiculous low amount others are exampling in their blogs or extreme life style changes.
I would like to thank you for sharing. The key piece for me is that you have generated a cash flow mainly through real estate. Maybe in a future blog post you can describe how you developed income with real estate.
As a real estate investor who is less than a year away from retiring at age 46 it is interesting to note that even with your high net worth, you could not retire right now and follow your goal of not touching principal without real estate given your current mix of other assets and the income they generate. In fact it wouldn’t even be close. (When I retire 100% of my cash flow will come from real estate. It will equal 150% of my salary + benefits, and continue to climb from there as I expand. You may recall that 150% replacement for salary + benefits has always been my cutoff for retirement with enough room to cover real estate contingencies and continue to grow the business. I need more of a buffer because I expand using considerable leverage so I need both cash reserves and higher cash flow margins to be sure there is safety in case of any downturns).
Even though you have some concern about too much of your income coming from real estate, I would like to suggest you give some thought to slowly looking at new real estate options that might make sense. Little by little I suspect you could increase that cash flow number to $100K over the next 5 years if you expanded your portfolio a little bit. It is certainly not as lucrative as it was when you got started (I know Colorado, especially Denver, is not exactly cheap right now, but you could expand your portfolio via your contacts back in Michigan if you so desired since you are already there) but it is hard to beat real estate for long term, stable, growing, passive cash flow. It is also the case that the natural appreciation of property and rents make the returns better over time if you just get in and let it grow.
Something to ponder as you consider your income options.
you mentioned 9K for medical costs and insurance. Is that a real plan you have researched for next year or is that just a plug number?
If it is real could you give a break down of what type of insurance you decided to purchase:
1. Family plan? (I assume you still have your kids on your plan)
2. Monthly Premium.
3. Deductible or Co-pay both per individual and family if they are different.
4. Max out of pocket cost you would have to pay per year (in network and out of network)
5. Percentage the plan would pay in between the deductible and when the out of pocket cap is reached.
Trying to compare these things is a bit difficult and your number of 9K for medical costs and insurance combined seems quite reasonable compared to what I see so I would be interested to see what kind of coverage that will purchase in Colorado.
There is no mention of taxes in your income and expenses for 2017.
Are your income figures presented above before or after tax/expenses?
For Example: Rental real estate $66k. Is this net after property taxes, estimated repairs and management fees?
I am planning to start cutting back at my job by May 2017 when I am 45 and similar to you rental income is a major part of my plans, though your rental income is presently higher than mine will be. However, I calculate my rental income as net income after all expenses.
Taxes are one of my expenses but I didn’t detail expenses (food, clothing, etc.)
Income is gross (for rental too) and comes to me as an individual. from there I have 20-25 expense categories that get deducted from that to get a cash flow number (by month) which then adds to last month’s leftover cash flow to give me the starting point for this month.
I appreciate your breakdown, it is very intriguing. I am trying to be more entrepreneurial and have found that initially it’s been hard. (Need money to make money, sort of thing). How did you get started in real estate?
Here are the details on how I started in real estate:
Thanks for the thorough break down ESI. One concept that I like that you emphasize is the safety created by having multiple streams of income. I’m planning on purchasing my first rental property next year and hope to add additional real estate in the future.
Financial Samurai says
Your daughter has a nice car! I got a POS $2,200 hatchback that lost its transmission 2 months later!
I think you’ll find that you need LESS THAN YOU THINK in retirement to maintain a happy lifestyle.
Also, you’ve got huge upside to your blog income if you get at it.
Finally, if you want, you can consult, which is also some nice extra income. Consulting was my biggest X Factor that at times generated more than my previous day job income!
Matt C says
I am curious – if you could make a different decision when you were 30 – would you invest differently then into your accounts that are restricted from withdrawal until 59.5? if yes, what decisions would you have made differently. If no, why not? It seems a common thread that you not being able to access that $$ has been a little bit of a pain point?
Also, I read in another post you have another blog you are maintaining? Is that your old one or are there 3? Get me those links!!!
I actually have a two-part series on what I would do differently if I started over again. here’s part 1:
Part 2 will post in a couple weeks.
These will answer most of your questions.
Short answer: I would put more in taxable accounts for the flexibility it gives. I’d also get into real estate earlier and buy more.
I have one other blog, the old one, and that’s more than enough. It’s on life support, really. This is where all my best stuff is posted these days.