As I explained in The Goal: Financial Freedom, my basic retirement plan is to 1) put together enough assets and then 2) invest those assets so they generate enough income to more than pay my living expenses (which I have roughly estimated at $100k per year).
This would allow me to never have to spend a penny of the assets themselves — just live on the income they produce.
But as I asked at the end of Various Forms of Retirement Income, why don’t I forget the “invest those assets so they generate enough income to more than pay my living expenses” part of my plan?
I could retire now and spend the principal of my liquid assets at the rate of $100k per year and have enough to cover 20 years. And that doesn’t account for any earnings I make along the way.
Or what if I didn’t need $100k? Could I still generate enough assets with my income to cover my living expenses?
If I jumped on either of these scenarios, I could likely retire today. So maybe I need a different retirement plan.
Let’s look at each of them and see if they are viable.
Spending the Principal
If I was willing to spend my principal, how would that work out?
The major factors in this scenario are:
- I can earn about $60k per year conservatively — $50k from my real estate investments and $10k from my P2P investments. That’s on the low end. On the high end I would bring in closer to $70k or maybe a bit more.
- I have current liquid assets of a bit over $600k. Most of these are in index funds that I would have to sell (and pay capital gains on) to turn into cash.
- I’ll get access to another $175k when my wife turns 59 1/2 (it’s in an IRA) and a much larger amount when I turn 59 1/2 (also in IRAs). Those events are four and seven years away.
- So put these factors together and you get this scenario:
- If I need $100k per year, then I have a net need of $40k from savings ($100k less the $60k from investments). I’d have to draw on the $600k, but at $40k per year it would last for 15 years, more than enough time to get to the rest of my assets.
- At a $40k need per year, this money would last until my wife and I were over 100 years old (I worked out cash flow by year just to make sure).
- This scenario assumes I get no income from any other source, which is unlikely. I’d at least like to teach a bit and my wife may want to work as well. Or I could go back to being a soccer referee (as glamorous as that is.) Or maybe this blog will end up earning me millions. 🙂
Any way you look at it, this scenario seems viable and screams “retire today”.
Not Spending the Principal
But what if I didn’t want to spend my principal but could live on less than $100k?
Using the info above, here are my thoughts:
- I created a retirement budget for every expense I could think of and ended up with an annual need of $79k. You might think this is high (especially for someone who doesn’t have a mortgage), but 1) we still have kids at home and 2) I did include many discretionary expenditures that would make retirement more fun. In other words, it’s far from a bare-bones budget.
- Of the $79k, I already have $60k covered. Maybe more in a good year.
- The other $19k could be made up by working and/or investing the $600k in liquid assets into income-producing assets. At 3% in dividend stocks, $600k would yield $18k in income. Invested in P2P lending at 6% (which is far less than I’m earning), it would net $36k. Of course I’d have to sell the assets and pay capital gains, so I would have less than $600k, but it would be in the ballpark.
So it appears that this scenario would work as well.
Combining the Two
At this point most of you are probably asking the obvious question: why not do both?
Why not spend the principal and live on $79k per year? Given the above information, I’d have enough to live 200 years or so under this scenario even if I never earned another dime.
Ok, maybe not that long, but you get the idea.
Other Factors
A few other factors to consider about retiring early:
- My kids are still in the house. One is off to college and the other is not. College for the first is covered by savings not counted above. College for the second is as well, but it looks like he won’t be spending it. So if I can wrestle the money out of the 529 (a topic for a future post), I’d actually have another $70k-$80k even with penalties.
- What do I do about health insurance? Ugh. The bane of my retirement existence. The good news is that the ACA makes health insurance accessible. The bad news is the first “A” is a liar — it’s not affordable. I’ve heard horror stories about how expensive health insurance is on the open market. There are alternatives, but they seem to have downsides as well. Does anyone have any suggestions in this area?
So that’s it. What do you think? Any holes in my analysis? Should I retire or keep working? If the latter, for how long?
Your thoughts and suggestions are appreciated.
Jon says
June 23, 2016 at 4:53 amCongratulations, I would say that you are now financially independent but are choosing to work because you continue to enjoy or at least receive satisfaction from the challenge! I would recommend that you keep working until you find something else that you would rather be doing with your time. Perhaps non-profit work or pouring yourself into blogging or your other non-career activities full time.
You can sleep well at night knowing that even if the s**t hits the fan at work, you are financially secure at home – well done!
ESI says
June 23, 2016 at 6:52 amOr maybe I’m financially independent and too much of a glutton for punishment to quit. 🙂
I am looking over the numbers frequently to make sure I am where I want to be and, as you can likely tell from this and other recent posts, moving closer and closer to at least semi-retirement.
Matt says
June 23, 2016 at 6:43 amI don’t know what advice to offer you, but I’m *very* interested in hearing more about what you learn/decide regarding healthcare. Gone are the days of pensions and lifetime group health insurance for most, so the pattern my parents and in-laws are following (I’m in my 30s) aren’t going to work for me. It’s one of the biggest question marks for me as I think about my future retirement budget — I have no idea what I should plan for.
ESI says
June 23, 2016 at 6:49 amIt’s probably the biggest unknown we have right now.
We are working on options and rest assured I will write about whatever solution we come up with.
Hrant says
June 23, 2016 at 2:34 pmACA is $585/more for me, single w a 2000 deductible.
Wait, just got letter advising me next premium request is 33% increase!
A CA sounds great, yet, penalizes the self employed, and the person who is middle class, trying to get ahead!
Government in any business, is needed, yet in this case bigger government aka bureaucracy, is always more expensive.
Go out and vote for smaller government.
Looking forward for the post on choices….if any viable ones.
Crystal says
June 23, 2016 at 9:07 amCongrats on being able to make this decision! 🙂 We’re paying $570 a month for a pretty high deductible plan of health insurance for just my husband and me through the ACA, so I know how frustrating it is…total bull shit if you ask me.
BUT, I’ve heard about a few options I haven’t looked into yet – paying a small annual membership to be part of a group of some sort and then getting a group policy together, getting a high deductible plan and opening an HSA, getting a bare minimum high deductible plan and paying the tax penalty for it not being everything the ACA needs it to be, etc. I really look forward to the post where you go over what you find. 🙂
JayCeezy says
June 23, 2016 at 9:11 amWell done, good Sir!
re: healthcare – my wife and I are mid-50s, in decent health. We have a catastrophic policy covering both of us at $9K/yr. Our deductible is $3,000 each. Neither of us has spent more than $500/yr. in many years. The policy will benefit us greatly if we were to get in an auto accident, need an emergency room or ICU care, etc.
One example of a catastrophic expense (for a family member) was a recent ambulance trip, ER visit, ICU three days, and it was $82,000. A few of those, or something more serious, could wipe an individual out financially.
re: leaving principal intact – have mentioned this to you before, still not seeing your IRAs/401ks as fungible. That money will grow, if you are earning $30K/yr in those investments you should easily be able to draw down the $600,000 by like amount, dollar-for-dollar. Don’t worry about taxes, when you do get to the RMD (or use the 72(t) Rule, which you should do as soon as your salary goes to zero) you will be very surprised how little in taxes you pay. Your blended tax rate will be less than 10% for both Fed and State, if you do it right. My back-of-the-envelope calculation says you are there now.
Last words, keep working as long as you don’t wake up in the morning with a pit in your stomach. Click on my link, and you will see a truth that should make you quite secure, ESI!:-)
ESI says
June 23, 2016 at 7:14 pmAppreciate the thoughts! (though the guy on the video has a potty mouth!)
I’ll be digging a bit deeper into the numbers the next month or so and will update as needed.
BTW, I do get a pit in my stomach now and then, so maybe that’s the answer right there…
Mike H says
June 25, 2016 at 6:05 pmI think the main speaker in this clip is Canadian, right?
-Mike
ESI says
June 25, 2016 at 6:52 pmI’m not sure. What makes you think so? (And do I sense a joke coming?) 🙂
JayCeezy says
June 25, 2016 at 8:52 pmIt is award-winning actor John Goodman, in prosthetics, in the 2014 remake of the 1974 film, “The Gambler.”
Mike H is referencing a promotional clip of JL Collins for his excellent book, “The Simple Path To Wealth.” Everything noted in this clip is incredibly great advice. And done in good humor.
Mike H says
June 26, 2016 at 6:57 amThat’s correct. The promotional clip is done to reprise the 2014 “The Gambler” scene with some creative liberties on the funds to use and the 4% draw down rule.
ESI- your plan is a lot more robust to live off the cash flow of the portfolio without selling principal. That is my plan too.
-Mike
K D says
June 23, 2016 at 11:01 amYes, health insurance is the bane of early retirement and self-employment. As someone mentioned, a catastrophic insurance policy might make the most sense but I’m not sure what the ACA requires.
I look forward to future posts.
Mike H says
June 23, 2016 at 5:11 pmCongratulations on the outstanding progress. You are correct, health insurance is a fly in the ointment. It may not be practical for you but moving to another low cost country with good healthcare (for example Thailand) allows you to self insure for medical expenses and as long as you have $9-10K set aside that should cover very significant issues. Additional insurance out here isn’t too expensive, about $1-2k per year for a small supplemental policy.
Once you get to medicare eligibility then all should be fine.
Do you enjoy your work, ESI? Would it be possible to migrate into another job with more flexibility and into something that is more rewarding to carry on for a few more years? I was lucky enough to be able to have this opportunity and am grateful for it.
-Mike
ESI says
June 23, 2016 at 7:12 pmAt this point, I’m enjoying my work less and less. I’d like to take some time off if not completely retire, hence this and similar posts.
This will also be my daughter’s last year at home (she’ll head to college in Aug. 2017) and I’d love to be mostly home and spend time with her before she leaves our home for good.
Lots to consider, and I will certainly keep you all informed of my progress.