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.
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.