I have had a vague idea of when I would become financially independent. Somewhere between age 46-50 was the general idea. I can’t say when it will happen for certain, circumstances change, inflation happens, or life events. But I can say if everything cost wise and lifestyle wise were to move in the same direction as where I am today, that I know when I can retire. The good news is I am a bit of an optimist and I hope I can create a larger spread in savings, paying off debt, and make a little more income than inflation. Who knows, if this blog starts to make a little money a couple years into the journey that is all money that will speed up this process.
After reading a detailed post from Big Guy Money on his journey to financial independence I thought maybe I should share my thoughts on the time frame for my journey here. So this post will kind of give you an idea of where I am going now and how I plan to get there. Kind of like a travel guide subject to changes due to unforeseen circumstances.
How do I know I am on the Right Track?
This is the main reason why I share my net worth. It is the way in which I can measure my success over long periods of time. While I am not overly worried about little (or big) fluctuations through the market dropping or increasing, I am concerned that each month I am making a conscious effort in my savings. Between these two systems I should know that I am headed in the right direction to one day be financially independent. Once I have 25 times my ordinary expenses I am free to leave my full time day job if I so choose. That doesn’t mean I cannot work in any fashion, I can just choose whatever I want for how every many, or few, hours I choose. Or I can even volunteer on a greater scale as I should have more free time to do so. The fact is when 9+ hours of my day is spent working and going to work, it is hard to get value out of my time.
Where my Money is Going
Loans
I hate debt, which is one reason why I am paying it off a bit quicker. But I also need to get rid of all my debt before I retire. Currently I plan on paying off all my debt at age 40. And being in debt is a pain as I must ensure that I protect my family until we have significant financial assets. This is why I call life insurance a penalty of debt. If we were in a more solid financial position this is one more cost that we would not need. Currently I have a mortgage, one car loan, and student loans that I am contending with. Once these are all gone my cash flow should greatly increase allowing me to save more in other accounts. My plan is to first max out my ROTH as loans disappear and then put anything over that into pretax accounts.
Pre-Tax Accounts
Currently we are putting a decent amount of our savings into Pre-Tax Retirement Accounts. Based on the current amounts about $7,400 a year as well as $2,075 going into a defined benefit pension. Once Debt is paid off this will likely increase to about $17,000 a year, or more, as we will no longer need as much cash coming into our checking accounts to pay for bills. Currently this money is all being invested via index funds.
Roth IRA’s
These accounts are building up income producing assets, currently all dividend growth stocks, in which I can use just the income they produce to help fund my retirement. Currently I plan to invest approximately $5,600 a year into these funds and this amount will increase as loans are paid off upto the maximum allow by law (which currently is $11,000 between the two of us).
Taxable Investment Accounts
It may seem odd that I am putting money into taxable accounts without maxing out the tax advantaged accounts. There are multiple reasons for me to do so, starting with I need a 5 year buffer between my ROTH IRA and brokerage accounts in order to a ROTH IRA ladder retirement strategy to be successful. The wife and I don’t gross six figures, and even with raises during this time frame I kind of doubt that we will be grossing that high. It could potentially be possible to reach that amount of income before we retire, but I am not planning on spreading the gap between my income and expenses more than it is now. If our income does outpace our personal inflation then we will be able to max out our ROTH accounts sooner and possibly not need as much in our brokerage accounts. Never the less, brokerage accounts also server as part of our emergency fund. And investing an average of $1,200 a year into these accounts isn’t going to kill me on the lost tax benefits while still providing liquidity.
The Big Picture
Total Annual Savings and Debt Payments
Right now my plan is to in have at least a total of $27,270 each year going towards the combination of savings and debt payments. Currently I exceed this figure, but I estimate this a bit lower so that if we have kids in the future we will be able to still reach this goal. These accounts also do not include the savings I am putting in my HSA account which can also provide a boost for medical costs. Eventually I desire this account to grow to be self funding where the interest and dividends can pay for the deductible in any given year and there would be no need to contribute anything further. With a $6,000 deductible that figure right now is $150,000 so I don’t think I will reach an also guaranteed self sustaining health account by the time I retire, but it is possible to continue growing it as long as nothing would arise.
Safe Withdrawal
I plan on using dividends to provide the safe withdrawal for income based on $650,000 assets investing in today’s dollars. Stock prices fluctuate much more than dividends so it will provide a safer stream of income in retirement. If interest rate rise again I could consider using bonds as well in the portfolio along with some REIT’s. I also plan to invest some still in index funds to provide some long term growth and diversity. Although my total assets by 2030 will be about $685,000 a portion of that is locked up in my defined benefit pension program.
The Assumptions
I did a basic interest calculation for the prior year balance increasing 8% and no gains for the present year contributions. I also am not counting any interest the pension fund may earn. It does earn some, but nothing significant and I don’t plan on rolling those funds over the an IRA when I leave either.
Margins of Safety
My major margins of safety in this plan include:
- Social Security – all income from this program will be a bonus
- Pension – at age 60 I will qualify for a pension with my work. Based on working at my current job for a total of 17 years with only raises matching inflation, this benefit will be worth another $8,100 in annual income once I reach at 60.
- Health Savings Account (HSA) – No figures from this were included as they are not available to withdraw, but will help offset future medical costs
- Earnings from work – if I work at all for an income past age 43 that money will all help in adding a margin of safety
Why I Might Wait to Retire
There are two main reasons why I may wait to retire once I am financially independent. The first is I would like a larger fund for traveling. This can be accomplished with maybe two more years of work to build up the accounts a little more to provide enough passive income for international travel on an annual basis. This also could be supplemented by working part time to fund each vacation, however that would remove that margin of safety.
The second reason is that my wife and I eventually plan to have kids and depends on things are we may decide to earn some extra money to help fund their college educations. The tricky thing is that systems change and the way things are right now if we could drop our income considerably before they graduate they could qualify for federal grants because our income would be below the point in which assets are counted. If the system changes this may not be the case, but this will be something to be decided much later in the future. But to be honest, when I get to this point I should just pull the trigger, because life is just too short.
How about you, what is your plan to reach financial independence?
Sounds good to me Kipp. The benefit of financial independence is that you don’t HAVE to retire, but you gain a tremendous amount of flexibility. It’s interesting that you bring up dropping life insurance once you’re out of debt. My wife and I have gone back and forth on this front, but ultimately decided to forgo life insurance even though I am by far the primary breadwinner. While not financially independent, a small mortgage is our only debt, and we decided the payout wouldn’t change our lives one way or the other. Of course the death of a spouse would.
Hope you had a good weekend
-Bryan
Hi Bryan,
Life insurance isn’t necessary for everyone. I feel that for a few years it is for us while we are paying down debt and building our investments. In a few years we will cross a point where we can pay everything off with our own funds, and at that point we are basically self insured. Of course it would be difficult if one of us were to die, but at least financially we would be in an ok spot.
I did have a great weekend, busy, but great. How was yours?
Kipp
What a wealth of information here. I’m like you because I want to have extra money to travel on after we retire so knowing the right number might be difficult. I’ve considered that I might continue freelancing or blogging and using that income as travel funds, instead of trying to figure that into retirement savings.
Thanks Kirsten,
Yea I am not sure what the future will hold when I get to that point. It wouldn’t take much work annually to build a little vacation fund, but the key would be how much money to help future kids with education. But with the likelihood of kids still being in school during that time we would really only have summers available to travel at first, so not a big deal to work during the school year and save for the next vacation. 16 years is a long time away to say anything for certain!
I like how you have broken it down and have a rough idea of when, how and what you would be doing if you retire. It’s a clear enough trajectory.
First on my list is pay down the consumer and student debt…then shore up the e-fund before I can think that far into the future.
Reading this though gives me a glimmer of hope…thanks for sharing
Hi Simon,
I am glad that this post helps give you hope! There are alot of variables this far out in the future, that is why I don’t want to say a certain date and end up disappointed. Just some savings and having debt paid off will give me alot of flexibility and freedom in the future.
Kipp
Oh the spreadsheets are out in full force
(I’m a huge spreadsheet nerd, but I haven’t gone out 25 years yet – I’m just trying to get through the first 5 years!). I am hopeful I will have enough money by the time I am 45 to be able to consult when I want, etc. I’m currently 28, which gives me 17 years as well. My biggest concern is that I just started working last year, so I feel a little behind the times. I’m hopeful I can make it though.
Hi Alicia,
Age 45 is doable, it all depends on your savings rate. It does seem slow at first, but each month I can see my efforts when I look at my income and expenses. I am only a year(ish) younger than you are and not that much above $0, in fact I crossed the $0 mark sometime in 2013. And if you are planning on still earning some income at that point you could always consider that into your plans as well.
Kipp
It certainly seems like a good plan that you have here.. I think the plan to gradually shift payments from loans into retirement accounts is solid..
For me, financial independence isn’t a mystical time in the future, when I won’t have to work.. I look at financial independence as more in the present, but as a time when money won’t have to enter the daily conversation.. We’ve been (mostly) there ever since we finished paying off our consumer debt.. But we could still be a little more “independent” with some additional income..
Hi Jefferson,
Good points. There are several different levels of independence. I guess what I am referring to is no need of any income from a day job. But as you progress in your journey more options are open as debt disappears and savings increases.
Thanks,
Kipp
Hey Kipp,
Thanks for the mention! I’m also a big spreadsheet guy (love them), and it appears that some of our timeframes are similar. Keep it up!
No problem, your post made me think about digging in deeper to see where I am at in this whole thing. Give credit where credit is due!
With that said I am not too worried about it taking a little bit longer either. Just as long as I keep working towards that direction every month, I am happy!
Sounds like you have a good plan. FI doesn’t mean you have to stop work, it just gives you more options.
That is very true Tawcan. I honestly don’t know if I can not work in any fashion. It just seems to be how I am wired. What type I do in the future is unknown and I would like to be able to volunteer my time which is difficult to do when you work full time. And no kids yet! I think I am lacking time efficiency at home!
I think we are very similar in our plans, especially with the battle against debt, I’m more real estate heavy and you plan to be more investment heavy. All in all we are on our way, tracking the good times and the bad. Cheers to that!
I am open to getting a rental property in the future, but I don’t want to be that leveraged currently. Maybe once I get some other debt out of the way I will look into one near by. I also want to increase my handy-man skills before getting a rental as well. But it isn’t anything I am truly considering for another 5-6 years at the earliest. Who knows what the housing market will be like then!
And yes, track during all times. I am not too concerned about a drop in the stock market, especially since I am concentrating more on dividend investments. It will provide more of an opportunity :).
This is great! Nothing like building a solid model and then updating it every year to track progress. I did something similar a couple a years ago, and it’s now a New Years Day tradition to update the model and compare projections to reality.
So far we’ve always been ahead of schedule… but then again it’s been a great couple of years in the market. We’re heavily enough invested that a 20% correction would make our savings rate negative for the year. I try to remind myself that so when it inevitably happens I don’t mope around too bad
Hey Mrs. FW,
It is good to have something to use as a guideline. I am not counting on 20% returns every year either. Also, I tend to have more money going towards savings and debt than the assumptions. It gives me some more room for live to happen in the meanwhile.
Kipp,
Sounds like a good (and detailed) plan. You’ve got those spreadsheets rocking out for years. Nice!!
Ultimately, financial independence comes down to one’s savings rate. The rest is just frilly details. But the great thing is that you guys will have more and more flexibility as you go. More freedom will be “unlocked” and you can change course at any time.
I do plan to travel when I’m FI. Would love to see certain areas of Europe, South America, and SE Asia. The thought of traveling about without worry about money is just amazing. Well, the thought of doing anything without worrying about money is pretty awesome.
Keep up the good work!
Best regards.
I agree Jason. The further we are the more options we will have. Yes I have had the debt spreadsheets all set up with formulas so I can easily change the payment amount to check on the time frame. I had to map out the investing side of things to get a good idea for where that would be.
I like your travel plans. I would also like to go to those places someday and even more domestic travel as well. We shall see what the future will hold!
I think if you spend less than you make and are patience, then you can’t help but be well off. It just takes time. I think we’re all on the right track, only time will tell!
Cheers.
Thanks Henry! I agree, you have to be consistently saving money and/or paying off debt. It is more of a marathon type event than a 5k race :).
My plan feels inadequate after reading this post. Looks like you’ve really sat down and taken a hard look at what you’ll need to do to reach financial independence. For now I’m going to continue to pay down debt and focus on increasing my income.
Hey DC,
With it being so far out there it isn’t a huge deal to really run the hard numbers right now. You just need to consistently save and pay down the debt. Things will likely change during these 16 years, so nothing is for certain. I just have a snapshot of what I would need today if nothing changes.
Increasing income is a good goal, one that I should probably try to focus on a bit more. I just don’t want to get a job that may pay more, but also suck the life out of me.
I love your in-depth graphs here! Nice. I honestly don’t know when I’ll be able to retire. Retirement to me still means working, but just working less and traveling more. Currently, I’m trying to get rid of the last $38k of my student loans.
Yea student loans are a pain. In total we have had about $32k. I had 5k with enough cash to pay it off when I graduated, but I got married and my wife had 5k in unsubsidized loans which carried a higher interest rate plus accrued during school. So we paid those off then went to work on mine, which are all gone now. I am going to cool it after this 5.35% loan is gone.
The stupid thing is I kept paying extra on them and when my car broke (and my broke I mean the rust had weakened the frame and it broke, no fixing option) my cash was too low to find a quality used car and got a loan… so emergency funds are important!
I think we have similar plans. Like you, I’m not counting on social security. I just pretend it doesn’t exist. I’m sure it will in some form, but why risk it? I play around with 25 times my annual expenses a lot when I’m bored – I run multiple scenarios and come up with a range – bare minimum – living like a rockstar. Right now I think I have 15 years until I reach FI, but I’m trying to find ways to hit it sooner. I’m sure I’ll work in some capacity – but definitely not a 40 hour a week job.
Hi Autumn,
I think we both have the same mindset. Once I get there it would be nice to take a little break and then start looking for something that would be rewarding.
As far as multiple scenarios, I know my base line and anything over that would be great for travel. Who knows, free time may open up some new ways to save more money!
Kipp, the really great thing about FI is that it allows you to have CHOICES. You might retire, you might not, you might want to take a low paying job because you love it, or move to another city, country or whatever. You never know what 45 will bring in terms of your dreams, and with this plan, you’ll be able to follow those dreams, whatever they are. This is why staying out of debt and FI is so vitally important: it allows you to have choices. Great work, my friend!
Hi Laurie,
That is very true, it gives you OPTIONS. And that is what I am excited about! It’s not that I hate my job, I just don’t think I would choose to come here 40 (or more) a week if I didn’t have to. Maybe I would on a part time basis, but payroll is a bit inflexible with travel desires. Too many people live paycheck to paycheck to go more than two weeks without pay :).
Thanks for the compliment!
This is a pretty good plan, Kipp. My plan is very similar to yours and I would love to be able to retire at 45. That’s 12 years for me. I shouldn’t say retire because I won’t really retire, I’ll just be financially independent and will continue to do things here and there to keep me busy.
If I miss my mark by 5 years then that would be okay too because I’ll only be 50, but I’m trying hard to make it 45.
Sounds like a good idea Aldo! I should have my basic finances covered around age 43 (almost 44), but really a few years isn’t anything to fret over. Like you I am not sure if I will be able to shut down completely from work, so we will see what happens when the time comes. 16 years is a decent amount of time for life to happen!
I’ve been very interested in financial independence. I have no doubt that 55/56 is the latest that I will retire…the pension is a bit of a golden handcuff, but I hope to be financially independent before that age. I’m not in a hurry to pay off my student loan debt as they are very low interest rates (under 4% and some under 2%!)
Hi Andrew,
Yea it is kind of like a golden handcuff, my job has that as well. But I am not going to let it actually handcuff me and more of provide a safety net (which it will be a small safety net given it will be a few years before it will start and being less years worked it isn’t worth as much).
After this single student loan is gone, I do not plan on paying the others off at an accelerated pace as they will be in the low 4% and low 3% range. But just getting the one 5.35% loan out of the way will free about $50 a month which is pretty nice. The big wins are getting the monthly cash flow requirements down. Under 2% is great, so good job on that!
Sound plan, Kipp! Love the charts, btw. Should make some of those myself.
I don’t know anything about the US system, but I’ve decided for myself to see my attempt at FI as being seperate from the situation in which I’m trying to achieve it. There are a lot of things we don’t have control over, but they shouldn’t impact our ability to reach FI. By either working with them (like with the federal grants you mentioned) or around them (like doing something completely different), anything should be possible.
Recently I wrote an article on the tax rate in Belgium in which I was talking about the benefits of our system… I don’t count on these benefits to be there when I retire, but if they are, all the better for me.
Keep on truckin’, pal!
NMW
Hey NMW,
Oh yea, excel and I are good friends :).
Much like you do not know anything about the U.S. system, I do not know much about the Belgium system. I like your outlook on trying to find new ways to conquer any potential barriers that may arise. I guess I am not concerned about items outside of my control, but maybe if things outside my control have an effect on me I should try to do something in my control to fight back. Like somehow find ways to supplement my income if health or energy costs are extremely high. There aren’t any federal grants in the way I think of grants (free money, sometimes with strings attached). But I do plan to utilize any tax advantaged plans that do exist in our system.
I also do not count on our government’s old age pension, for one reason it is underfunded, and second is because it is underfunded there is a good chance that major changes could occur before I would be eligible for the “full retirement benefits” in 40 years. I suppose that I shouldn’t count on my work’s pension either. They are kind of underfunded as well… but that may change since new people on the plan (such as myself) pay in a much higher portion towards the benefit and it won’t rise with inflation as people on previous versions of the plan receive. So by the time I am 60 years old… it won’t be worth too much anyways!
I plan to keep on truckin’! Thanks!
Wow, it was fun to see it all laid out — I’m impressed by this level of planning
I don’t expect to be able to retire until 65 at the earliest; I simply won’t make enough money to do that, no matter how frugal I am. (I’m starting my savings at 35, too, which obviously affects matters.)
Thanks Cecilia! Well it really depends on your expenses to be honest, so how frugal you are can help! I think I read that you are a teacher, I know here education level matters greatly for pay… which of course is another cost for you to obtain and to do in your lack of time during the school year :).
But hey, if you love what you are doing, working until 65 isn’t the end of the world.
Interesting, I’ve never tried planning out 25 years though, I think the closest I’ve come is just very rough estimates maybe 10 years out, but that’s just for entertainment purposes, I don’t expect that to be how things really pan out.
I do make a fairly detailed 1 year plan each year. I get the balances of my account, extrapolate how much I think they will grow on their own, estimate how much I will contribute to each of them during the year, and how much interest that new money will make. Then I have my goal for the year. I also create a stretch goal for if I think I will either contribute more or if my investments do better than expected. I think this will be my 4th year doing it, each year I’m getting more and more detailed with it after seeing how far off I was the previous year. So far I’ve been really lucky and beat my goal each year. I think that’s why I don’t try to predict further out than 1 year, since I’m usually off by a significant amount after 1 year that will only get compounded as you add more years in.
I think it’s fun to set a detailed annual goal and see how you do against it. Have you ever tried setting a very specific annual goal? I think it’s a bit more interesting since you only have a year to see how you’re doing and for the most part you can predict the major life changes within a year like moving, or changing jobs.
Hi Zee,
Yes, I did make out a list of goals for the remainder of the year and I plan on doing goals for each year. I see that some people do monthly goals… not sure if I will get that crazy with it! But yea, this is more of a guideline as things can change in 16 years. Hopefully for the better though! So we shall see how everything goes in reality.
I’m not sure I would necessarily leave my job once reaching FI – we will probably have kids in a few years and the benefits coverage through both our works would make it hard to be independent of the full range of benefits that would cover our kids.
If we made incredible bank outside of our day jobs, it would be worth it to pivot away no questions asked.
I think the most appealing aspect of FI will be having the option to leave work with no worries. That optionality and freedom is very appealing!
I agree Steve! The best thing is does is give options. I don’t see any rule saying no work at all.