Hopefully you’ve already read Part One of our numbers game post. We are trying to project how much we need to save in order to be financially independent and retire early. This post covers our current and expected progress towards our FIRE numbers.
Here’s a quick recap of our high level FIRE plans and numbers.
- Retire early within 7 years around age 51 1/2
- Have at least $590,000 saved and invested in brokerage accounts to cover living expenses between the ages of 51 1/2 and 59 1/2
- Target $2,500,000 in 401(k) and IRA accounts by age 60 when we plan to start withdrawing some of this money without penalties
Before we get into the numbers and an excessive number of bar graphs, I want to point out a few things about our situation. At 44 years old, we seem to be a bit older than most of the FIRE bloggers that we typically read. That means that we’ve been working for over 20 years and have had quite a while to accumulate our current savings and investments. Although we’ve worked hard at our careers, we also realize that we’ve been blessed with good fortune and some good luck.
With that said, on to some numbers!
Short and Medium-Term Savings
We aren’t counting our short and medium term savings towards our retirement goals, but I’ll say a few words on this. Every month we move a predetermined amount of money into savings and other low-risk accounts to cover short and medium term expenses. The short term items are things like our car insurance, propane refueling (heating and cooking), annual vacations, Christmas fund, etc. The medium term items include future vehicle purchases, anticipated house maintenance (e.g. eventual roof replacement), Emergency Fund, etc.
These savings fluctuate throughout the year, but we currently have around $100,000 across these accounts. Since these expenses are short-term, they are not relevant to our saving and planning needs for FIRE.
Gap Years Savings and Investments
‘Gap Years’ is the time between when we stop working (age 51 1/2) and when we start to withdraw from our tax-advantaged 401(k) and IRA accounts (age 59 1/2). We call it the Gap because it’s between when we are saving in earnest for our traditional retirement years and when we will actually start pulling those funds out from our accounts. We need to cover at least 8 years of living expenses during this time. From Part One, we estimated that we would need around $590,000 to cover this time period.
Currently, we have around $120,000 in savings and investment accounts targeted for our gap years. We are in the process of aggressively paying off our mortgage (see more about our mortgage payoff goal) and that should be done within the next four years. During this mortgage payoff time, we should also be able to direct $40,000 per year towards our gap year investments. Once our mortgage is paid off, we should be able to contribute around $100,000 per year towards our gap year investments. In regards to market growth of these funds, I’m playing it very conservatively – only 2.75%. The bar graph below shows the growth of our gap year funds.
I don’t expect us to work a full year during our last year of employment, so I set the contribution amount to $40,000 for the last year. As you can see, we will likely reach our target amount before we turn 51 1/2.
401(k) and IRA Investments
We plan to start withdrawing from our 401(k) and IRA investments once we are 59 1/2. From Part One, we estimated that we would need around $2,500,000 in these accounts by the time we are 59 1/2. Let’s see how we are going to get (and likely exceed) there.
We currently have a little over $1,000,000 in our combined 401(k) and IRA accounts. Our plan is to contribute the maximum amount (currently $18,000) to our 401(k) accounts while we are still working. In addition to the retirement savings, maxing out our contributions also helps lower our current income taxes. In the year we will turn 50 (2022), we will take advantage of the catch-up contributions and add an extra $6,000 per year. After adding in our employer contributions, we should be able to invest around $45,000 per year until we are 50 and then $57,000 per year in our 50s. In regards to market growth, I assumed a reasonably conservative rate of 5.5%. The bar graph below shows the growth of our retirement accounts while we are still working.
That math happens to turn out nicely. Our starting $1,000,000 turns into $2,000,000. As the saying goes, “The first million is the hardest million“.
At this point, we will no longer be working, but we still have around 8 more years of growth during our gap years. Keeping the market growth rate at 5.5%, we end up with the following growth assuming we don’t touch the investments and live off the ‘Gap’ savings described above.
More nice math. The starting $2,000,000 balance has become $3,000,000! Note that we don’t anticipate making contributions during this time period, but we do plan on a executing a Roth IRA conversion ladder for the tax reduction benefits. Retire By 40 and Root of Good have good articles on the Roth IRA conversion ladder.
Will the Retirement Money Last?
As mentioned above, my target amount at age 59 1/2 for our retirement accounts was $2,500,000 and I admit that was probably being overly conservative. So if we have $3,000,000 we should definitely be in good shape. Another oversight on my part is that I didn’t consider getting any Social Security benefits during this time. We expect that is not the case and will only improve our situation.
Hopefully the following bar graph isn’t too difficult to follow (yes Mrs. Need2Save, I did misspell Withdrawal in the graph but I’m too lazy to fix it). I’ve tried to show the retirement account balance over time along with the expected withdrawal and growth amounts. The retirement account balance is the dark blue line and is against the left Y-axis. The withdrawal and growth amounts are the bars and are against the right Y-axis. I’ve used a modest 4% growth rate during this time period. One thing to point out in regards to the withdrawal amount is that we will need to start paying income taxes on this money because the majority of our savings is in 401(k) and Traditional IRA accounts. To avoid complicating things with the impact of Roth IRA funds, I just set the tax rate to 20%. That inflation adjusted $60,000 per year is what we want our net income to be, so we needed to bump up the withdrawal amount to cover taxes.
You’ll notice that for almost the first 12 years until we reach age 71, our anticipated growth is larger than our withdrawal rate. So our nest egg should continue to grow during this time. If we make it all the way to 2067 at age 95, we would still have nearly $2,000,000.
If our starting retirement funds balance is the $2,500,000 I originally targeted, it’s a different story as shown below.
In this scenario, our withdrawal amount is always larger than the growth amount – assuming a 4% growth rate. It would be great to average more than that over a 35 year period.
Congratulations if you made it this far! Let me know if that was too mind numbing.
Overall I think we are in really good shape and will likely be able to retire a little earlier than 51 1/2. I concede that some of my assumptions may be a little more conservative than the need to be. Not to mention that I totally ignored any benefit we will receive from Social Security. In addition, as we have mentioned before, Mrs. Need2Save has a very small pension that she may collect as early as age 55 if we choose to (or wait a little longer along side with Social Security to earn a higher monthly benefit).
It’s important to point out for us that when we first started talking about an early retirement, we were thinking a realistic age would be around 58. In fact, we called it ‘Project 58’. We quickly realized that we may be able to bring that age down to age 55 or 54. Now we are looking at 52 or even 51 – so the closer you look at your own situation, you may be surprised at how early you can reach your goals too!
Besides the Social Security omission, are we way off-base on anything?
Are you doing a similar analysis or just following the 4% rule?