If we were going to follow the traditional retirement path, we would need to work for 23 more years! But we aren’t on that path and we expect to be financially independent and have the ability to retire early in the next 8 to 9 years at age 52/53. Given the state of some other FIRE bloggers, that may sound like an eternity. Everyone has different goals and actions they are willing to take. This is where our current plan is leading us. A couple of years ago before we lacked focus, I was expecting that our early retirement would happen around age 58. Just by doing some basic planning and tracking of our actual spending, we’ve been able to comfortably reduce the amount of time we anticipate we need to work.
How are we going to reach our goal of retiring early? I’m sure you’ve heard this quote before – ‘A goal without a plan is just a wish’, so we have a simple 3 step plan for retiring early.
- Pay off mortgage
- Build up post-tax accounts for our Pre-60 living expenses
- Continue maxing out pre-tax accounts for our Post-60 living expenses
Your situation may be completely different, but hopefully you have a plan. Note that we aren’t counting short term savings, which we use for known short and medium term expenses. We will have future articles on how we budget for those items. Also, college savings are outside of this as we believe we have that covered pretty well.
Let’s look at each of these three areas individually.
Our mortgage is our only debt. We haven’t taken out car loans in quite a while (I love paying cash for a car!) and I can’t remember the last time we had credit card debt – we may have to go all the way back to college for that. Luckily Mrs. Need2Save and I have always been on the same page as far as debt goes.
We live in the DC metro area and the cost of housing around here is high, not San Francisco high but still significantly higher than the median US home price. To give you an idea of where we are at with our mortgage, in 2012 we refinanced our mortgage of around $443,000 for 15 years at 2.75%. Today our current principal balance is around $280,000. Still pretty high by most standards, but we feel like it’s dropping fast.
Each month we pay extra principal in order to wipe out this debt. Also, we both typically get yearly bonuses, so we take $6,000 in bonus money to pay down mortgage principal. Some people think it’s not wise to pay your mortgage off early, but it’s the right decision for us – a few points on this:
- We no longer get full tax breaks on mortgage interest due to our income level
- We know we may be able to get more in the markets than the interest rate of the loan, but the end is in sight and we just want to get completely debt free!
- We should have the mortgage paid off by April 2021
For our current stage in life, this is the right house for us. However, we actually don’t plan on staying in this area once we retire. Our plan is to use the proceeds from the sale of this house and buy somewhere else after traveling around the country. We would love to design and build the house that fits our needs (does anyone use a formal dining room anymore?)
Pre-60 Living Expenses
We don’t plan on pulling from our pre-tax accounts (401k and IRA) before turning 60. There are ways to withdraw from these accounts before 59 ½ without incurring a penalty, but we aren’t planning on pursuing those methods. So assuming we retire sometime around 52 or 53, we will need 7 to 8 years of living expenses saved up.
This is the area we are most behind in. We anticipate doing a significant amount of traveling in our fifties, so we are estimating somewhere between $60,000 and $70,000 per year in living expenses. We may (likely) have some type of income during this period, but it will not be anywhere near what we make today. Given a 7 to 8 year range and $60,000 to $70,000 per year in living expenses, our Pre-60 savings target is between $420,000 and $560,000.
We expect that our taxes should be pretty low during this period as we will not have much earned income. During these ‘gap years’, our minimal earned income should allow us to do Roth IRA conversions from our existing Traditional IRAs.
The big unknown during this period is health insurance costs. We are currently participating in a Health Saving Account (see our article on ‘Debunking the Fear of Health Savings Accounts and High Deductible Health Plans‘) through Mrs. Need2Save’s employer and are contributing the maximum amount. We are, at least currently, pretty healthy so hopefully this account will continue to grow. However, after leaving our full-time jobs, we will have to get health insurance on the open market. Not trying to get political here, but it’s hard to see how the current structure of the Affordable Care Act (a.k.a. Obamacare) will be maintained over the long term. For that reason, we are estimating reasonably high health insurance premiums.
Post-60 Living Expenses
So how long are we going to live? Knowing that would sure make all of this retirement planning easier, but we can still make pretty good estimates based on anticipated life spans, our current health, and family history. I see us making it until age 90, so our tax-advantaged accounts (401k and IRA) need to last for 30 years.
Once we reach 60, we will likely start withdrawing from our 401k and Traditional IRA accounts. If we still have funds left over from our Pre-60 accounts, perhaps we will drain those accounts before tapping the pre-tax accounts; but it’s too early for committing to those types of decisions.
Assuming we are still in good health, we will still travel frequently and continue to be active. Being an avid runner, I have the typical runner’s bucket list item of running a marathon in each of the 50 states as well as a few key international races. I’m currently only at 3 marathons, so that’s a lot of running left to do! Given what I’m willing to put my body through in a year, I plan on still working through my marathon list in my sixties – which is going to require a good bit of travel and more pairs of running shoes (We actually set aside money each month in our budget for running and other exercise costs).
Our current plan is to maintain the $60,000 to $70,000 yearly living expenses, adjusted for inflation, during our sixties. We imagine that our living expenses will decrease over time, as we will likely not be as active, will not eat as much, etc. Once again, the big wildcard here is health care expenses. We are expecting some form of Medicare to be available, but that is over 20 years away for us. Who knows what changes will occur to Medicare of the next two decades. If we still have money left in our HSA account, we will use that for health care expenses – tax free!
We are also expecting some form of Social Security benefits during this ‘traditional retirement’ time. I’ve always been a bit pessimistic about Social Security, given that it’s a wealth transfer program rather than an investment program. That said, I expect we will still receive some benefit, although we are planning for less than the currently defined benefit. We are not counting on Social Security income to be a major component of our traditional retirement income, but it will be something.
Those are our primary goals. Goal 3, funding our traditional retirement post-60 is very much on target. We will continue to focus on paying off our mortgage (goal 1) and get very serious about additional post-tax savings (goal 2) in the years to come. In fact, once goal 1 is reached, we will have more funds available to invest in goal 2.
Who knows? Maybe we can shave another year (or two) off our plans. From time-to-time we will post updates on our progress here.
Do you have a defined early retirement plan? If so, is our plan similar to yours? What do you expect your living expenses to be in retirement?