It’s Sunday night… the weekend went by so fast. How much longer do we need to work? When will we be Financially Independent (FI) and be able to Retire Early (RE)? At some point you need to figure out what your FIRE number is. Basically, how much money do we need to have saved and invested so that we can choose to stop working?
For us, we want to have enough money so that we no longer need income through employment. We may occasionally work for income here and there, but the need to work will not be the driving factor. Another prerequisite for us is that we want to be totally debt free. As we’ve mentioned in our mortgage payoff goal post, we are aggressively paying down our mortgage which is our only debt. Some folks may be comfortable retiring with a mortgage, but we are not – so it needs to go fast!
Based on the analysis below, we think we will reach our FIRE goals around age 51 1/2. That’s about 7 years from now. I must admit that we are financially conservative and aren’t looking for a life of immense frugality. There are copious amounts of travel planned once we quit the 9-to-5 life. Read on to see how much we think we need. Part two of the post (to come later in the week) will show you our current and anticipated progress towards our FIRE numbers.
How Much Do We Need?
I’ve never liked the financial advice that you need X% (e.g. 75%) of your pre-retirement income during retirement as suggested in this CNN Money article. I find it much more useful to consider how much you plan on spending per year. Between the two of us, we make a very healthy salary and are currently saving a little over 50% of our after-tax income. Once our mortgage is paid off, that number will shoot up to over 70%. Using our income as a basis for what we need during retirement is flawed since we will no longer be saving.
After looking at our current spending and anticipating how our spending habits will change once we stop working, we project that we will need around $60,000 a year in 2017 dollars. For many of you that may sound crazy high, but let me break that number down a bit in the table below.
Anticipated Yearly Expenses
A huge unknown is the cost of health insurance and health care. When we are no longer working and able to take advantage of our employer’s health benefits, we will need to buy insurance on our own. We are a bit pessimistic on the cost of health insurance, so we are budgeting $1,000 per month for this and any associated health care costs. Luckily we are both relatively healthy and don’t have any chronic medical conditions. We certainly hope the cost of insurance will be less, but we would rather be conservative in this area. We are funding Health Saving Accounts, but we plan to preserve these accounts for as long as possible to let them grow bigger over time.
And remember that copious amount of travel comment above? Well here it is, a travel budget of $12,000 per year. I doubt we will spend this much each year, but some trips may go over. For example, I imagine an extended trip to Australia and New Zealand is going to be a pretty penny. Our destination wish list is pretty extensive and we plan to take a major trip at least once a year on average and possibly smaller, regional ones whenever the mood strikes us. We are also planning to save on travel costs by exploiting off-season pricing and travel rewards whenever possible.
From looking at our current spending on Mint, I think we should be comfortable on $3,000 per month for general expenses. Some costs associated with work (e.g. work clothing, commuting costs, etc.) will cease and recall that we will no longer have a mortgage. It seems like $36,000 per year for general expenses should be more than enough, even if we eat out more than we should!
The Other Big Unknown –> Inflation
In addition to the unknown abyss of health insurance, it’s hard to know how hungry the inflation monster will be. A typical inflation rate recommended for retirement planning is 3% as mentioned in this MarketWatch article, although the article mentions that 3% is too low. Inflation is one area where I may not be conservative – I hope that doesn’t bite us in the a$$.
Although inflation isn’t exactly the Consumer Price Index (CPI), it’s a familiar measure of the change in prices for a typical “basket” of goods and services. If you really want to go down the rabbit hole, take a read through the CPI for February 2017 . However, I don’t think we will be affected much in retirement by certain key areas of the CPI, most notably housing/shelter, apparel, transportation, and education. This post over at Can I Retire Yet provides a nice analysis of your personal rate of inflation.
Given that I anticipate our personal inflation rate will be lower than the overall average, I’m assuming a 2% inflation rate for our planning purposes.
So How Much Do We Need2Save?
Time for more numbers. If you consider our expenses at $60,000 per year in 2017 dollars, that becomes around $69,000 per year in 2024 when we believe we will be able to retire at age 51 1/2. We have no plans on drawing from our tax advantage 401(k) and IRA accounts until age 59 1/2. So these ‘gap year’ funds (as we describe in our Early Retirement Goals post) need to last us 8 years until the year 2032. By then that $60,000 per year in 2017 dollars will be nearly $80,000 per year in 2032 – Inflation Sucks! (Mrs. Need2Save’s editorial note: we will be using this time to convert some of our IRA/401k money into Roth IRAs however during this time).
If you add up the anticipated expenses for our ‘gap years’, it comes out to nearly $590,000.
And then there’s the amount for once we reach age 59 1/2. The big unanswerable question here is – how long are we going to live? If I knew that, I’d already be a very rich man. For our planning purposes, we are using the ripe old age of 95. We both have some longevity in our ancestry, and with continuing medical advances coupled with an active lifestyle, I’m hoping that we can continue to enjoy life for that long.
A few other factors come in to play during the post 60 time frame. Assuming there aren’t drastic changes to Medicare and Social Security, we expect to receive some benefits from these programs. We’ve certainly paid handsome sums into these programs over the years through our payroll taxes (almost $250,000 so far in combined taxes), so hopefully we can reap some of these benefits in the future. We know that we should collect some Social Security for example, but we want to be pretty comfortable with our savings without and view it more as a cushion or a way to pay increasing health bills later in life. As we get older, our travel will likely decrease but our medical costs will probably increase. Throw in some inflation and market return uncertainty and it can be difficult to plan this far out into the future.
With some assumptions and generalizations, I’ve pegged our required retirement savings and investments at age 60 to be $2,500,000. Being the number obsessed engineer that I am, I’m sure that I will continue to refine this number often.
So there you have it. Our magic numbers are to fill our gap years bucket to $590,000 by age 51 1/2 and fill our retirement bucket to $2,500,000 by age 59 1/2. Wow, those numbers seem big now that I’ve written them down. Stop by later in the week to see how well we are progressing towards those numbers. It is possible that our timeline may shrink, but for now, it is reasonable to project that we can give our employers the old heave in roughly 7 years. Now how many Sunday nights is that?
Have you figured out your FIRE numbers yet? Are we too naive on a 2% inflation rate? How much do you think you will need for annual spending in your retirement plan?