To date, we have held off on figuring out our Financial Independence number, mostly due to a number of future unknowns. This post has been sitting in “draft” status since early January……but I really want to know my Financial Shit, so I am going to take a shot at formulating our number.
Even though this number will likely change, I like the idea of having a single number to work towards.
This will be a 2 part post, the second one will look at how long it will take us to hit our number with some assumptions.
The typical advice is that you should aim to replace 70% to 90% of your annual pre-retirement income through savings and Social Security. For example, a retiree who earns an average of $63,000 per year before retirement should expect to need $44,000 to $57,000 per year in retirement.
No Thanks. Hard Pass.
That advice might be accurate for someone who spends all or most of their money, but we save 40% of our after tax income even though we still pay $1,000 a month in Student Loans.
Instead, we will get our base number using a multiple of our annual spending. I like the simplicity of the 4% rule as a base number for early retirement. There are some risks associated with the 4% rule, the biggest one would be the market tanking early in your retirement requiring you to take more of your nest egg before it grows, but it stands up well.
Starting with the 4% withdrawal rule or 25 times our annual expenses:
Adjusted Monthly Expenses are $3,688
I will lay out the assumptions that get us to this number below, but with monthly expenses of $3,688, we will need 1.1 Million Dollars to reach Financial Independence.
$3,688 X 12 Months X 25 Years = $1,106,400
We will have a mortgage
Since we are planning on retiring early and aren’t paying down our mortgage at an accelerated rate, there is very, very high probability that we will have a mortgage when we reach FI. I left our current mortgage expense in the numbers above.
We will have vehicles
Not subtracting our current car payment out of our annual expenses since we will be purchasing/maintaining vehicles forever. I doubt it will be the $450 we pay + maintenance we pay now but count it as a little safety buffer (more on that later).
We won’t have child care
We will have kids in the house, but our current $8,000/year child care expenses will be gone! I left $2,000 as a buffer for miscellaneous expenses. I know our children will still cost a significant amount of money, but they aren’t going to be retiring with us either.
We do travel at least once a year now and that money is included in our Annual Expenses, but I want to set aside an additional chunk of cash strictly earmarked for traveling. Part of this is to protect me from me. I don’t want to be hesitant to spend on travel if the markets tank for awhile.
Count this as the forced fun in early retirement fund. Mrs. AE will probably run this account, she is more fun than I am.
Travel Budget + $100,000
I am aggressive with investing but am more conservative when it comes to these estimates and have already identified a few
Leaving Social Security out of our projections
I am a brisk 37 years away from the retirement age of 67. Mrs. AE is a little behind me with 39 years.
That means I don’t put too much stake in our projected social security payments. Plus the rules will change a dozen or so times between now and then anyway.
We will get something when the time comes, but our retirement accounts will have plenty. We will use Social Security as a late-in-the-game buffer that we can hopefully do some good with. If all goes according to plan we won’t need it.
Mama Fish Saves has an awesome Social Security post if you want more information on how your benefits are calculated. I didn’t know they took your 35 highest earning years and put in 0’s if you don’t earn for the full 35. Punishing us early retiree pursuants! Thankfully I started working when I was 16 and already have 14 years under my belt.
We will Still Earn
This blog is monetized (and I actually made a decent amount of money last month! – well decent for me) and will help fund our expenses after full-time work.
We won’t quit until we are comfortable
Financial Independence to us means choices, the main one being, do we HAVE to work for a paycheck. Right now we can swallow doing work we don’t love because our income makes it worth it. By the time we hit our number we will both be earning 6 figures a year and we won’t give those jobs up unless we are comfortable.
If we are going to work, we want it to be on our terms. I don’t want to be forced back into a lower paying job I don’t like out of necessity. Would rather stick it out another year and put that fear to bed.
And Yes, I do realize that sounds like One More Year Syndrome way too early.
The biggest unknown at this point is Health Care coverage. Hopefully, we can get a better/permanent solution in place before we have to deal with this…..but I am not going to hold my breath. Depending on the situation this could add significant costs for everyone.
Another child is likely in our future (and no that isn’t foreshadowing for a near term announcement). We should have a better idea on the impact after getting Little AE through her first few years, but that is still unknown at this point.
The bulk of our unknowns are on the income/saving side at this point and we will go through those in Friday’s post.
Our Financial Independence Number
Our Financial Independence Number is $1,200,000
No big deal…….just roughly 10.5 times our invested assets and cash today…..
If we were planning on working until 65, or even 55 years old this number wouldn’t be daunting at all. We could cut back our savings and coast here without any issues.
Thinking of trying to hit this number in 10 years IS daunting, but I like having a number in front of us.
Stop back Friday to see our current projection and assumptions on the saving/investing side of this equation.Rel How long will it take us to reach Financial Independence
Do you know your Financial Independence number?