There has been a lot of content produced on retiring early with the so-called Financial Independence Retire Early (FIRE) community. It is very appealing to think about quitting your job and starting an early retirement, but I still have work to do, and here are my thoughts about continuing to work.
Financial Independence Number
First, in order to consider retiring early, you need to determine your Financial Independence (FI) number. That is, how much money do you need in order to retire.
The FIRE community generally takes one’s yearly spending and multiplies that number by 25 to determine how much you need to have saved to retire early. This is based on the so-called 4% rule which was based on a 1994 article by William Bengen where he discussed a yearly 4 percent withdrawal from a portfolio, and how it should last at least 33 years. This 4% Safe Withdrawal rule was confirmed by the Trinity Study.
For me, my yearly costs would probably be:
- $40,000 for expenses
- $25,000 for medical insurance and medical expenses
- $15,000 for taxes
So my total would be around $80,000. Multiply that by 25 and you get $2 million.
Revising the Financial Independence Number
Maybe you don’t really need that much money. Maybe it can be smaller by digging deeper.
First, once you reach Medicare age, the medical insurance costs should go down. Let’s assume it is around $10,000 including deductibles for two people.
Second, once you start taking social security and pensions, the amount of money you need will be less. Let’s assume you get $20,000 per year for social security and your wife gets $15,000. Also, assume you get a pension of $10,000 per year.
Then the numbers look like:
- $40,000 for expenses
- $10,000 for medical
- $15,000 for taxes
This totals $65,000 and then let’s subtract:
- $35,000 for social security
- $10,000 for pension
The difference of $65,000 – $45,000 is $20,000. Using the 4% rule, you calculate $20,000 times 25 to get $500,000. So you can see that having additional income and having cheaper medical costs, you need a lot less saved to live on. That is one reason why many people work until 65.
In Between Retiring Early and 65
It is likely that many people will retire before age 65. So they will not be on Medicare and they will not be receiving Social Security and their pensions. If they don’t have $2 million, then they need some sort of additional income. This income can come from dividends, rentals, side hustles, or other sources.
For me, I have been saving $20,000 into individual buckets, each corresponding to a particular year. Let’s suppose I do not take social security until my Full Retirement Age (FRA) of 67. Then I need a bucket for ages 66, 65, 64, etc. One way to accomplish this is to open a brokerage account at Fidelity for each year. Since Fidelity has no minimum and no charges for brokerage accounts, you can open multiple accounts, all under one userid/password. See my blog article on Why I Use Fidelity Investments. So you can mentally designate one brokerage account as your age 66 account, and when you fill it with $20,000, you then open another account and designate that as your age 65 account. Then just keep repeating. These accounts are in additional to your normal workplace retirement savings.
So you end up with three distinct categories of income and spend when you stop working.
- Early. Just living off savings such as taxable savings, Roth IRA principle, or 72(t) early distributions.
- Mid. The above supplemented with income from bucketed savings for particular years.
- Late. Your full retirement income from Social Security, pension, and 401(k) withdrawals.
Traditionally most people followed the Late model. People who retire early use the Mid model or the Early model.
Why I Am Not Retiring Early
I would love to retire early and travel. But for now, I am not considering that move for several reasons:
- I am not at my FI number yet. I would like another $400,000 invested so that I have some cushion in case of a negative stock market or a big expense.
- My house needs some fixes and enhancements. I need new flooring and carpeting, and I would like to add a deck, replace the kitchen, and replace the master bathroom. That would take at least $40,000 to renovate the house.
- I am helping my son and his wife with their school loans. I would like to see their school loans paid off by the end of 2020, and my wife and I are planning to help. That will be around $15,000.
- We will probably have to replace my wife’s car in the near future so that will cost around $30,000.
- We want to contribute to our grandkids’ savings. The power of compounding at an early age is so powerful, so it makes sense to give them a big jump start. We are also contributing to their 529 accounts.
So it makes sense to work at least two to three more years. Since I have paid off my house and have no debt, I consider these to be my wealth building years. Take advantage of those years to save and help others.
