It’s my annual update to our plan for financial freedom.
Trust me – you’re not going to find another plan like this anywhere else.
For some time now I’ve been saying that my wife and I plan to retire when I turn 45 years old.
How do we plan to pull off such an ambitious goal? That’s what this plan is all about.
We put numbers to paper and actually see what our cash flow will look like all throughout the future. Hence the name of the blog, this is our “money design”.
If you have any desire whatsoever to retire at 45 (or any age really), but you’re not really sure how you’re going to do it, then this post is for you! I’ll show you exactly how we’re going to reach financial freedom, and how you can use the same strategies to get there too.
So without any further ado, let’s see how the plan is looking this year.
First – A Little Background:
For those of you who are seeing this plan for the first time, here’s a little background on how the plan is structured. Basically our assets are arranged into three major groups (columns) based on when you can actually access them without penalty.
- Income from age 45 to age 60 (before we can officially access our 401k and IRA without penalty)
- Income after age 60 (after we can officially access our 401k and IRA’s without penalty)
- Income after age 70 (when we’re eligible for full Social Security)
Starting with the first column, the goal will be to withdraw a minimum of $5,000 (my pre-determined monthly retirement income) without depleting my resources for the second column.
The same is true of the second and third columns. Again the goal is to be able to withdraw my minimum amount needed without emptying all the accounts or sacrificing any other stage of my life to do so.
As long as all 3 columns support my minimum amount of income needed and don’t deplete, the plan is a success!
A few technical notes:
- Yes, this plan is inflation adjusted (assumes 3% every year)
- I’m assuming annualized investment returns of 6%
- Federal income taxes are calculated by subtracting a standard deduction and 2 exemptions (my wife and I) and using today’s standard marginal tax bracket system.
Our Plan to Retire at 45:
Here is the master spreadsheet containing all my calculations and estimations (click on the image to make it larger):
So Are We On Track to Retire at 45?
The answer is YES! By exceeding this income value in all three columns, I feel very comfortable in knowing that we’ll have a very comfortable retirement without fear of running out of money. (More on that to follow).
How This Plan Will Actually Work:
On the surface I realize there’s a whole lot of numbers, and the story behind what’s actually happening is probably getting somewhat lost. Here is a little bit more explanation as to what’s really going on behind the scenes.
From LEFT to RIGHT:
- Save a whole lot of money (don’t worry … we’ll get more into detail on this in the next section). Monitor their progress easily using free software like this one here.
- At age 45 is when my wife will become eligible to start receiving her full pension. At the same time we’ll take our 401k and 403b, convert them into a rollover IRA, and use a 72t to start taking out SEPP’s. (The numbers used in the plan were calculated using a 72t calculator.) Combine all that with our stocks and that will be our monthly income from age 45 – 60.
- After age 60 we’ll add in income from our Roth IRA and SEP IRA to boost our income up even higher. Technically we could start withdrawing more from the 401k and 403b, but there’s really no reason to change the low withdrawal rates quite yet.
- After age 70 both my wife and I will qualify for full Social Security benefits. The benefits used here were calculated using Social Security’s website and reduced by 25% to compensate for Social Security’s notice that they’ll only be able to fund about 75% of $1 after 2033. Regardless, now our monthly income will really be kicked into full swing.
- By keeping the withdrawal rates low from age 70 on, we should statistically never run out of money.
Things We’ll Need to Do to Pull This Off Plan for Financial Freedom:
In real life there are LOTS of things that will need to happen to make sure it is a success. Here are the main highlights:
My Wife’s pension. One key factor to pulling this whole thing off will be making sure my wife receives her full pension benefits. Basically she needs a minimum of 25 years of service (really its 30 but we bought 5 years ahead of time). Once she does that she’ll be eligible to start receiving guaranteed paid benefits every year. Another nice bonus will be that we will be able to latch on to her health care benefits for a decent price.
Save big! Normally when you retire at 65 you’ve got a ton of years to let compound interest work its magic and build up your fortune. That’s not necessarily the case when your plan is to finish working by age 45. Therefore in order to pull this off, we’ll need to:
- Max out our 401k plan – Accomplished!
- Max out our Roth IRA’s – Accomplished!
- Contribute as much as $500 per paycheck to our 403b. Right now that’s the savings rate we’re currently at. However I would like to see this go up.
Utilize tax efficient resources. Not only are we going to save our money in IRA’s and 401k’s, but I also plan to save as much of our blogging income as possible in a SEP IRA (find out how you can do the same in this post here).
Build up as many passive income streams as possible. Even with saving at the maximum contribution levels with my 401k, 403b, and Roth IRA’s, that’s not enough! To really make this happen we’re going to focus on building up the money we make outside our jobs – in particular my online business efforts. This year has been particularly great for us in this area. Just read by through any of our niche site income reports and you’ll see that we’ve been consistently making about $1,000 for the last few months.
Take advantage of lower capital gains and dividends taxes. As you might already know, capital gains and dividends are taxed at lower rates than normal earned income (15% vs 25%). By saving a portion of our money in these types of accounts we’ll not only keep the money more liquid but also be strategically them less expensive when it comes to taxes.
What Assurances Do I Have That This Retirement Plan Will Work?
As with many engineering designs, there are various safety factors built in to help ensure the designer that their creation will work. Here are mine:
- It’s FIRECALC tested.
Do you ever use FireCalc? It’s a pretty cool free retirement analysis tool where you check to see if your money will last as long as you think it will. The way it works is it uses the past +100 years of market returns and shows you how your portfolio would have worked out for any time segment throughout history. By looking at the trends and seeing how many of them were successful you get a sense for how durable your portfolio will be (assuming history repeats itself).
So let’s play this game. If we assume I retire at 45 and I’ll live to be 100 (yes, we’re overshooting a bit here) then I’ll need my portfolio to last 55 years. Using Firecalc with an estimated balance of $1.5 million and a withdrawal of $48,000 ($4,000 per month not coming from the pension), then here are the results.
WOW! According to FIRECalc I will have a 100% chance of success with a possible average ending portfolio balance of $11,179,704. (Long live the MMD heirs!)
If I was willing to take on a little bit more risk and drop my chances of success back to a 95% confidence level, running the numbers again I find that I could withdraw as much as $55,000 per year (or $4,583 per month). Either way – it looks like we’ll be doing good here.
- I’m overshooting my basic needs. In previous posts we’ve already proven that $5,000 should more than cover our expenses throughout each stage of this plan.
- We’re inflation adjusted. By subtracting away inflation, you’re seeing all the numbers in today’s dollars which means we shouldn’t lose purchasing power.
- I’m using very conservative growth figures. Most of the time when people forecast market growth they assume a historical 9% growth rate (because that’s what an index fund classically returns on average). But with only 11 years left to go, what if stocks DON’T return 9%? What if it’s less? What if I intentionally invest more conservatively into a hybrid fund containing both stocks and bonds? What if I just want a safety factor? For all those reasons I’m using 6% as my growth value.
- My withdraws will also be very conservative. The popular 4% safe withdraw rate was only ever guaranteed for a 95% success rate for up to 30 years. By using figures closer to 3% instead of 4% within this plan we will almost guarantee success.
- This plan is tax efficient. Notice in the pre-age 59-1/2 days I’ll be relying on dividends for a decent chunk of the income. That fact combined with a modest income will help to keep my effective tax rate will be very, very low.
- I’m not considering or counting on future employer contributions. Because my employer’s contributions are somewhat unpredictable, I’ve decided not to include them in my future projections. They’re pretty much just icing on the cake. That not only helps to keep my plan more conservative but also helps to buffer any unforeseen dips in my balances.
- I plan to keep working and bringing in an income. On my own terms of course. As we’ve discussed before, I’ve given a lot of reflection as to what I actually want to do when I retire early and will do with my newly earned time. I’m pretty sure at least one of those things will be doing what I’m doing now … side hustles that generate cash!
That’s all I’ve got to say about this year’s update of the financial freedom plan. What do you think? Will I actually be able to retire by 45? Perhaps sooner? Is there anything in this plan that you didn’t know about already or that you think you might borrow for you own retirement plans?