My core strategy on building up account balances toward retirement is centered around tax deferment, Roth growth, and brokerage accounts. What works best for my family is to prioritize the accounts in the following manner.
As you are aware at this point, you need to have a combination of frugality and saving mindset coupled with a high enough income to be able to maximize your savings in any retirement account. For the year 2019, my family is aspiring to maximize my 401(k) with a total of 19,000 in tax deferred contributions and increase what my wife had been contribution to her 403(b). The increased contribution to her 403(b) will have a positive impact on our tax bill at the end of the year vs what we had to work with during 2018. Beyond the tax deferred, we are hoping to max both of our Roth IRAs this year. My account should be funded equally over the course of 12 months and my wife’s will have some lump sum contributions this March and March 2020 (pending work bonus) while also including some smaller monthly contributions during the year. After our Roth accounts we will make some tiny contributions to M1Finance while maintaining a monthly investment equal to the difference in a 30 vs 15 year mortgage payment. The annual shakeup looks like this:
For the year 2019 and forward, if we can stick to these investment contributions, I believe that we should be able to meet our long term financial goals. One area that I am not considering here, but is vital to our long term goal planning is our Health Savings Account. When possible, we’d want to max our contribution here also, but it’s not going to be in the cards most years. The past two years I have been an individual on the plan and was able to max out my contribution. I believe we’ll need to draw on this account for health related items in the future so I’m not counting it toward meeting my monthly expense needs during retirement. It’ll be a “bonus” so to speak.
My forecast for where these accounts will end up primarily in March 2033 is driven by an assumed average annual return of 5.75%. I believe that this value can be used to safely account for inflation, but I am going to remain conservative to help promote that idea. My model is going to be constructed strictly under the assumption that my wife and I are not going to receive annual compensation raises. A low raise at my work is around 2.5% of base compensation, which is a target that I believe I can continue to meet year over year. Vanguard just recently delivered a 10 year forecast estimating 5% inflation adjusted annual returns, which my forecast doesn’t deviate too far from. To add some additional background, the figures below have the average interest compounded monthly and they also include my current starting balances in each of the accounts.
To Be in the Year 2033:
The total savings amount is very appealing to me if we can reach this point. We also know that even if this plan doesn’t materialize in full, that our efforts today will create options for us down the road that we would not have had otherwise. You can also see that we will have amassed a variety of points of savings that should be useful depending on where we want to draw our withdrawals from. For the remainder of this posting, I’ll talk about how we will navigate the first partial year of early retirement.
January – March will entail our normal spending habits without much change. For the year, I expect our income to total $78,400 after taxes, which results in a monthly income of $6,500. This is compromised of my monthly wages, bonus, wife’s wages, and our rental income. For the first 3 months, I expect to have additional expenses of $4000 from mortgage/insurance/tax payments to our lender. After that period, our monthly expenses should be in the range of $5,400. I think that this figure could potentially be higher than required, but I like to error on the side of conservatism where I won’t be placed in a situation where I have less money than I need. That methodology seems to be making some more sense in comparison to the alternative! My income will be limited to the first three months of the year so that money will need to be retained and saved for equal monthly distribution after that. My wife will then become the breadwinner in the family and we will celebrate with a vacation in the summer using the leftover of the mortgage investment after paying off our house.
April – December will continue to average out to an income of $6,166 per month reduced due to allocating more money toward the front of the year where I was making my final two regular mortgage payments. My anticipated expenses are not expected to change much aside from the reduction in the mortgage and will remain at $5400, which I am allocating as the fixed total amount of expense we will owe each month through the end of life. Obviously, over time our expenses are going to drop down as we age and are limited in the amount that we can travel, which is why our plan is potentially pay more in taxes than necessary in order to have more money available in the 40’s rather than waiting until our 60’s.
Part 3 will be the conclusion of my early retirement plans as of today. Any thoughts on things to consider so far?
Categories: Early Retirement