I’ve been asked a few times about how I plan to execute my retirement plan and I think now is an appropriate time to reveal all of the geeky details. Fair warning, the math and the nerd level here is going to be intense!
Building A Strong Financial Base 2004 – 2012 (Ages 18 – 27; Complete):
Over the past several years I have taken several important steps to build a solid financial base. That base is now fully cured and the rapid construction of the tower has begun.
1. Emergency Fund: We built an emergency fund equal to 9 months of base expenses. We can pay all of our bills for 3/4 of the year without any income coming in. This is a very important and difficult step. Over the years there have been several emergencies and each time we have to rebuild a portion of this fund it has delayed our retirement portfolio. This emergency fund also earns 3% interest from a high interest checking account.
2. Primary Residence: We bought a modest house with 20% down; This is huge. When we bought our house the monthly principal and interest payment was under 15% of our yearly income, and now it represents under 10% of our yearly income. The average American family spends upwards of 33% of their income on housing. We also bought our home in a low tax area. Our yearly property taxes are right around 1% of the value of our home.
3. Insurance Costs: We developed a long term reduction in insurance costs. It takes a long time to get your insurance costs down on home owner and car insurance. Our vehicles and houses combined average to under $50 per month each to insure. For Michigan, the ONLY state that has unlimited medical insurance for people injured in car accidents this is extremely low.
4. Employment Choices: I purposely chose jobs that provide for decent increases in pay over the long term and that are temporary in nature. My rates have more than doubled since I started out in the nuclear industry. I have options to work jobs as short as two weeks and as long as 3-4 months at a time. This is a major part of my long term retirement strategy.
5. Energy Efficiency: We invested substantially in energy efficiency. We replaced our 1979 boiler in 2012 with a new energy efficient 95% AFUE condensing boiler. We replaced all of our lighting with LED bulbs, and we replaced our washer and dryer with energy efficient models.
6. Avoided lifestyle Inflation: We haven’t changed the way we live and our yearly spending by more than 10% in 10 years. We strive to spend under $36,000 per year.
7. Debt Free: We have no credit card debt, no student loan debt, and no vehicle debt. During this time period we had medical debt at the beginning, which we paid off in 2005 and we had a vehicle loan for 18 months around 2009. For the most part we have lived debt free. This has kept us from having some nicer things at times, but the piece of mind and lower cost of living is certainly worth it.
Building Wealth: 2013 – 2025 (Ages 27 – 39; In Progress):
Now that we have a very solid financial base Mrs. C. and I are saving around 50% of our income per year. Once the house is paid off we should be able to hit a 66% savings rate.
1. Paying Off The House: We are following the strategy of paying an extra $200 per month extra and a large lump sum at the end of the year. For 2017 – 2020 we plan on paying approx. $15,000 at the end of each year. This will have the house paid off in December of 2020.
Directly following paying off our home, we will pay off our 2nd house, which Mrs. C.’s mom lives in. My goal would be to pay this property off 6 months after our primary residence is paid off. This will require an $11,000 payment in June of 2021. For the roughly 4 – 5 years after the house is paid off we will put all the money that was going towards paying off the house early and the house payments into our retirement accounts, which combined is around $20,000 per year.
2. Building Our Nest Egg: For 2017 I will max our IRA accounts through automatic weekly deposits and I will contribute 50% of my gross income from one of my employers into my 401K in 2017. Any additional savings will go into our taxable brokerage account. Now that our emergency fund is fully replenished, we should be able to direct more of our savings towards retirement.
3. Keeping Our Income Up: I am working snow removal again this winter to start out the year, followed by a busy spring season of Nozzle Dam jumping. The Ice Condenser outage starts early next year and is supposed to last longer than a normal outage, meaning more income. Our youngest will be in preschool starting in September, allowing Mrs. C. to work more hours and increase her income.
4. Keeping Our Expenses Down: We have three new expenses coming in 2017. Our health insurance is increasing by around $100 per month, our youngest will start preschool to the tune of around $500 a month in September, and we will be getting our oldest braces, at a monthly cost of around $200 per month. Yikes! Thankfully we have no other large expenditures planned. No vehicle or appliance upgrades, no land acquisitions, and no expensive vacations. Thankfully both the braces and preschool costs are short term expenses.
5. Staying The Course On Investments: Regardless of what the market does we will continue to invest in the same mutual funds and stocks that we already have. These are long term plays and we will not be shifting into other asset classes or funds to try to chase yield or diversify further. In 2017 and 2018 several of these funds will become cheaper as we move from investor shares to admiral shares once we hit a $10,000 balance in a particular fund. The expense ratio is around 50% lower once you are in admiral funds with Vanguard, with most of these expense ratios being below 0.1%. Our investment portfolios consist of:
- Vanguard Small Cap US Index Fund
- Vanguard Medium Cap US Index Fund
- Vanguard Total Stock Market US Index Fund
- Vanguard Emerging Markets International Index Fund
- Vanguard REIT Index Fund
- Betterment 100% Stock Allocation (Total Stock Market index, Large Cap US Value Index, Small Cap US Value Index, Medium Cap US Value Index, Developed Markets Index, and Emerging Markets Index, all Vanguard Fund ETFs)
- Tesla Stock
The red flag here is obviously the Tesla Stock. I invested 10% of our portfolio into Tesla. I strongly believe in the leadership of Elon Musk, I believe that solar power, battery storage, and electric cars will all become extremely large markets over the next 5 – 20 years, and Tesla will be leading the way. As far as the risk is concerned, I asked myself, if 10% of my portfolio fell 50% because Tesla didn’t deliver, would I be OK with it? A 5% dip in my portfolio value should not be a cause for alarm. If Tesla falls to $80 a share I will not panic. I also will not sell my shares if Tesla rockets all the way up to $300. This is a long term investment and I plan to hold these shares for decades.
Retirement Phase 1: Retire, Then Get Rich: 2026 – 2036 (Age 39 – 50)
When I officially retire, or more accurately, reach financial independence, we will still not take any withdrawals from our accounts for the first decade. During Phase 1 all of our major expenses are complete. We will have paid off our home, the vast majority of child raising years will be complete, and we will have fully funded our retirement accounts. By fully funded I mean that the total value will be at least $430,000. This is the minimum number for us to retire on comfortably. This would provide for a $30,000 yearly budget with a 7% withdrawal rate. Keep in mind that $30,000 goes a lot further when the house is paid off and you aren’t paying any payroll taxes.
1. Income: So if I am not taking any withdrawals where will this money come from? I plan on working temporarily, even though it is not required for us to be OK. We reach Phase 1 when we COULD completely stop working, not when we actually stop working. Since all of those major expenses are out of the way my income goal would then be $30,000. In Phase 1 we will have two primary sources of income:
Income Source #1 Outage Work: I will work 1 season per year, as it makes sense. In a typical 3 month season I can now earn around $25,000 – $30,000. Phase 1 is now on track to start in 9 years. 9 years from now I should be earning a bit more than I am currently earning. I am confident that 3 months of work will be able to cover our expenses. How many couples in their late 30s/ early 40s have 1 person not working and the other only working 3 months of the year? Not too many I would guess. The retirement police may call shenanigans on me claiming to be retired if I am still working part time, but that’s their problem, not mine.
Income Source #2 Blog Income: I did not start this blog to make money, nor do I manage it to make money, although I should really start to try more, since I am accidentally starting to make some significant income. I’ve been averaging around $250 per month recently. With my blog being just over 3 years old, and the start of phase 1 of this plan being 9 years from now, I think it is highly likely that Action Economics will be generating significant income by 2025. I can’t really put a figure on what it will be then, but I would certainly expect it to be greater than what it is now. This is something I will certainly work on improving and tracking as phase 1 approaches. This income is not being relied on, but since it is likely to occur, I wanted to mention it. Depending on blog income I may ratchet down my active employment work from 3 months to 1 – 2 months. I may do some early retirement consulting to provide some additional income as well.
2. Taxes: Although I am not counting on our tax code to help us out during this time period, the amount of money we will receive in tax credits is worth noting because it is significant.
For tax year 2025: We will have 3 children that count as dependents. We can earn up to $33,000 without having a taxable income before credits. We would receive $3,000 in the additional child tax credit ($1,000 per kid) and $4,900 in the Earned Income Tax Credit. We aren’t relying on this money, but it is important to note that we would most likely receive it. An additional $9,000 in tax free income is certainly worth talking about.
For Tax years 2026, 2027, and 2028: We will have 2 children that count as dependents. Earning $30,000 we would have a taxable income of $1,200 and an income tax liability of $120. We would receive $2,000 in the child tax credit and a $4,200 Earned income tax credit. This would total out to just over $6,000 in tax free income.
For Tax years 2029 and 2030: We will have 1 child that counts as a dependent. Earning $30,000 we would have a taxable income of $5,250 and a tax liability of $520. We would receive a $1,000 child tax credit and a $2,300 Earned Income Credit, for a total of $2,800 in tax free income.
Note: These above numbers are actually conservative. You can claim children on your taxes who are full time students up to age 24 for both the exemption and the Earned Income Credit. It is entirely possible that our kids will be full time students who do not claim themselves for at least 2 years, as we plan on them living at home and attending our local community college. This will increase the earned income credit levels, and allow us to potentially continue to have tax credits of at least 10% of our annual spend through tax year 2033. Once again, we are not relying on this income, I am just stating that it will most likely be part of our yearly income.
At a minimum for the first 6 years of this plan we would receive very generous tax returns. Additionally for tax years 2025 – 2028 we would receive approximately $10,000 in Social Security payments for our nephews, and in 2029 – 2030 $5,000, as the older one would be over 18. The youngest will turn 18 in May of 2031. This money would of course offset the cost of still having children in the house and getting them launched into adulthood.
3. Investment Portfolio: Phase 1 will start with an investment portfolio of at least $430,000. Assuming 8% growth, over this 10 year period of time, the portfolio would be worth $928,000. For you naysayers that think expecting 8% is overly optimistic, lets go with 6%, even then the portfolio will be worth $770,000. The main point here being that not touching the portfolio for the first decade will allow it to grow to a much larger size.
Phase 2: Fully Retired 2036 -2052 (Age 50 – 66)
1. Income: At 50 I will be at a point where I most likely will stop all active work. That 2 – 3 months per year is now more valuable than the money it generates. Also, a lot of the jobs I do are physically demanding and working 72 hour weeks is a young mans game. The most flexible of the jobs I do is generator jumping. I’ve worked jobs as short as 2 weeks in this field, and I might occasionally work 1 or 2 of these a year, but not for the need of the money, more for wanting to stay in contact with some of my friends. Working 4 weeks out of the year could still generate me $10,000 in income, which is a full 3rd of our planned spending.
Who knows if blogs will still generate revenue this far into the future? Action Economics could earn nothing, or it could earn hundreds of thousands a year, or anything in between.
An additional source of income during either phase 1, 2, or hopefully late in phase 3 will be income from the sale of or 2nd home. Mrs. C.’s mom currently lives in our old house and she covers the house payment and property taxes on it. Once the house is paid off, which will happen right after I pay off our home, most likely in 2021, she will only be paying the property taxes. When she passes away we will most likely sell the house, which is worth around $60,000 representing 2 years of planned spending.
2. Investments: Conservatively our investment portfolio will be worth $750,000 at the start of this phase. A 5% withdrawal rate would generate $37,500 per year, which is an extremely conservative withdrawal rate. When I turn 50, I will set up an SEPP (Standard Equal Periodic Payment) for our IRAs. This involves jumping through some hoops, but is doable. We may also take small withdrawals of long term capital gains from our taxable account.
NOTE: Because of my flexibility with income generation, I will only take a maximum of 5% of the remaining balance each year, not 5% of the first years balance in perpetuity. This means if my portfolio drops to $400,000 I will only withdrawal $16,000. The other $14,000 will come from other sources. This strategy is modeled after Warren Buffets ingenious gifting mechanism to the Bill and Melinda Gates Foundation. Every year since 2006 he has gifted 5% of the Remaining shares of a pledged 10,000,000. The value of those 10,000,000 shares in 2006 was $31 Billion. 11 years later, after essentially taking 5% withdrawals, the remaining shares are now worth $45.5 Billion. After taking 5% withdrawals for 11 years he has 47.5% more money now than when he started.
3. Taxes: I expect that taxes will be extremely low for us. Since our income is not from work we would not be paying payroll taxes. We have money invested in traditional IRAs, Roth IRAs, HSA accounts, and Taxable Accounts. Under current tax law, the first $20,700 is not taxed (standard deduction with 2 exemptions) We would take this money out of our traditional IRA account. The next $28,374 would be taxed at 10%. Most likely we would withdrawal anything over $20,700 from our Roth IRA, or take out long term capital gains from our taxable account, which currently would be taxed at 0%.
We would also most likely receive a small tax break on our property taxes of around $500 per year if the current Michigan Homestead Property Tax Credit is still in place.
Phase 3: 2052 and Beyond (Ages 66 And Up)
1. Income: By 2052 our retirement accounts most likely will have grown to extremely large levels. We will be able to spend fairly freely out of our accounts. In 2055 we will be 30 years out from our original retirement date. In the Trinity study, the median end of portfolio balance (after 30 years) with a 75%/25% stock/bonds allocation for accounts that withdrew at a rate of 5%, the ending value was 8.7X the original balance. This means that IF those trends repeated themselves, then it would be likely that our portfolio that started at $430,000 would in 2055 have a 50% chance of being worth $3.75 Million or greater.
Wow that’s a lot of money! And, we still wouldn’t be all that old. I would be 69 and Mrs. C. would be 73, not much older than the average retiree, and we would have already had 30 years of retirement. People are living longer, and it is entirely possible that we would both be around for another 30 years. Keeping with a 5% withdrawal rate on $3.75M we would be able to take out $187,000 per year, and most likely at age 100, we would have over $32M.
2. Social Security: We will delay taking Social Security until we are 70. Mrs. C. will hit that mark 4 years before me in 2052. Social Security is a fixed income plan with substantial yearly increases for delaying benefits. Because Mrs. C. and I lead healthy lives and expect to live longer than 80 years, we will reap the benefits from waiting until 70 to take our benefits. By retiring early we will not have 35 years of income so multiple years of zeros will be added in to our calculation. My projections show that we should qualify for roughly $2,500 combined per month in Social Security benefits if we wait until 70 to take them.
3. Inheritance: My parents worked hard, saved for a long time and retired early by today’s standards (My mom Semi-retired around 50 and my dad will retire at 55 in January 2018). They prepared extremely well for early retirement, are fiscally disciplined, and invest well. I would not be surprised if they have a very large nest egg remaining when they do pass. By the time that happens I will most likely be an old man. Perhaps they will instead give more of an inheritance to their grandchildren or great grandchildren. My parents had children very young (as did I) and lead very healthy lifestyles, so it’s very probable that I will be in my 70s or 80s when it happens. I certainly won’t need the money, nor would I expect it.
What do you think of my comprehensive retirement plan? What are your long term plans for retirement?