For the most part people in this country would classify retiring at age 45 to be extreme. The “normal” retirement age is 65, and age 55 is seen as early retirement. Retiring at age 40 means that I will have worked for 23 years. My current long term goal is to hit financial independence by age 45 in May of 2031. This date co-insides with the youngest kid in the house turning 18, which is one of the primary reasons I selected it as the finish line. My financial projections show that I would have amassed a large enough nest egg by then at my current earnings level to stop working comfortably. While analyzing these projections I realized I left something out, the high probability of wage increases. Because of wage increases it might be possible for me to hit financial independence much earlier, perhaps as early as age 40.
What I Need To Retire:
My goal for retirement is to have the house entirely paid off and at least $600,000 in investments. At a 4% withdrawal rate this would allow me to take out $24,000 per year. Our spending with 4 kids is around $36,000 per year. Without a house payment our spending would be reduced to around $28,000 and without the kids I’m sure our spending would be reduced further to reach the $24,000 per year goal. Our current goal is to retire by age 45.
One of the wild cards retiring at 40 would bring to the table is potential college costs. When I turn 40 our kids will be 23, 18, 15, and 13. Although I have a decent plan for reducing total college costs it may be in my best interest to continue working longer simply to pay for their education out of cash flow. I don’t want my kids to take on debt to get through school and our savings won’t be enough to also fund schooling for them.
Where I Am At And My Projections:
Currently Mrs. C and I are on track to max our IRAs and our HSA, as well as put $17,500 extra on our house each year starting in 2016. Our after tax income then looks something like this:
- After Tax Income: $72,000
- Spending: $36,000
- IRAs: $11,000
- HSA: $6,550
- Extra on House: $17,500
- After Tax Betterment Account: $1,200
Once the house is paid off which is on track to be May of 2020, all of the money we were spending on it, $17,500 PLUS our $7,000 in scheduled mortgage payments would then go towards investments in an after tax investment fund.
Option 1: Fully retire at age 40: Stop working entirely and live off our investments: This option is cutting it close with my current projections. At age 40 we should be right at $600,000 in the bank. We would be living a somewhat tight lifestyle with money if we cut it this close to our goal amount.
Option 2: Partially retire at 40, and only work select jobs to cover our annual living expenses. At my current rates I could earn our yearly expenditures working less than half of what I am working now, and Mrs. C wouldn’t have to work. At 8% returns not touching our money would allow it to grow from $578,000 to $850,000 at age 45. This would provide a much larger cushion and at 4% withdrawals would give us $34,000 in income.
Option 3: Continue working full time to age 45. These 5 years will very likely be my highest earning years. Our expenses will already be lowered by the house being paid off and we can save the lions share of our income. Waiting 5 more years to pull the plug also gives our retirement accounts 5 more years to grow in value. It is highly likely if I work these 5 years our retirement accounts will have a value in excess of $1 million.
Calculate In Increased Earnings:
This is the elephant in the room as far as I am considered. I am not sure exactly how I should project our future earnings because nothing in life is certain. 10 years ago we were struggling to earn $30,000 a year, If I projected our retirement date off our life then, it would probably be 2050!
It is likely that once our youngest who is 3 now starts school, Mrs. C. will work more and her income will increase by several thousand dollars per year. Currently she is only working 2 days per week. My pay rate has been increasing steadily and I have been steadily taking on more projects. For 2015 my personal earnings were 30% higher than the previous year. While I know this percentage isn’t sustainable, It stands to reason that my projections SHOULD include increases of income over the next 11 years. If I change my projections to include 4% annual after tax wage growth, which is probably conservative, I could start saving an extra $2,800 per year in the first year.
Another major projection I left out was 401K matches. It is possible my employment status could change, and this change would give me a 401K with a 5% match. If I maxed my 401K to the 5% mark I would have an extra $2,900 from the company match the first year (I would reduce my IRA contributions to reflect my 401k contributions). NOTE: My income is about 80% of our household income, so that is the percentage I used in the chart below for the 401K data.
With these projections, between saving 100% of our after tax wage increases and receiving an employer 401K match, we would have an additional $290,000 saved by 2026, the year I turn 40. This would give us a total of $868,000. This would make it much more comfortable to stop work entirely and be extremely selective with any additional projects I work. If I chose to wait until 45 to retire, the additional savings would total over $545,000, bringing us to around $1.4 million.
If I retire at 40, I most likely will at least work 1 or 2 small jobs to reduce our withdrawal rate to between 0 and 2% so that in the early years of retirement we are not risking depleting our nest egg. I can see working 6 weeks out of the year and being able to cover over half of our yearly expenses. Our taxable investment account at Betterment would then be tapped to provide the rest of our income. We have several years before we have to make any decisions on this, and all we can do in the meantime is stay the course and continue to live well below our means.
Do you include wage increases in your retirement projections? How do you think I am doing, is retiring by 40 a realistic goal for me?