The “Number” is a big question!
How much do you need in savings and retirement accounts to cover your expenses the rest of your life without having to work again! You could still choose to work once you hit this number and be Financial Independent (FI) or choose to Retire Early (RE). There are many other options including Barista FI/RE where you earn enough to cover you expenses at a less stressful possibly part-time job but have saved enough not to worry about retirement. Our goal is to Retire Early from our current careers so we can focus our time and energy on our family, hobbies, and life. This may include some future income options since Mr. FoF is always working on some new idea, but not required to maintain our lifestyle.
There is no one right number for everyone. Trying to find the right FI/RE number is a tricky subject and provided for many hours of discussion, debate, and negotiation with Mrs. FoF.
For this article, we also debated on if we should share our real numbers and decided as much as practical we would show our real data. This is based on our decisions and choices and will not be the same for everyone. This is a n=1 data set that applies to our situation but the experience and example should help others in their journey. If you want to cheat just scroll down to the end!
For those Redditors out there, we do not really fit into r/leanfire , trying to live on under $40k annual expenses (or less). We also are not really planning to wait till we have enough money for r/fatfire either, with multiple million in savings. We probably fit closer to the middle of what many on r/financialindependence are striving for.
To figure out our FI/RE number, we first reviewed our annual expenses and our goals for early retirement. Luckily, we are big users of You Need a Budget YNAB (more on this in some future posts) so we had access to all our spending for the last few years.
For those not familiar with YNAB its a fantastic budgeting app that we strongly recommend. We have been users for over four years and it has really changed our relationship with money and spending. Prior to YNAB, though we had decent savings in our 401k, we spent almost everything we took home and would never have been in a position to consider early retirement.
Let’s get to the numbers! Before anyone comments, we are not r/frugal and earn enough to cover our expenses, live our lives, and still consider an early retirement. Here is our initial budget analysis based on prior years actual expenses.
Note: For this initial exercise we had to choose a Safe Withdrawal Rate (SWR), this is the amount you can withdraw each year and not run out of money. There are many articles and studies on this and we will dig into this much deeper in future posts. For simplicity, we stuck with the “4% Rule of Thumb”, it was shown by the Trinity Study that a 4% withdrawal rate had almost a 100% chance of lasting at least 30 years with a 50% Stock / 50% Bond investment mix. This is not a guarantee and will analyze our planned SWR in future posts.
The initial number of $3.4 million was a little sobering and did not even yet account for health care insurance costs in retirement. Our retirement savings are good but not even half of this amount. We would need to wait another 10+ years to retire at this level and we really want to have a plan for us to retire in the next 5 years (or sooner) so we went to work. Here are the steps we took:
- We extracted all our annual spend data into Excel from YNAB.
- We reviewed any one time and other expenses we would not expect to see in retirement. Results shown in Table 1 above.
- We then reviewed each category and debated, negotiated, and sometime fought over what we thought were reasonable changes. Some were easy and others were a little more difficult.
- The Easy choices:
- Professional expenses and memberships were easy to eliminate.
- We had a term life policy we felt we no longer needed. Mrs. FoF would be fine with our current savings if anything happened to me.
- Cars – Without both of us not working we could reduce down to a single vehicle.
- Food – We agreed with cooking more and buying less prepared foods we could cut our dining out budget. Even cut back groceries a bit since we started Intermittent Fasting.
- Charity – We were never big $ charity people. We are not religious and have a few local charities we support. As we enter into retirement we don’t plan to change this but are considering donating our time to some local charities such as Habitat for Humanity.
- Travel – This was easy since we did not want to reduce our budget in this area. We plan to do more travel and will mix some splurge trips with some lower cost travel plans.
- The Harder Choices
- Moving – We considered options for moving to a lower cost of living area. We are in central Ohio so our Cost of Living (COL) is not terrible. This is something we are still considering.
- Our House – We love our current house and location but realized we could downsize. Down sizing is built into the plan but could be in our current location or future low COL locale.
- Gifting – We don’t have our own children (yes, we are DINK’s) and have always been generous with our family. We decided as we eliminate our employment we would need to scale back in this area.
- Health Insurance – We currently get decent insurance from our companies and it is pretty well subsidized by our employers. We estimated an Affordable Care Act (ACA) policy that is similar to our current coverage. This is pricey but gives us something to work with. This is a big area of concern for us with all the uncertainty around health care.
After this effort we had a more reasonable number of $84k per year with goal of $2.1 million. This is interesting because even before I become interested in FI/RE and really worked the numbers I always had a $2 million number in mind as my goal.
Is the Balance Right?
Reducing our spending from $136k to $85k is a big change. Some costs will will logically reduce as we stop working but others would be more challenging. Could we live with these new numbers without disrupting our lives and keep a good balance between retiring early and having enough money to enjoy our lives?
Since our FI/RE goal is within the next few years, we felt we needed to test out this budget. In comes YNAB and we adjusted our budgets in some key categories such as Dining Out and Groceries. We did this about two months ago and though we have not been perfect we are getting close to hitting these new targets so it seems these goals are achievable.
Housing and Healthcare are the two we are not experimenting with right now and we still have some decisions in these areas. Medical is right now 24% of our planned budget so we need to review this much more closely in the future.
What about ACA Subsidies?
The Affordable Care Act (ACA) provides health insurance premium subsidies for incomes below $64.9k (in 2018, for a family of two). Our target pre-tax income need of $85k puts us over the ACA subsidy limit. When we consider we are budgeting $15k on health care premiums we are only about $5 k short of the limit. Most of our retirement assets are in tax deferred plans so any withdrawal would be considered taxable income. Note: We plan to use a SEPP withdrawal plan to avoid penalties for withdrawals prior to age 59.5.
So how much savings would we need to keep our taxable income under the ACA limits and get the benefits of the premium subsidies? In the following table we reviewed what it require if we had a Bronze ACA plan, saved our medical expenses in an HSA which would reduce our taxable income, and then see how much income we would need to generate from non deferred savings.
Note: For some this may be controversial but we need to do what makes the most sense for our situation and having been heavily taxed with minimal write offs most of my professional career I have no issue with using a benefit I have available to me. If you do have comments on this please keep them to the financial aspects of our plan and not the political.
If we took advantage of adjusting our plan under the ACA income limits, our new expense would be lowered from $84 k down to $ 72 k. That is something worth considering but it has a great deal of risk with the state of the ACA at the moment.
So What is “Our Number”?
For our situation we are going to use the range of $1.8 to $2.1 million and assess periodically as we get closer. Taking advantage of the ACA subsidy looks very attractive for our situation, reducing our medical budget from 24% to 10%. However this has a lot of risk and we don’t want to count on it always being there.
We also need to review our Safe Withdrawal Rate (SWR). 4% is good for a 30 year window and we could be as long as 50+ years. We are also worried about sequence risk: retiring at the current market peak just to have poor market performance our first few years of retirement. We are old enough (late 40’s) that we will have some benefit from Social Security as a cushion when we get older but we don’t want to be in our 70’s and looking for work!
Now that we have our initial target, we have more work to refine the numbers, verifying a SWR for our situation using some more advanced analysis including running some Monte Carlo simulations. More on this in our next post.
If you would like a copy of our budget worksheet used in this effort, just subscribe to our blog and we will send a copy.