After months of being stuck in the day-to-day issues of buying a house, moving, and work, I spent a lot of time today… daydreaming! Mainly because I am getting tired of only having 2-3 weeks of vacation per year, I went back to thinking about how early I can achieve financial freedom. Let’s say I really want to retire in 10 years by age 40. What do I need to do?
Part #1: Pay off the house
I’m not saying everyone should buy a house, but I have one and would psychologically love to have it paid off before I retire. For me, housing is by far my largest expense. Using this mortgage payoff calculator, I would need to increase my monthly payments by $2,500 per month to pay off my mortgage in 10 years. For a 20-year payoff, I would need only $600 per month in additional payments.
Part #2: Estimate remaining expenses
Things now simplify greatly. What else do I need to pay for in retirement? This is for two people, kids will increase some items. I will ignore scary things like college tuition. All costs are monthly with some padding.
- Food, both groceries and dining out: $600
- Communications + Utilities: $350
- Gas, not much need if retired: $100
- Transportation, amortized cost of one car: $150
- Housing maintenance plus property taxes: $350
- Clothing, Entertainment, Travel: $250
- Healthcare: ???
Total without healthcare: $22,000 per year. Note that this isn’t my barebones spending, this is about what we spend now, and what I’d be happy with indefinitely. Of course, we could do better.
So how much will health insurance cost? This is a huge unknown. We are relatively healthy now, but who knows. Let’s say you get an individual high-deductible health plan for $100/month per person and get cancer (knock on wood). Can the insurer drop you or raise rates? I don’t know the answer, but I’m guessing they can at least raise rates at some point.
It’s possible that within the next decade we will have some form of universal healthcare system. If not, we may need to investigate ways to get on a group plan somehow. I will put in a wild guess of $8,000 per year.
Total with healthcare: $30,000 per year (after-taxes)
Part #3: Set up portfolio to produce this income
Using current tax brackets, we will have to pay very little income tax to achieve an after-tax income of $30,000 per year. For federal taxes, the first ~$18,000 is not taxed at all, and the rest would be taxed at 10% (married filing jointly). That’s an overall tax rate of less than 5%. We have no pensions or other annuities, just maybe Social Security down the road.
(Side note: If I have no other income from sources like pensions or annuities, this means I should lean towards contributing to Traditional IRAs and 401(k)s exclusively right now instead of Roth’s since my tax rate in retirement should be very low – much lower than I might have guessed before.)
Anyhow, if I use a 4% withdrawal rate, I would need $750,000 in today’s dollars. I will start with the $120,000 I have now and estimating returns at 8% annually, with inflation at 3%. Using this savings calculator with a goal of $750,000 in 10 years, I would have to save $3,600 per month for 10 years, or $1100 per month for 20 years.
I know this is all guesses upon guesses, but here’s what my back-of-the-envelope daydreams give me:
- To retire in 10 years, I would need $6,100 in excess income every month.
- To retire in 20 years, I would need $1,700 in excess income every month.
Retiring so early just doesn’t give compound interest enough time to work its magic. It will be tough to integrate all this with our actual goals. But this is still encouraging for me, as I love having even rough numbers in mind to provide something to reach for.