Financial Status Bar & Goal Updates

This updated post explains my ratio-based method of tracking our financial progress towards early retirement (as shown by the status indicator on the top right of every blog page).

Cash Reserves / Emergency Fund

Our goal is to always have a full year of expenses in cash equivalents as our “emergency fund”. (This is not the same as a year of income. Our expenses are much lower than our income.) This is a cushion for a variety of potential events including job loss, health concerns, or other unplanned costs. It also allows us to take a more long-term view with our investment portfolio since we know we won’t have to touch it.

Since our emergency fund is relatively large, I try to maximize the yield. If we stuck it all in a money market fund, the yield would be barely above zero. With a bit of work, our cash earns a blended rate of over 2% annually without taking on extra risk. We use the same accounts to make money from no fee 0% APR balance transfer offers, but currently don’t play that “game”. Here are recent updates on where we keep our cash:

March 2013 Cash Reserves Update
June 2012 Cash Reserves Update
March 2012 Cash Reserves Update
May 2011 Cash Reserves Update
January 2011 Cash Reserves Update

Home Equity

I don’t think everyone should buy a house (or more accurately, take out a huge loan on a house), as it historically doesn’t necessarily work out to be a very good investment over short or even long periods. However, if you are geographically stable, I do think buying and eventually owning a house free and clear can be a solid component of an early retirement plan. My current forecast is to have our house paid off in 10-15 5-10 years. Housing is very expensive where I live, so once that mortgage payment is gone, the actual income my investments will have to produce will drop drastically.

There are many ways to define home equity, and I am sticking to a simple method of calculating home equity by taking 100% minus (outstanding mortgage balance / original home purchase price). As of 2011, our home price has rebounded to over the original purchase price according to a refinance appraisal and comparable sales. Overall, I’d rather enjoy having continuous progress without worrying about my home’s exact market value. Here are some previous mortgage updates:

April 2013 Mortgage Paid Off
[...]
November 2011 Mortgage Payoff Update
February 2011 Mortgage Payoff Update

Investment Portfolio

The goal of my investment portfolio is allow withdrawals to support our needed expenses in “retirement”. Again, income and expenses are not the same thing. After mortgage payoff, I expect our required expenses to be less than 25% of our current income. I like to assume a simple 3% safe withdrawal rate, which means for every $100,000 saved, I can generate $3,000 a year of inflation-adjusted income for the rest of our lives. I used to assume 4%, but since our target “retirement” age is in our 40s and not 60s, I feel that 3% is better. Even 3% is not guaranteed, but again it does provide a quick estimate of progress. Here are recent portfolio updates:

June 2013 Investment Portfolio Update
January 2013 Investment Portfolio Update
July 2012 Investment Portfolio Update
February 2012 Investment Portfolio Update
November 2011 Investment Portfolio Update
July 2011 Investment Portfolio Update

My initial goal was to try and keep the home equity and expense replacement ratio about the same so that both will reach 100% at the same time, but we’ll see. I am still (very slowly) researching shifting to a more income-oriented portfolio that yields about 3% and has a principal value that can grow with inflation.

The actual implementation of my plan will probably require more flexibility. At some point, I plan on using some of my money and invest in an immediate annuity for some income stability. I’ll also need to vary my exact withdrawal rates a bit with market conditions. Once I reach age 70 or so, Social Security will kick in something. I don’t think Social Security will disappear although I do expect means-testing, but who knows these days.

Comments

  1. Dude, your formatting is all messed up. The right-hand side bar stuff is for some reason now is sitting way at the bottom of the page. I use Chrome…

  2. Way to go. You guys are in very good shape.

    If you are really planning to stay put, why do you care about home equity? Why not just track the amortization of your mortgage, since that seems to be your ultimate goal? That’s kind of what you are doing here anyway, by tracking the % of your purchase price you have paid off. You could use a % if you don’t want to disclose numbers.

    Also, I know you have mentioned children in the past. They will probably push your expenditures up a bit from the 25% of your income. Have you given any thought to how that will effect your trajectory? Also, children come with their own significant liabilities, particularly a big one that lasts for four years from ages 18-21. Have you considered starting to defease those? The earlier you start the better, as you know. Once you start doing that you may want to split your Investment Portfolio into a Retirement Portfolio and a separate College Portfolio which has its own time horizon and goal(s).

    Thanks for sharing.

  3. once again, you deliver a thoughtful and practical snapshot for day to day awareness and ongoing motivation. Bravo! I’ve borrowed several of your methods for our own family’s financial snapshots that i maintain and I’m certain i’ll borrow from this update as well.

    Keep up the good work.

  4. Rodrigo Says: says:

    Good for you. Do you and your wife treat everything as “shared finances” and you control it all?

  5. Do you project when you’ll be hitting 100% of your ultimate goal — 100% of expenses replaced? I.e. “if I continue to save at the rate I am now, I will hit my goal by XX/XXXX.”

  6. Also, the 4% withdrawal rate only works for the “average” retirement age. If you retired at 30, you would run out of money well before you died if you started at 4%… if your goal is early retirement, 4% is almost certainly too much.

  7. If you do end up having kids – make your best projections. Then, multiply by 10. Follow that with an increase of 30 years before you retire and you’re there!

    Just kidding, I’m sure you’ll do fine but they sure can put a wrinkle in retirement plans – but are worth every cent. Good luck.

  8. You should also factor in health care expenses in retirement.

  9. Your “My target asset allocation remains pretty much the same as here.” link goes back to the mortgage calculations.

  10. @Anon – Fixed, thanks.

  11. Is your current split of 75/25 stocks/bonds based on your 10 yr plan to retire? Would you still have this split if you were planning to retire around age 65?

  12. @Erin – Yes, for me my target is to go down to 60/40 when I retire. If I was going to retire at 65, it would be a more gradual shift.

  13. Great blog, great website…thank you for the information you provide us here. My wife and I are in a similar boat to you in regards to age, lifestyle, savings goals, income, etc. and we have picked up some very valuable advice here. Keep it up!

  14. Victoria Lindsay @ Lend Not Borrow says:

    Great blog. Well thought out retirement plan- do you think a 4% withdrawal will be sufficient in your retirement years?

    Thanks for sharing!!!

  15. Awesome way of looking at retirement/ financial freedom.

    1. Curious though – have you included kids education/ college funding in your plans? Can you share the progress on that?

    2. Can you elaborate on how you arrived at the amount that is needed for retirement? What assumptions did you make on (i) the rate of increase in living expenses (ii) rate of inflation (iii) rate of real increase of assets (iv) length of retirement living

    Thanks again for putting the pieces together for all of us.

  16. I always thought myself a saver, but then I see your updates and find myself totally outclassed! I admire your ability to sock it away!

    My question is why does everybody assume that they should pay for their kid’s college bill? Maybe that would be a good topic to explore in a future post…

  17. Jonathan,

    I know a lot about finances as well. From everything I know, you do a real good job investing for early retirement.

    I believe that 95% of American Citizens would be better off by just copying what you do or adapting what you do to their own needs, than to listen to what their banking representative or other financial advisor is telling them.

    Keep up the good work, my friend.

    Johannes

  18. @ Jon M: From a recent father of two (age 1 and 3), I think paying for college (or for some portion of college) is a wonderful gift to give your children, provided they are responsible, have a good work ethic and the parents are financially able to do so. I know there are ways to get a college education without taking on loans, but I think that’s a lot easier said than done. There aren’t many jobs a high school graduate can do part time to cover $20k + in tuition/room/board that the average public school runs (not to mention what private schools cost).

    I have set aside in a 529 enough to (hopefully) cover the cost of my kids’ college education at a public university. My parents did this for me, and the benefit of graduating from school with no debt was HUGE. If my kids want to go to private school, hopefully they’ll get a scholarship to cover the difference (as I did).

    Did it cut a few years off my retirement goal? Sure, but the benefit to my kids is worth it.

  19. Just curious what income you calculated you will need after your early retirement, and how much of that you allocated to health care costs.

  20. Jenna, Adaptu Community Manager says:

    Thanks for the update. I like your little icons at the top of your page.

  21. @ Michael: I guess our plans for our children mirror our own experience. Neither my wife nor I received parental assistance for college. Since I knew I had to pay for it myself, I chose to attend community college and transfer to an inexpensive state school (that cost $5k/year). I had to take loans but I did not accrue any more debt than I could pay off in a year of work afterwards. My wife chose to join the armed forces to get the GI bill to pay her way. We both believe that our situations forced us make choices that taught us very valuable lessons about personal finance and life in general. I hope that our children would learn the same.

  22. For cash reserves some of those interest rates in reward checking accounts at credit unions look pretty tasty.

    They mention looking at your credit history if you open one though. Anyone know if thats considered a hard credit pull and would hurt your credit score?

  23. curious how do you define income – after taxes, investments, etc or before any deductions.

  24. Great job! You live the number one most important rule for getting ahead financially…Live on less money than you make. Take that money, invest it wisely, and enjoy the rewards. As someone who has similar goals, I feel obligated to say that I despise the safe withdrawal rate and the poverty consciousness that it attracts. Basically, stretch your money in retirement such that you will die before running out. Hope and pray that the ills of taxation and inflation doesn’t erode your savings and thwart your plans. With all due respect, I believe you should have more real estate in your portfolio. Not residential real estate or REITs. Look into large multifamily buildings and fractional ownership through a reputable syndicator. In this way you can enjoy superior returns from cash-flow, appreciation, and principle pay down. Shelter is a basic need. Real estate has the added benefits of being tax advantaged and a hedge against inflation. In this way, you can expand your means in retirement as opposed to tring to exist on an ever diminishing slice of the pie. I wish you all the best!

  25. Jun Bantolinao says:

    Informative.

    Thanks for sharing

  26. Jon, One very important investment missing is kids education. We just had a baby and we would like her to goto college debt free, atleast at the undergrad level. When you do have kids, what will be your plan. Thoughts?? Thanks for all the free and highly needed guidance

  27. It looks like you’re definitely on the right track and it’s interesting to see a breakdown of your finances like this. I don’t have a mortgage yet, as I want to buy outright (or as close to it as possible) to avoid the interest. I have also had to relocate for work, so not entirely sure where I will be settling down in the long run. Until then I plan to keep everything I save towards a house in high interest bonds, savings accounts/ISAs. I also don’t plan to retire completely at any age (I’ll keep working as long as I am able), although I hope to switch over to work that I have a passion for once I have the finance behind me and don’t have to worry about living costs. Keep up the good work and best of luck!

  28. Hey Jonathan, curious as to how you made the status bar and how you update it? I was looking to add one to my website, http://www.militarymoneymanual.com Feel free to drop me an email or respond to this comment, thanks! By the way, been a long time reader of the site, and must say you’ve got some good stuff on here! Keep it up!

  29. If you paying mortgage at close to 3%. The amount of contribution into mortgage should be allocated to your investment.

  30. So our economics class just read about your money blog in our book and we wanted to see if blog still existed. It does! You should definitely give a shoutout to our class in your next update!

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