Project The Future
We like projections. We have found that the only time we get excited about what we are doing is when we look at what our hard work will produce in terms of lifestyle and the financial numbers that will support that lifestyle. Frankly, it’s so hard not to get excited about it! It’s easy to get caught up in the projections and feel as though they are guarantees of the future. We know this is not the case. In terms of the stock market alone, it is a constantly moving figure, and no one has been able to consistently predict what it will do in short term periods of time (1 year and 5 year predictions are almost useless) and yet we are planning on having 40+ years of our lives contingent on the stock market allowing us to live off of it. Are we reckless? We don’t think so, and we will explain why.
We had spoken briefly in a previous blog of a study that showed you could withdraw 4% of our net worth from investments every year for 30 years and still have an intact portfolio. There is a LOT more to this study, but “the 4% rule” has become the golden standard of what most people consider a “safe withdrawal rate” where you won’t outlive your investments. If you withdraw even less than 4% of your total, the likelihood your investments will still be intact 30 years later is even greater. If you withdrew 5%, there is less of a chance your investment will still be intact. So, if you had $1 Million dollars in total investments, you could safely withdraw $40,000/year for 30 years. Like all statistics, this is based on “the average” return from the stock market and many other factors. Naturally during these 30 years we have no doubt there would be ups and downs. At times it would seem like there was enough growth in the market you could safely draw $60,000/year, and other times it would feel like you were going broke, losing 40% of your net worth. Imagine what that would feel like! The important thing to note is the fact that the market will constantly have ups and downs, but the market continues to grow, albeit slowly, regardless of those big dips. Slow and steady wins the race.
Why is the 4% rule important?
Between the calculations you make for how much you actually need to live on, (something we are currently in the process of doing) and how much you can safely withdraw from your accounts for 30 years, it’s a matter of acquiring and investing the money you need to create that magic number every year. $500,000 in an index fund would allow you to sell stocks and yield dividends without reinvesting in the neighborhood of $25,000 a year etc.
What if another 2008 type collapse happens while you’re early retired
It’s a great question. We can’t predict it, but would be foolish to not have a plan for if it did happen. If we are lucky it will happen soon. Why? Because our plan will remain the same and stocks will be “on sale” and our purchase power will be much greater. The market is at an all-time high right now, and obviously, it is better to buy during a down market, but as the graph shows above, the market grows regardless of ups and downs and the best time to invest is NOW regardless of those ups and downs. But what happens if a big collapse happens a year or two after we start our early retirement? Will we still withdraw our 4%? It’s an intriguing question. The study that produced the 4% rule, says you can continue to do so with no problem. As much as we would like to think we won’t have any emotional input into our financial decisions, we would probably choose not to withdraw our 4% during a significantly down market.
So what are our projections and how do we intend to use them?
Current investment strategy–
Roth IRA- ($5,500 a year each is your max contribution) As we write this we have $22,703 in investments. We still have $5,500 to contribute to Kristen’s IRA this year (Rory has already done his max contribution) We are planning on contributing our max every year for roughly 5 years. So in 2022 we will have $112,528 (Assuming an average return of 10%). We intend on leaving that figure alone until we are 60. At age 60 our Roth IRA’s will be worth $757,032.
403B/401K-($18,000 a year each is your max contribution) As we write this we have $71,690 combined between our 401K/403B accounts. We are planning on contributing our max every year for roughly 5 years. So in 2022 we will have $335,241 (Assuming an average return of 10%) We are intending on leaving that figure alone until we are 60. At age 60 our 401K/403B accounts will be worth $2,255,333.
Brokerage Accounts- (No max contribution per year, but not a tax shelter) As we write this we have $9,283, all in a low cost index fund currently. We are planning on contributing $4,000 a month to this for 3 years, and then $6,000 a month for 2 years ($48,000/year $72,000/year respectively). In the first 3 years it will be worth $171,235. With our increased contributions for the remaining 2 years, our brokerage accounts should be worth around $358,394 (Assuming 10% returns on average) If we left those accounts alone for another 5 years without withdrawing from them, or contributing to them, they would be worth $577,197.
Summarized that means in 5 years, assuming we meet our contribution goals consistently, our net worth with these accounts will be $806,163. Only $358,394 of that is actually accessible before the age of 60 however. If we were to start withdrawing 4% of the $358,394 each year, starting 5 years from now, we could only withdraw $14,335 each year. This is why our goal would be to leave it alone for another 5 years, where although we won’t be contributing to it, we also will not be withdrawing from it. This should allow it to grow to $577,197. That figure would allow us to safely withdraw $23,087 a year with no problem until we are 60, where our $3 Million or so is waiting for us from our 401K/403B/IRA accounts.
That’s a lot of numbers again, but we felt they were necessary to tie in many of the things we had been talking about to this point, and how when it all comes together paints a picture of the future supported by the numbers. For 5 years we intend on working our butts off to make our contribution goals, for 5 years after that we intend on being “pseudo retired” and earning at least enough money to pay for our living expenses, but not intending on making lots of money to invest, but enough not to withdraw from any of our accounts. And for the remainder of our years we hope to live entirely off our investments.
What if the stock market sucks for most of that time?
It could happen. We are willing to accept that. If it does it certainly will throw off our projections and our ability to fully retire early, but truth be told, we aren’t afraid to work. In fact, most people that “early retire” find that they don’t retire at all. They all report being financially independent having a similar effect in their lives. The psychology of knowing your future is financially taken care of allows you to enjoy working more than you ever have before, it allows you to have the freedom to earn less, do less, and do more of what you want. Even when it comes to doing our current jobs, we don’t anticipate hating working much if we just had that feeling that we didn’t HAVE to work if we didn’t want to. That feeling alone is life-changing we are sure. So if the stock market sucks for a prolonged period of time… So be it… We feel strongly that our flexibility is our safety net.