update: we’ve expanded our early retirement plan page to spell out our financial approach (mostly index funds with one rental property that will pay off down the road). check it out if you’re curious.
y’all already know we don’t share numbers as in dollar figures (read why that is here), but we have no problem sharing percentages. we talked two weeks ago about our planned financial independence day, and wanted to share a clearer sense of where we are now, and how that’s changed over time.
so this is our first post with an actual chart in it. we know, fancy.
as of right now, we’re at 76 percent of what we need in order to retire. factored into this are mortgage balance (we will pay off the mortgage and we’re 2/3 of the way there — we know it’s controversial to include primary residence in net worth, but we’ve included it here because it’s a progress measure), taxable investments and our tax-deferred 401(k)s. of course, there are scenarios in which we might need more than 100 percent — if, for example, our 401(k)s climb in value because of market gains but we do a lousy job saving money, then we’re also not making much real progress. but so far we’re on track with the saving and investing.
we plan for the 2015 point to keep moving upward — we’re only in april after all. we made huge progress last year — from 52 percent to 70 percent of what we need. some of that was market gains, though. if we can get to 80 percent this year (not too much farther to go, and we should be able to surpass that), then 90 percent by end of 2016 and 100 percent by 2017 should be do-able. we’ll be right on schedule. but given that we’ve gone from 70 to 76 percent just since the start of 2015, we’re feeling downright stoked. (all market dependent, of course — knock on wood!)
if you glance at the chart, you can definitely see the point at which we got serious about saving: 2011. even though we’d been saving for a few years before that, and had already saved up for and bought our first place in a very pricy city, that’s the year when the idea of early retirement became real for us. we bought the house we call our retirement house, changed our lifestyle to be a lot less extravagant, and got serious. (earning more over time for sure helps, too.) it’s pretty amazing how much motivation a goal can provide, and the chart is proof that having a goal — even if it was abstract back in 2011 — has worked mightily well for us. do you keep track of your net worth, year over year? what other motivational tips have you found to keep yourself on track?
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Excellent progress! For the record, I have never understood why it is controversial to include your primary residents as a part of your net worth – at least the portion of the home that you actually own.
2017 sounds like your special year. Have you given any thought yet to whether you will retire the second you’ve hit that 100% mark, or will you work a little extra to pull in some “just in case” money?
Thanks! Good Q on 2017. We have decided that our jobs are taking such a toll on us that we’re going to quit at the end of 2017, pretty much regardless of where we stand financially (barring some major market crash or economic collapse of course, but in that case who knows if we’d even still have jobs?). We should have the house paid off, so will have flexibility. Our hope is to be able to stop working for a while and decompress/travel through most of 2018, but we’re willing to jump right into some part-time consulting if needed to make it work!
I don’t own a home so I’ll play devil’s advocate in why it shouldn’t be included. It doesn’t generate any income like an index fund or home that you rent out. For the most part (unless you live in San Fran lately or NYC) home values keep up with the cost of inflation. Then you factor in maintenance, taxes, interest, insurance, etc. My index fund doesn’t need any maintenance and will provide me a steady stream of dividends and appreciation (over the long term, obviously some blips). This is just my 30,000 feet view, but everyone can do what they want since its their net worth! :)
Also – Another reason I wouldn’t include home equity in my net worth is for financial independence calculations. I wouldn’t want to include home equity as part of my SWR calculation for the reasons noted above and the fact you can’t really easily access it. Just something I’ve made sure to think about when I project out my financial independence.
I think you’ve made an excellent point with regards to the ability to easily access your home equity and how that plays into your special number – the number that will allow you to retire and maintain your targeted lifestyle for the rest of your life. I absolutely agree that people need to be honest with themselves and not simply assume that if something goes terribly wrong, they can just sell their house and things will be okay again.
I think where you and I differ is in our definition of “worth”…as in, net worth. To me, the net worth number isn’t constrained by income, but is essentially a summation of everything that you own, or in other words, the *value of your assets*. Equity in your home is certainly an asset that you own even though it may not be easily accessed, and that value may go up or down depending on the real estate market.
That said, both my wife and I certainly understand the point that you made with regards to the ability to easily access our wealth, and to that end, our special number – if we had one – would be based around our income-generating assets, similar to how you’re calculations are mapped out. That is our true indication of how prepared we are to maintain our current lifestyle post-job. But our net worth – independent of our retirement number goal – does include home equity because it is an asset that we own.
Agree 100%. We don’t factor the house into ER finances, but we do factor paying off the mortgage into our calculations we need to get there! This net worth percentage chart reflects that, not strictly our home equity, which is currently higher than what we paid.
Totally agree with your big points. In our case, we plan to rent out and/or house swap to help fund our travels, so the house will generate income and/or offset expenses. Also agree with Steve that it’s an asset we own, but for this percentage, we’re actually just factoring in our mortgage — the starting point and how much we still owe. Splitting the difference.
The main reason the primary residence is excluded from the Net Worth calculation is for Net Worth comparisons among individuals where you have both renters and home-owners.
When someone transitions from renting to owning, his/her net worth takes a dip because the liability is greater than the equity and it messes up statistics.
Eg. an Ethiopian renter could have a higher net worth than an American home-owner.
Since everyone needs to live somewhere (renting or owning), the primary residence is excluded from these net worth calculations. It is this definition that the US Gov uses to determine that an Accredited Investor is someone with 1M$ net worth.
I agree on the primary residence. Sure, its value can fluctuate, but you own it, just like you own stocks which also fluctuate. Primary residence is especially valuable if you are sitting on a nice chunk of land too….
Thanks for sharing your chart. You made great progress last year & are off to a good start this year. So 2017 is the year of freedom?
Thanks for reading! Technically start of 2018, but we’re sure the time will fly by. :-)
Great job guys. Keep it up! And don’t let a stock market correction spoil the fun. Think of it as an opportunity!
Always a great point, hard as it may be to watch our numbers shrink.
Just have to remember they will eventually be on the ups again at some point in the future :)
Nice graph, you have an impressive progress since 2012, you’re obviously doing the right things. If you continue at that pace, looks like you may hit your goal right before end of 2017. Keep it up!
Thanks! That’s the plan/hope!
I love how much steeper the slope on your graph got in the last few years :)
We love it too! 😎
Offering a late comment on primary residence being part of “net worth”: I note our home as part of our total assets (“net worth”), but not as part of our available retirement assets until the point we “plan” to sell (perhaps when we reach 80?). Our home is a “sunk cost”. The money we put into it is lost as far as supporting us other than not being a monthly expense for a place to live. It makes our “budget” lower (no rent), but it doesn’t help feed us or provide any direct financial benefit for our financial costs. In fact, it is a burden since we still must pay for insurance, taxes and upkeep. So my chart for “available assets” shows our “cash” and our IRA investments and the total takes a huge bump up in the year we think we might sell the house/property.
I used to show the home as an additional “asset” added on after we use up our other resources (perhaps at age 94 in the budget). But recognizing that at 94 we will not be wanting to sell a (then) 50-year-old house (likely much depreciated in value), we decided that selling at 80 (or maybe 75?) is more practical and helps to provide the incentive to keep the property up to current standards (by investing in maintenance and improvement).
Your house value could easily be as much as 40% (or 50% or more) of your total “net worth”. But as I said, it will not feed you and as several noted, it may not be easy to convert to a real disposable asset.