The Magic Is Real // 2016 Q3 Update

We hinted at it a few weeks ago, but we’ll just go ahead and make it official:

We are way ahead of schedule on our savings plan!

If you read our Q1 and Q2 updates, and you know from living in the world that the stock markets haven’t crashed or corrected lately, then this is probably not too surprising. But it continues to surprise us!

We’ve reached this surreal place where our finances no longer seem like ours. Everything is so automated, and with all the investments earning compound interest these days, we just sit back and watch these numbers get bigger and bigger. It’s crazy. It certainly doesn’t feel like something we did. We’ve just tried to stop spending on things that don’t make us happier, which doesn’t feel like the same thing as saving up a big chunk of change that will sustain us for decades.

It feels like magic.

Of course, if you are one of the lucky global rich who has money leftover to save each month, then you can have this magic too. Just keep saving and investing, and let time do its thing. (Bonus points if you remember to be grateful that you’re in that fortunate position, because not everyone is, and because gratitude is good for your health.)

The story of the 2016 has been setting bigger goals, upping our savings game and benefiting from market tailwinds (which we know could reverse themselves at any time), in addition to continuing to be in the amazing position of earning incomes well above average. (Thank you, lucky stars.) While we’ve been planning for almost two years now to retire at the end of 2017, we’re now entertaining the possibility of quitting sooner than that, depending a lot on how this year’s bonuses shake out. (To be continued in December…)

Let’s get to the updates!

The Big Picture

As always, we’re sharing percentages and charts but not the real numbers (here’s why). As of the end of the third quarter of the year, here’s where our net worth stands currently:

While we’re now in our prime income earning years and would expect to see that line get steeper each year, we’ve already hit a net worth increase in 2016 that would be acceptable for the full year… and we’re only three-quarters of the way through it, and haven’t yet gotten our deferred compensation, which we shorthand as “bonus.”

That net worth number is made up of our investable assets (taxable and tax-deferred/401(k) accounts) and our equity in property (home plus rental property). But we haven’t adjusted upward the supposed value on our properties in more than a year, because we’re not interested in inflating our net worth on paper. We do count the equity because paying off our house is a meaningful metric for us (that will equal 100% equity), and paying off the rental will mean we get more cash flow from it.

And here are the breakouts of those components, showing some fun progress since the end of Q2:

Here’s what all of those numbers represent in our two-part retirement plan:

The Details

We’ll start with the easiest one first: our mortgage balance. We’re paying our rental property mortgage on schedule since that interest will continue to be a tax write-off after we’re retired (when mortgage interest on our home will no longer be deductible because we’ll switch to standard deduction). But we’re making fast progress on our primary residence mortgage, just about five years into it, and we plan to pay it off before we quit next year:

Next up, our “real” retirement funds, comprised mainly of our 401(k)s and a tiny IRA. This is the money that will support us from age 59 1/2 onward, and which we don’t plan to convert to Roth earlier unless we absolutely must.

Last year, we crossed the number that we think will provide all we need in our 60+ years, even after roughly doubling our annual spending compared to our early retirement years. But we’re still maxing out our 401(k)s because we can, and because we’re happy to have the tax deductions. (We totally believe in taxes, so don’t generally try to get out of them. This is the only tax-avoidance strategy we practice, because it’s it’s indisputably in the country’s best economic interest for us to be self sufficient in retirement. And because, no matter how pro-tax you are, in the higher brackets they just hurt.)

So far we’re at 114 percent of what we think we need to have a comfortable “real” retirement, and we’re still contributing through the end of the year. We should each get one more 401(k) employer match before we retire, as well as have all or most of next year to contribute, so this number could go to 125-130 percent of what we need, in which case we might rethink our plan not to convert some to Roth. Stay tuned…

Now let’s get into the good stuff: our taxable accounts. Since we got serious about retiring early, we’ve worked hard to build up our taxable savings, because those are most of what will sustain us in early retirement, especially for the first 12 years of it, when we’ll have minimal rental cash flow. (After the rental is paid off in 2029, that should pay roughly half of our expenses.) This is just how serious we’ve been about saving in our taxable investment accounts:

That’s a screengrab from Vanguard, where most of our taxable money lives. Notice that near-zero balance at the end of 2013? Yeah, that’s how recently we wised up. But we’ve been busy since then. And here’s how much of that is what we’ve contributed versus the comparably tiny gains:

The gains are growing pretty quickly now, and given how young these investments still are, we aren’t surprised to see that ratio. Our 401(k)s look a lot different, but we’ve been investing in those a whole lot longer. With time, the ratio of investments to market gains will shift in our favor. (By the way, is it weird to anyone else how comfortable I sound with all this market stuff? After being notoriously risk-averse and preferring to keep my money FDIC-insured? Personal growth is possible, friends!)

Here’s a historical look at our total taxable funds, including cash, showing some big growth already in 2016, with a lot of earnings still yet to come. This line should still get a lot steeper before the year ends:

Here’s a more zoomed-in look, showing strong and consistent growth based on our focused contributions, with a few dips for down market months:

My company is currently a little slow on expense reimbursements for work travel, so I had to dip into the “life happens” fund in September to pay my credit card bills. That has September’s number looking a little flat compared to August. Once I get reimbursed, I’ll pay us back, and October should look a lot better.

The Best Updates

I love looking at charts as much as the next finance nerd, but all the rest of this update has been boring compared to these last two charts. In the two most recent quarterly updates, we shared that we were trending ahead of schedule. But it’s now official: we’ve already passed the number we were hoping to save in the entire year, and we still have a quarter plus bonuses to go!

This means several things:

1. We could sustain a 10 percent market correction and still hit our total targets for the year (assuming bonuses are roughly in the range we anticipate).
2. We are now solidly aiming at our previous “super optimistic stretch goal” number, instead of our “only slightly optimistic but most likely doable” number.
3. We could possibly quit a little earlier than end of 2017. Stay tuned!

And the final chart shows that we’re not just whistling Dixie:

We’ve already saved as much in three quarters of 2016 as we need to save in the whole rest of our working careers to hit our middle-of-the-road number. Of course, we’re aiming at that bigger number now, but given that we have five quarters and two bonuses left to go (or even if it’s only three or four quarters plus prorated bonuses…), this all feels super possible.

Can You Feel the Magic?

We’ve been planning for and blogging about early retirement for a while now, but it’s always felt a bit unreal, like any far-off thing seems until you’re actually there. But sometime in this past quarter, when we realized just how fast of progress we’re making and how little we have left to go, it actually because real. And that’s when the  magic kicked in. Because even though there are plenty of early retirement blogs, and there are news stories about people who’ve retired in their 30s or 40s, in a big picture sense, WHO DOES THIS?!?!

It’s a super tiny fraction of people who manage to pull off an early exit from work, and all of a sudden we realized, We’re really going to do this. It isn’t just some nice dream we’re going to talk about for a while. We’re really going to walk away from awesome careers with excessive salaries next year. We’re really going to get to do whatever the heck we want to do every day. It feels like the letter from Hogwarts just arrived, and in an instant we knew that magic is real, when before we’d only hoped it was.

Our Q4 To Do List:

Our real moment of reckoning will come close to year-end when we know our net total for the year and can make some decisions about whether we’ll work all the way through 2017 or not. But in the meantime, we have a few things on our to do list:

1. Redo our projections to make sure we’re comfortable with our numbers, even if market returns get lower over time (we’ve always been conservative in our estimates, so this is really just for added peace of mind)
2. Decide how much of our year-end bonuses to keep in cash (we currently have one year of expenses in cash, but want to retire with two years or slightly more)
3. Figure out what the heck we’re going to say at our year-end reviews when those long-term conversations happen. We don’t want to tip our hands about our plans, but we also don’t want to overpromise, especially to those who’ve gone to bat for us over the years.
4. Get as many ski days in as we can! Resorts open next month. Yeehaw!

Now Let’s Chat!

Whew! We got through the full update! Now we’d love to hear from you guys. How was your third quarter? Anyone hit any milestones you’d like to share? We’d love to give you a big virtual high five! Any non-financial highlights we can help you celebrate? Any other info you’d like us to share in future updates? Or just want to recount a hilarious story from your weekend? Whatever it is, you know we’d love to hear from you in the comments. ;-)