The Full Financial Breakdown at Early Retirement

Here we are, at our very last quarterly financial update post chronicling the journey to early retirement. (Insert Kevin McAllister from Home Alone scream here. Which I may have watched more than once over the holidays. It holds up, you guys.)

While there’s a ton we have no idea about in early retirement — what will we be doing five years from now? how long will it take us to learn the skill of not filling up our schedules? what oddball hobbies will we fall head over heels in love with? — we feel more than solid on the financial side, which you’ll see here in more detail than I’ve shared before.

And while you’re free to say this in the comments, too, I’ll head some of y’all off and say: Yes, I know it will look to plenty of folks like we overprepared. And that’s fine if you think that. Each of us has to figure out our own comfort level with savings, withdrawal rate and all the rest. Our comfort level on financial stuff is more conservative than some others’, namely because of all the health care unknowns, the bubbly-feeling state of the economy, the cost of long-term care down the road and a bunch of other factors that folks tend to underestimate.

Plus, as I said to a new friend at the Longmont meetup yesterday, we’d much rather have our names on NPR as program sponsors for years after we die than risk running out of money. Far better, in our view, to leave behind a charitable legacy and to have overshot than to hit some bad sequence of returns, follow that with an extended flat market, and realize in our late 70s, when it’s too late to do much about it, that we don’t have enough. Being able to possibly oversave and still retire at 38 and 41? That is a, ”Pinch us!” moment, and not, ”Doh! We worked too long!”

But let’s actually get to the show-and-tell portion, so you can see what I’m talking about. Without further ado, it’s the full financial rundown at the time we’re reaching the goal post (or the starting line, depending how you see the early retirement journey). And keep reading to the end, where I share much more concrete detail than I have before!

Continuing with the grand tradition of the quarterly updates, let’s start with the rundown on progress in recent years. First up, our total net worth.

I love seeing the story in the charts, and not just the numbers (which we don’t share here anyway — here’s why), especially when those lines get steeper, meaning we stepped up our focus.

Let’s break it down into components. We paid off our house in January of our final working year, so the remaining mortgage balance is on our single rental home, and the 401(k) line and taxable savings represent the progress on our two big pools of assets:

We are somewhat unique (weird?) among financial independence and early retirement bloggers for thinking of our early retirement in two phases: phase one when we’ll rely on taxable investments and savings only (and not doing any significant Roth conversions) in the years before 59 1/2, and phase two after Mark turns 59 1/2 when we’ll shift to our tax-advantaged accounts (currently 401(k), soon to be rolled over to IRAs). This approach works for us because we got an early jumpstart on saving in our 401(k)s (and when I say ”we,” I mean Mark), and because we’ve earned enough that we could max out our 401(k)s and still save more in taxable investments. Obviously it’s a less practical approach for folks able to do one or the other but not both.

The Later Phase — Traditional Retirement

So that 401(k) line that looks all big and pretty? We ain’t touching that money for a long time, more than 18 years. Meaning it just gets to keep growing. And given that it\’s already well above what we expect to need come age 60 and beyond, we get to sleep well at night knowing that we’ve looked after future us. (And that if we screw up this whole early retirement thing, our actual retirement is still intact.) Here\’s what it looks like now, at 150 percent of what we projected we’d need to have saved by the time we pulled the plug:

We expect some of that balance to go away whenever the markets correct from this general frothiness, but even if they lose a third of the value, never recover it and then grow modestly over the years, we’ll be in good shape. And if things go better than that, then we can step up our standard of living a lot in “real” retirement, which we would be a-okay with.

The Now Phase — Early Retirement

The charts for our taxable savings and investments are way more interesting, because that’s where the stories are. You can see, for example, what we haven’t been able to share in pre-reveal updates, that we were always able to save more in election years, given that those are the bigger years especially in Mark’s work.

And you can see when we actually got serious about saving, even though we loosely formulated this plan back in 2011:

In the chart above, comparing what we projected we needed to save each year versus what we actually arrived at through a combo of saving more than we’d planned and market tailwinds, you can see where we got ahead of schedule in 2015, and that we adjusted our magic number upward to give us more security and peace of mind. And it makes us super happy to know that we actually beat that magic number by quite a bit, and were just able to sock a big chunk away in our donor advised fund (DAF) to continue our charitable giving even in lower income early retirement years, in addition to making a big charitable gift this year to the many organizations whose work we believe in.

Looking only at the last two and a half years, it’s crazy to see how much of our taxable savings has happened only in that time. We know we’re lucky to have been able to save as quickly as we did, but we kept surprising ourselves. And we don’t have a corner on being able to do that.

Travel 4Ever — The Points Balance

Travel is crazy important to us, and while we can shrink the rest of our retirement budget significantly if we have to in a recession to avoid depleting our assets, the thought of not being able to travel the world in a bad market bums us out massively. And that’s why we’ve made such a point to build up a big, fat travel points portfolio. We really tried to be smart about points these last few years, especially while we were traveling for work. I’m super proud that I was able to accumulate so many miles while still finding the best travel deals for my clients and company (#travelninja), and I can definitely attest that there is something much sweeter about that giant, comfy Polaris seat on a long-haul flight to Asia when you know you earned that upgrade the hard way, with butt-in-seat miles. So here’s where those are ending:

Through pretty minimal travel hacking, we’ve compiled well above our goal of 3 million travel points. The Chase Ultimate Rewards balance this quarter reflects an 80,000 points signup bonus we just got for adding the Ink Business Preferred card, and earlier in the year I got the Sapphire Reserve when it was still offering 100,000 points as the bonus. We also each have a United and Marriott card through Chase, and six cards feels like more than we need long term, without all the work travel. So stay tuned for thought on streamlining those.

I also can’t help but color code the miles to show who earned what. Given that Mark’s contribution on the financial side was bigger, I’m claiming credit for the travel mile greatness. (Not to worry… I will be reminding Mark of said greatness when we’re enjoying our ice cream sundaes in our new 777-300 Polaris seats en route to Taiwan this winter.) ;-)

(P.S. Did y’all know it can be way cheaper to fly to Asia than to Europe even though it’s much farther from North America, and that there are way more upgrades available and smaller copays to use miles? We have recently discovered this and are wondering why we’ve thought mostly about Europe our whole lives. There’s a whole big world out there, much of it far cheaper to get to!)

Real Detail: Multiples of “X”

The inverse of the 4 percent rule for safe withdrawal rates (a rule I have issues with) is the rule of 25X, with X as the amount you need to cover your living expenses for a year. Save 25 times your annual living expenses and you’re good to go, right? Um, maybe.

This is more than I’ve shared before, but here’s a breakdown of how much we’ve actually saved, well in excess of 25X:

In total, we’ve saved about 37.5 times X, but it’s truly even more than that, because after our rental mortgage is paid off in 12 years and that becomes all cash flow, our ”X” will also go down by 40 percent. So the 22.5X in our tax-advantaged phase 2 accounts? It is really more like 37.5 of what X will be when we reach 59 1/2. And that would feel absurdly conservative, even for us, if we weren’t planning to step up our standard of living at that point. But we are. #balleryearspartdeux We may be fine traveling like dirtbags for the next two decades, but after that, we want comfy mattresses and no more shared bathrooms. Not so much to ask, right?

And on the taxable phase one side, our early retirement is 18 1/2 years long, but with the rental income kicking in after 12 years, the total multiples of X we require (in today’s dollars) is only 16.2, not 18.5. Put another way, we’ve saved 93 percent of everything we expect to need in early retirement, assuming that our investments can gain at least enough to keep up with inflation. It would take only the most minimal real gains (under 2 percent after inflation), or a little bit of side work, to get us to traditional retirement without running out.

So why save so much and not pull the plug a year ago? A bunch of reasons:

1. Health care is of paramount importance to us, and we wanted to have answers after the last presidential election about what the fate of the Affordable Care Act would be before pulling the plug, which tied our timeline to real events as much as our magic number.
2. Sequence of returns risk impacts those who experience a recession early in their withdrawal phase, and given how overvalued the markets feel by many measures, it felt reasonable to assume some contraction will happen in the first couple of years of our retirement. If the markets lose 20 percent, which is not crazy, then we’re back at our original magic number and still okay, versus having only saved that amount and being at risk of our assets contracting to an amount that wouldn’t be enough.
3. I get notes often from people who wish they\’d saved more, and almost never from folks who wish they’d saved less. And the consequences of the former are much worse. So building up a cushion felt like the right move for peace of mind.
4. We could spend some of that cushion on other stuff like an RV, or on something less fun like an earthquake deductible if our house gets shaken apart. We wanted our savings to at least allow for the possibility of a big ticket purchase at some point.

What’s Most Important — and Worth It

As we now step into the great unknown, we have a ton to learn. How will we cope with actually selling shares instead of accumulating them? What will be the many inevitable surprises, even though we’ve put about as much time as we could have into anticipating what the transition and next life will be like? How will we feel valuable in the world, and derive meaning, and live out our purpose?

I believe wholeheartedly that early retirement is mostly about evolving personally and emotionally, and is only a little bit about money. But if we’d cut it closer with what we’d saved, we might end up being forced to think about money a lot. Saving more than is strictly necessary frees us from having to think about it because our odds of running into problems are so much lower.

And the question we’ve asked ourselves from the beginning of this journey has been, “What would make it all feel like it had been worth it?”

Quitting our long-time careers only to feel even a little anxious about money? Not worth it. Maybe working a little longer than we possibly had to, but never feeling that anxiety? Totally worth it.

To us, that’s the most important part, and pretty much the best gift we could buy ourselves.

Chime In!

Fire away with any questions you have. Or want to tell me you think we saved too much? I’m braced for it. ;-) Mostly I’d love to hear from you guys about how your year-end numbers are looking — I’ve got virtual high fives at the ready for those who hit goals this year, but any good news is fair game. Let’s continue this in the comments!