Our Ultra-Safe Early Retirement Plan
In a recent post, we shared our ideas to develop a completely redundant second income stream after reaching financial independence. In good times, this plan will allow us to live with an abundance mentality as we have throughout our working years. Should bad times arise, we will have a plan in place and ample cushion so that we will continue to live our lives without financial stress.
The question then becomes, how exactly do we plan to do this? The exact actions that have put us on pace for early financial independence will give us several viable options. These actions include developing a low cost lifestyle and developing multiple skills that will allow us to make income. The fun part is picking and choosing the most interesting and highest reward options.
Setting the Bar Low
To give a little perspective while using nice round numbers, we will assume that our current expenses are about $40,000. This is a close enough approximation to our numbers to illustrate our options, without diving into our specific financial situation. Using this assumption, we would start with a $1 million investment portfolio. This assumes a 4% safe withdrawal rate. 4% of $1 million = $40,000.
Remember, we are not trying to replicate our income from our working years. We are creating a second income stream, in addition to our investments, to cover our post-retirement expenses. To do this, one of us would have to earn $40,000/year or $3,333.33/month. Since we have two adults capable of working, we could each earn $20,000/year or $1,666.67/month to achieve this goal. We each have career skills that can demand relatively high salaries as well as a variety of interests that can be used to make money, making this a pretty low bar to reach.
Lowering the Bar Further
Since we will focus only on recognizing a relatively small income, we can drastically cut the largest expense that we currently have, income taxes. By making much less money, we will pay a far lower effective tax rate. Our income tax system essentially penalizes higher earners by making you pay incrementally higher taxes as your income increases. We can drastically cut back on the amount we work. With a far lower tax burden, we will be able to earn money in a much more efficient manner.
We also would save on taxation of our investments. Currently, about half of our investments are held in taxable accounts. We currently pay 15% on our investment income during our full-time working years. Long-term gains and dividends on investment income are currently taxed at 0% for those with a low earned income (in the 15% marginal tax bracket). We will remove this headwind allowing our money to make more money for us.
Let’s revisit the $40k living expense scenario. After utilizing standard deductions and our personal exemptions, about 50% of our income at this level will be free of federal income tax. We can then pay a low federal income tax rate (about 10%) on our remaining income. Alternatively, we could elect to defer the remainder of our income into tax advantaged investments and live off of taxable investments. This would allow us to avoid even the low 10% federal income tax. Instead we would pay tax on the long-term gains of our taxable investments, which conveniently would be 0% due to our lower income.
Most likely, we will utilize a combination of different strategies to produce our redundant income. Regardless of our exact strategy, we will pay a very low tax rate compared to our professional working years, removing another obstacle from making this plan a reality.
Option 1: Semi-Retirement
Most likely, we will begin the early stages of our early retirement with both of us entering semi-retirement. Our plan for now is to have Mrs. EE continue to work 30 hours/week for at least the first year. This will allow us to have some of the full-time benefits her company gives her at that level of work. The biggest is the ability to buy our family’s health care with her company subsidizing a large portion. Not insignificant is paid vacation. She also has some other fringe benefits such as having her phone plan paid, the ability to deduct other business expenses because she works from home, racking up travel rewards, and having the opportunity to get back near home with her occasional work related travel. At the same time, her job is location independent with flexible hours and she works for an awesome company doing work she enjoys. Her primary current stress is doing all of the household chores she has to do for our family while working. Much of that can fall to me when I am not working and commuting to work.
My early retirement will look a bit more like retirement as I will plan to leave my current job. However, I plan to keep practicing physical therapy using travel assignments and work 6-12 weeks/year for the benefits they can provide. For the first year, we can use a travel assignment to get our family out west where it will be easier to check out locations more closely before we decide where to relocate permanently. Once we are established in a new permanent location, we want to be able to come back east to be close to our family for part of the year. This arrangement will allow us to do that with free housing while also allowing me to make a decent amount of money in a short period of time.
Option 2: Turning Possessions Into Investments
After income taxes and food, our next biggest expense is our home. We also have considerable expense associated with being a two car family. This is despite owning our home and both cars outright.
Even having a paid off mortgage, we pay property taxes. We also pay far more than we need for utilities and insurance for a house far bigger than we need or, as we realized after the fact, even want. While working, we have at times paid someone to clean the house 2-4 times/month. In addition to normal expenses for upkeep, we also have been dealing with some ongoing projects to make the house more sell-able that have added additional expense.
Likewise, ours cars produce considerable ongoing expense. They need to be insured, inspected and maintained. Gas and depreciation are large expenses. Most of these expenses are due to the hour I spend daily in the car commuting to and from work. The next biggest portion of our driving is because we live at least one hour from our favorite recreational activities. Because I need a car to get to work every day, Mrs. EE has to travel occasionally, and we live in a location that is not walker friendly, we have chosen to buy and maintain two cars. Though the second car is rarely driven it still needs to be insured as well as having occasional maintenance, not to mention the initial purchase price.
In retirement, we plan to re-engineer our lives so that we live in a smaller home in a more central location to needs (groceries, work opportunities, etc) and wants (mountains, library, church, etc.). This will allow us to have additional money from the sale of our home and one of our cars to add to our paper investments or provide capital to branch out into real estate investing which is a developing interest of mine. It will also allow us to have lower ongoing expenses associated with our current large home/two car lifestyle. This strategy has the double impact of providing additional income while the decreased spending will provide less need for ongoing income.
Option 3: Getting Paid to Do What We Would Do For Free
Our outdoor hobbies are not generally the way to become wealthy. There is a reason even all but the most successful adventure athletes are affectionately referred to as “Dirtbags” and ski “bums”. However, doing some intermittent work in these fields can have great benefits. We can use them as ways to make social connections, educate ourselves, develop our skills, and get things like gear and ski passes for free or at steep discounts. At the same time, we can make small amounts of money that can go a long way to reduce stress on our investments.
Writing is also not generally an easy way to get rich. However, we can likewise use our blog or freelance opportunities in a similar manner. We can develop social connections, educate ourselves and share with others on topics like investing, tax and retirement planning, and travel hacking that we want/need to learn anyway and make a few bucks along the way.
With our low living expenses, it should be pretty easy to meet our needs or at least a decent portion of them while doing things that we find fun, interesting and/or educational. As our friends at Our Next Life put it, we’ll be “Turning Pro” at our hobbies.
Is Developing Redundancy Easy?
It is hard to answer that question assuredly, as we have yet to actually do it. However, as we do our analysis, we are very confident that our work skills and other interests combined with our low cost of living and desire to further simplify in retirement make this strategy very doable for us. This gives us the confidence to make our transition to an early retirement lifestyle even before we have achieved the traditional measure of having assets equal to 25X our current annual expenses. We feel that our strategy will give us much more balance and much less stress in life without taking any great financial risks associated with a more “traditional” retirement of relying strictly on passive income.
How Much is Too Much?
I don’t know that we will ever feel 100% comfortable living completely off of passive income. There are three things that currently scare us. First, we have little confidence that our expenses will stay constant (adjusting only for inflation) for the next 40-60 years as is assumed by safe withdrawal rate research. Second, stock markets are currently considerably over valued by historical standards while interest rates sit near historical lows. Starting any retirement under those circumstances makes it substantially more likely to fail, let alone retiring with potentially 50+ years of life ahead. Finally, we feel that health insurance is a huge wild card. While the ACA currently is very favorable to early retirees with low earned incomes, we are not confident that will remain the case.
At the same time, we don’t want to be forever caught in what Darrow Kirkpatrick refers to as “one more year” syndrome. I do not want to continue working a job I no longer enjoy simply to add money that we may never need to investment accounts while life passes us by. We think that this plan is a good balance of living for today with an eye on tomorrow.
We will focus on never again working jobs that we do not enjoy and find interesting and challenging. We are much more interested in building lives that we love and would never retire from than we are of retiring from jobs that are boring, are physically or mentally draining, or that we simply do not enjoy doing. Given that, we’re not very worried about this question.
Are you taking a similar approach to your early retirement, or do you want a more traditional retirement that focuses on never working again? If you plan on the more traditional approach, do you worry if you have saved enough or too much? How do you address those issues? Share your thoughts below.
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We are taking a similar approach. I already work only 10-20 hours/week and my job is location independent, I do it from home, and is very flexible with time. Mr. T’s job is the one with the benefits, which means our healthcare costs will cost about 10x what they currently do when he leaves his job. But, we plan to ease into it with my meager income still coming in. The question for us is whether we plan to do this before we hit our FI number or actually plan to work all the way up to that point. 🙂
Working without a commute and flexibility in hours is pretty sweet. Mrs EE also gets paid pretty well and really likes her work and the people she works for so it is hard to beat. She still was going to cut back more towards your type hours, but the option to get health insurance made it make more sense to stay where she is, at least for now as we see if it gives us the lifestyle we want. We are pretty certain we won’t be at our FI number which is another reason we want to keep some money rolling in.
I had similar plans when I first went FIRE. But I’ve found the layers of redundancy are unnecessary. I live off the stash exclusively.
I appreciate the feedback FV. I think often we are overcautious. Part of our plan in this case is also b/c we aren’t certain of future costs as we really want to split our time between the mountains out west and our families back east. I think having some extra income and the availability of travel assignments will make this more doable while we figure it out.
Nice anchor setup but personally I’d use locking biners instead of quick draws.
I think we share similar thoughts in FI and the different options we can pursuit. FI is really all about being open to the different options.
I was going for the most simple visual with the picture. Agree w/ using lockers whenever available.
Totally agree FI all about having options. It took us awhile to figure that out though. I think many people define retirement as being done working forever, which it can but doesn’t have to. The cool part of FI and lifestyle design is making up your own rules instead of doing what everyone else does.
We’ll probably go a mix of option 1 and option 3. Like you, I’ll most likely be in the more traditional retirement mode and just straight up exit the current workforce (oil and gas). Our new plan is for Mrs. SSC to try and bounce us out of Houston at some point at or near summer 2018. If she can do that, we’re there for our target and any income above that just pads our withdrawal rate, even if we’re not investing.
I mean it would let our investments grow even more, while also covering the huge unknown of health care. Provided she doesn’t want to keep teaching after a few years, then I’m fine with even finding a BLM job or similar that pays $30-$50k.year in some cool spot out west. They’re out there, but most people just don’t want to relocate for that kind of money.
Being in a position where it’s not about the money opens up those options, and could fund our “living out West” goal for a few years. Whether working or not, I want to get into woodworking more and see that or other hobbies as possible mini-mini side streams of income.
Totally what we were thinking about allowing our investments some time to grow while kicking the health care decision down the road for at least another year or few. Also totally agree that not needing to worry about how much you make opening up great options which to me is far more what FIRE is all about than retiring in the more traditional sense of never working again. Even if we fall short of true redundancy relying on options 2 & 3 and not doing any “professional” work it would take a massive strain off of our investments and allow us to live only off of income they produce while leaving principle untouched.
Great post and good questions. I the back of my head, I play with the idea of of semi FI. This means we have not yet enough money to fully stop working. We would work to close the gap on what we need and then do some more to keep the nest egg growing.
This would allow us to start living our ideal life way sooner. In our ideal life, we do some work anyway.
I think semi FI or having F-you money or however you want to say is a great first goal to give people freedom to not be wage slaves and live lives more on their own terms. We like the idea of actually being FI, but are not confident when that actually occurs and think it is a bit more complex than simply having assets reach 25X (or 33X or any other number for that matter). We are pretty comfortable with our plan until we reach a point where we feel more confident and comfortable and think this will allow us to design a lifestyle that is far more desirable than the one we currently are living.
My approach will be similar-ish. I currently have a lot of debt that I’m paying off. I’m developing a skill that will double my income. When my income doubles, I will destroy the debt quickly and find a small condo to call home. That condo will be in a walkable neighborhood near most everything I need. After I have destroyed the debt and found a home, I will continue earning the doubled-income for at least a year so that I can build up my nest egg. Once I feel more secure there, I will switch to only doing work at my own business that I currently focus on during nights and weekends. That sort of work I’d like to do 20-30 hours most weeks. The work my business does is really good for the world, but it is emotionally draining. I don’t think I will want to do it for 20 years. I think I’ll transition away from it. Maybe into full time retirement. Maybe into something else.
Sounds like a good plan. I think gradual transitions make a lot of sense allowing you to figure things out make adjustments as you go.
“Living for today with an eye on tomorrow.”
In a nutshell, our life. Love it.
We could have saved more by avoiding great vacation experiences with kids, extended family in the UK. The value of those experiences - immeasurable.
Still, we have been conservative in our approach and our WR will be very low.
4% won’t be viable in our opinion. At least we are planning for a more conservative 3% and that will fall to less than that with an additional income stream which I am rather fortunate to have ( pension)
We won’t be working post FIRE. Our aim is to live as many new experiences as we can and continue to do what we currently love - hike, ski, travel, kids activities, nap….
Sounds like we’re on the same page. Part of our evolution and learning and the message we hope to share is that FIRE doesn’t have to be either/or decisions. Instead it is about figuring out how to use finances to build a life you want.
Cheers!
EE
We had the same realization recently: That we may not ever be 100% comfortable retiring on 100% passive income. That’s led us down a similar road of considering more post-retirement work than we had before, just to take some of that burden to perform off of our investment portfolio. As for what that might look like for us, we’re considering a lot of the same stuff you guys are (no surprise!) — business that grows out of the blog, activities that align with our outdoors interests, maybe some consulting that relates to our current careers. But just like you, we don’t want to do anything unless we enjoy it and it challenges us in a good way — and we have one more requirement, which is that it not involve too many specific schedules. Project deadlines are fine, but we don’t want a million meetings along the way or mini deadlines — that’s the stuff we’re most eager to escape for good!
Agree 100% that we are changing the focus of work to doing the stuff that we most enjoy, find challenges us to grow and learn, allows us to help others, and has other secondary benefits like enabling us to hop between different locations in the country. The beauty of the FIRE lifestyle is that we have learned to live pretty well on not a lot of money while developing skills that allow us to make way more money than we need. Cutting out the need to save any more money and greatly decreasing our tax burden allows us to make what we need without focusing on earning a lot of money.
Cool that you can do some travel work in Physical Therapy. I’ve done quite a bit of “locum tenens” work as an anesthesiologist. I thoroughly enjoyed it.
I’ve also had the opportunity to be on the receiving end of a little PT myself, including just this morning as I am learning to rehab my thrice separated shoulder… for details see my “Announcing my Retirement” post.
Easing into retirement in the way that you two plan will make it easy to change course if the need or desire arises. Ripping the job off like a band-aid makes it more difficult to adjust the plan on the fly.
Cheers!
-PoF
Good to hear some more positive feedback on the “locum tenens” experience. Two of my roomates who were PT’s and one of their wives (a nurse) did this out of school, one for some adventure and the two to pay off loans quickly. They both were very happy with the experience as well.
Good luck with the shoulder and thanks for the positive feedback.
Have you narrowed down which places you potentially want to move to?
I’m doing something totally different (and potentially stupid, but it’s okay.) and taking a “fake retirement” or “mini retirement” so that I can travel around mid-career and potentially look at other places to live and start a new career in. The benefit is that spending my whole life in Southern California, almost anywhere else is going to be a lot cheaper. The downside being that I’ve been super spoiled by having amazing weather almost my entire life. 😀
We’re looking in the mountain west. The challenge that we’re facing is that we really want to live in a ski town and affordability is tough. The three front runners at the moment (in no particular order) are Ogden, UT, Driggs, ID and Granby/Fraser, CO. I wrote more about our criteria and search in the “September Update” if interested.
I personally don’t think it is stupid to experiment, though you will probably get looks and comments by family/friends who want to do something different but don’t have the courage. The thing that we are finding in doing our search is that every place is going to be a trade-off between weather, COL, family, access to things of interest, etc. No place is perfect and decision is not easy. Especially if you already are pretty happy as we are, but feel like you need to find something different.
If you haven’t read any of his stuff, I highly recommend Chad “Coach” Carson who I found through blogging and has become a friend. He is in the process of prepping for a year mini-retirement to Ecuador (with wife and 2 young kids) and has already done some other really cool stuff without a ton of money. Here is a guest post he did here with tons of links back to his site. http://eatthefinancialelephant.com/guest-post-climbing-a-different-route-to-financial-independence-using-real-estate/
Cheers!
EE