My first goal of becoming a millionaire by age 40 is more just for fun. While it serves as a good motivator to continually stock away money and to grow my net worth, a million dollar net worth doesn’t have a lot of meaning. My second goal is what saving and investing is all about. It’s why I choose to forego luxuries that I could afford now.
My wife is always shocked when one of her friends is building a million dollar house. Not from a standpoint of envy. More from the point of how in the world are they doing that? I remind her that they’re most likely not saving a dime, and all of their income goes directly towards buying possessions. We have the money to do it if we wanted to. But there is something much more important and valuable to us than all the stuff that is now thought of as necessities. Independence.
We work until we have accumulated enough money to no longer have to do so. To no longer have someone or something else dictate our schedule. We want to be able to relax and not have the pressure that comes with being in the working world. To be free of the anxiety or fear that the job we have today will no longer be there for us tomorrow.
I love my current job. It is as close to being a utopian job as it gets for me. However, I recognize that this dream job could be gone tomorrow if a larger company came in and decided to acquire us. Being an executive, my job would be gone. Acquisitions have been increasing in my industry and this is always a lingering possibility. Therefore I want to put myself in the best position financially as possible. Best case scenario, my company continues to grow, we become the acquirer and not the acquiree, and my job is still here 10 years from now. At that point, I can choose to keep working if I still love my job, decide to start my own venture, or just relax.
My Three Stages of Financial Independence
My goal for FI is broken down into three different stages. Each of them covers a different level of spending. From the Bare Essentials FI up to the Livin Large FI, it’s good to lay out some numbers so you know what you’re shooting for. Let’s take a look at my three stages of FI.
Bare Essentials FI
This level of FI covers our basic living expenses. I look at the Bare Essentials FI stage as a worst case scenario. I don’t anticipate hanging it up and calling it a career once I hit this level. But it will be nice to know we can survive if our world comes tumbling down around us.
Say my wife gets fired after grabbing a mouthy kid’s arm at school and can no longer find a job. Meanwhile, I take side hustling to an extreme and earn extra money at night working as a bouncer and entertainer at a strip joint (I actually know a guy who did this). My boss finds out and fires me, thus ruining my reputation within the industry (banking, not the strip club).
So what expenses do I need to have covered in such a situation? For me, the bare essentials include the following:
- Insurance (car, life, etc.)
- Utilities (electric, gas, water)
- Personal property tax
- Dogs (not giving up those furry jackasses!)
- Misc (drug store, home essentials, etc.)
To cover our bare essentials, we need approximately $32,000 annually. I took a haircut on our normal monthly gas expense as we will no longer be commuting to work every day. My number also includes a cut back on groceries. We get a little spendy on our groceries now, but our food is something that is important to us. There’s plenty of room to cut back on our current grocery budget if we need to.
Current Standard of Living FI
The next stage of FI is to earn enough to replace our current standard of living. This includes everything we spend our money on today. Take a look:
- Bare essentials
- Fun money (we give ourselves an allowance each month that we each spend no questions asked; there’s also an allowance for both of us to include dinner, movies, going out with friends, etc.)
- Other (random expenses that happen each month when you’re not watching every penny)
I included internet here instead of in the bare essentials as there are so many free sources available. If we’re having to cut back, we won’t be spending $50/month when we can get it for free at the library, coffee shops, and numerous other places. Being retired, we’ll have plenty of time to find free wifi.
To cover our current standard of living, we’ll need approximately $68,000 every year.
Livin Large FI
The final stage of FI is Livin Large. If you have the urge to splurge, this stage has you covered. I’m by no means a penny pincher. But we do have aggressive savings goals that require us to forego luxuries like a YETI mug. Once I’m in my 40s and have been saving for two decades, I may get the urge to spend some cash.
Maybe I’ll be tired of driving the car I bought right out of college (going for 300,000 miles on that baby – half way there!) and want to drop $90k on a Tesla. Tearing down old homes and rebuilding them has become really popular in our area. We’ve toyed with the idea of doing this. It’s obviously not cheap to buy a house for the sake of tearing it down and then building a new fancier house with modern amenities.
Or maybe, I’ll get tired of being crammed into coach sitting next to a lady whose farts are smellier than my dog’s. Surely people don’t pass gas repeatedly for a three hour flight in first class, right? (it was actually my poor wife who sat next to the stinky lady, but I still got more than I bargained for). I’ll need a bit more saved up to fly first class around the world.
To cover a life of fancy electric cars, tearing down houses, and avoiding smelly people, we’ll need around $122,000 per year, after taxes.
How to Get There
First off, I only need to save enough to get us to 59.5. I know there are ways to access retirement accounts before then, but we’ll stick with a nice round number of 60 to be conservative. If we never contribute another dollar to our tax-deferred retirement accounts, the value will grow to $2.5 million by the time we’re 60. So we’re already in good shape, but I plan on continuing to max out my 401k contributions as I work on building an after-tax investment account to cover the period between retirement and age 60.
My numbers assume converting the after-tax investment portfolio into cash and drawing my living expenses directly from it. Thereby running it to near zero by the time I’m 60 and will be accessing my tax-deferred accounts. For example, if I need $68,000 per year to fund my current lifestyle, I’ll need to accumulate an after-tax nut of $68,000 x number of years until 60. My example assumes that once I reach my number, the investments will be converted into a risk-free investment with the goal of keeping up with the rate of inflation and maintain principle.
In all likelihood, I will invest the money in buckets. For instance, the first 5 years will be invested in a risk-free investment. The next 5 years of living expenses will be invested in slightly higher risk investments to provide a higher return. And the final 5 years of living expenses will be invested in a more risky alternative like stocks. Even if the market tumbles while I’m retired, the timeframe until I’ll need this money is long enough to allow it to recover.
But, we’ll keep things simple and more conservative here and just assume the entire amount is invested into cash and run to zero by the time I’m 60.
So how much after-tax savings do I need for each of my three stages of FI? And how long will it take to get there? Here goes…
I’m projecting that I can increase my after-tax investment portfolio to $700k in 5.5 years. This is an aggressive goal, as it requires me to continue to increase my income. Setting an aggressive goal will push me harder to achieve FI, and I believe I can do it. With continued maxed out contributions to my 401k during these 5.5 years, the balance of my 401k at age 60 will grow to $3.5 million. Not a bad nut to retire on.
Current Standard of Living
In order to fund $68,000 per year until I’m 60, I’ll need an after-tax portfolio of $1.3 million. This will take nine years to accumulate based on my trusty calculator. Again, if I continue to max out my 401k during this time, the value will grow to nearly $4.2 million by the time I’m 60. More than enough to maintain our current standard of living into our golden years.
What will it cost to live my life of luxury? About $122,000 in after-tax dollars each year. Working for an additional two years beyond the Current Standard of Living FI will give me an after-tax portfolio of $1.7 million. Another couple of years maxing out my 401k will grow it to a value of $4.5 million by age 60.
There it is. Much of this obviously depends on several variables that will play out in the future. How will the stock market perform? Will I continue to love my job in 10 years, or will it even be around in 10 years? Will I want to work part-time during retirement? These variables will play a role in determining what level of financial independence I get to or even want to get to.
Readers, what do you think? Can you identify anything I might not be considering? What stage of financial independence are you shooting for?