My Retirement Plan

I am not going to settle for a barely-getting-by retirement. I haven't worked all my life to sit and just make ends meet for my golden years -- simply surviving until I die.

I am not going to settle for a retirement where my money may or may not run out when (and if) I'm 85, 90, or 95. That would feel like living with impending doom and a lifestyle I would hate.

No, the traditional retirement isn't for me.

What is the "traditional" retirement you may ask? Something like this:

• You work a 40+ year career, saving for retirement as you go along.
• When you get to 65 (or older), you retire and live on a combination of Social Security and your savings.
• If you've done it "right", the savings portion allows you to withdraw 4% (the old rule) of your savings every year with a fairly high confidence that your money will last longer than you will (something like a 95% chance your money will last until 85.)

And this is the retirement plan for those Americans who are pretty advanced in their saving and retirement plans. Most Americans simply have "work longer" as their plan.

Anyway, the above plan is at least decent. That is until something happens:

• What if you live past 85?
• What happens if some large, unexpected expense comes along?
• What if inflation rears its head and your money only lasts until you are 75?

No, this sort of "a lot of things could go wrong" retirement isn't for me. Instead, here's what I'm planning on:

Accumulating a substantial amount of assets that I can then turn into income generators, churning out enough income that more than covers my annual expenses.

The benefits of this plan are probably clear, but let me spell them out just in case they aren't:

• I can retire and completely support my lifestyle on income generated from my assets.
• The assets themselves are never touched. I live only on the income they provide.
• There's a safety net each year (between earnings and spending) in case something bad happens.
• Any Social Security money added to this is gravy.
• Any income from a job I may have is gravy.
• Any income from a job my wife may have is gravy.
• Any income from a side business we may have is gravy.

In other words, this plan will give us more than enough income generated to cover our needs plus a good margin of safety.

Yes, this is the sort of retirement I want to have.

But there are a few challenges to this plan:

• I need to save a significant amount of money.
• I need to use that savings to generate a significant income.
• I have to account for inflation.

I'm currently between phase 1 and phase 2. Here's what I'm doing to hit my goals:

• I'm working to make the most of my career.
• I am also developing side income.
• As you all probably know, I spend significantly less than I earn.
• I'm taking the savings and investing it, mostly in index funds.

Those are all phase tasks. I have started the "turn savings into income" phase as well with my real estate investing and so far, it's going well.

I'll keep you posted as things progress.

Comments

[Carole]

None of us can imagine we'll need it, but nursing home care is very expensive. The spouse who doesn't need it, is the one most affected. Tons have been written about how to best handle this problem, so I won't attempt to discuss it. It is something to be considered, tho.

[Angela]

Planning early and taking into account possibilties of negative economic downtown is smart. You've outlined your retirement goals which is admirable, so now it's just a matter of outlining steps towards achieving those goals. I turned 35 this month, and have been trying to figure out a good retirement plan with my financial advisor of 15 years. He started me on my ROTH IRA plan with my first campus job and that little nest egg is growing nicely. I will probably model mine in a similar fashion using your goals, so thanks for the info. I plan to retire in 22 years, and I'm lucky my current job has a pension plan (rare nowadays)and deferred compensation plan (maxed out). I keep seeing articles from contributors for 6% returns on conservative investments such as CDs. I'd appreciate some examples of these. Thanks!

[Simple Man]

I love your blog, and you are clearly a great writer and leader. I agree that we should be intentional with money and save for the future, but I get significant resistance from my spouse when I discuss a plan like you have above. My spouse's response would be something like "you can't take it with you". Just curious to know if you and your spouse or your close friends ever have that sort of disagreement, i.e. when is it enough? How do you balance the desire to save for the future with enjoying life today?

[MITM]

Yeah, the thought of trying to time withdrawals from retirement savings to run out as you die sounds just sounds morbid doesn't it!

I think about retirement the exact same way and I feel like you're about 20 years ahead of me, so I'm watching closely.

You have a balanced approach to life and finances that some people lack. You aren't completely focused on lowering expenses or increasing revenue (income statement). Nor are you completely focused on retirement savings or debt reduction (balance sheet). You do it all and that is important.

I see too many blogs and books that only focus on one or two of those financial statements but not on the whole picture.

I'm a regional CFO for a large company and if I didn't know any better I would say you are a CFO yourself.

In our family, I have a strategy for all that you are talking about. It's not perfectly clear because it's a 20+ year plan but we are working together to make it a reality.

[freebird]

My thoughts are pretty much exactly the same as yours, but let me play devil's advocate and highlight the cost of your plan.

One of the themes I see on the early retirement boards is that accumulating enough assets to cover all possible contingencies adds years of work time (aka pain). This is regarded by most there as a bad outcome, and I see how they typically pull the plug as soon as the numbers from their simulator say it's OK (BTW my own impression is that their simulator is a bit on the optimistic side). In short, your constraints of "no depletion" and a "good margin of safety" between earnings and spending require a larger nest egg so may be keeping you occupied by your occupation longer than is absolutely necessary.

But I'm doing it your way, I'd rather short myself a few years of idletime than take the risk of worrying about money in my old age. Part of what enables my favorable attitude toward work is contentment in my job that I believe is attributable to financial independence. Salary is optional and stuff like raises and bonuses are rounding error. I could probably earn more in a high-stress and time-demanding management job, but that would just make me want to escape. Instead FI allows me to settle for a pretty good income for doing just the parts that I enjoy and am naturally good at. I'll take a longer drive on an open freeway over a shorter crawl through city traffic any day.

[Kurt]

I like your plan, but no plan is foolproof. Each of us has to make the challenging and complex calculation among time spent working 50+ hours per week, retirement lifestyle, margin of error in savings (is this enough?), future inflation, future investment returns, etc.

For me, I don't anticipate or look forward to a day when I'm earning no money (i.e., the conventional definition of retirement). As long as I can get out of bed and have two brain cells to rub together, I aim to keep earning at least a little money through paid employment. I've found nothing calms the 'am I going to outlive my money?' nerves like a paycheck, even a modest one. But it's not just about the money. I think keeping at least a toe 'in the game' will improve my quality of life and keep me vital longer. And that is really the most important part to me.

[TortoiseBanker]

"I'm taking the savings and investing it, mostly in index funds." Well done... this will take you far!

[Roy Nelson]

Your retirement plan sounds exhausting to me!

[JimL]

FMF,

I am planning like you are. Things can go wrong. Just ask those that are currently living off of their Detroit pension. I don't think I can recall a time when someone told me that they may have saved too much for retirement, yet I continually hear from people that have fallen short in retirement or are nearing retirement without enough saved to address their expected expenses.

[FMF]

Angela -

I have no idea how someone could get 6% back on CDs these days, but I would love to do so myself!!!

[FMF]

Simple Man -

It is a balancing act, for sure.

Every couple will likely have a saver and a spender, to some extent. So how do you get through it?

One way is to drive your income to the point where you have enough to both save and enjoy. This is the point in life that we've reached.

But before we got here, we had to make compromises. We had to discuss and decide what to sacrifice based on our goals. And that's really the only solution I know - you have to talk it out and reach an agreement.

[FMF]

MITM -

I'm not a CFO, but I have a CFO who reports to me. ;)

[FMF]

Free bird -

My thoughts are similar to yours. Specifically:

1. Having ANY chance of running out of funds would cause me way more stress (pain) than working longer.

2. My job isn't a burden. I enjoy it. So I'm not really toiling in pain for the sake of a bigger nest egg.

[FMF]

Kurt -

Agree 100%. I'll probably earn something (even if it's just blog income) until I can no longer do so.

[FMF]

Roy -

Retiring with nothing saved is worse than being exhausted. ;)

Besides, it's not tiring to me. I love this stuff!

[Roy]

FMF
I think your plan is great to start with if retiring early, but basically your retirement plan is like a business, so you can't really call it full retirement. I just think most people at age 75 in full retirement want something a lot simpler so you have to have an age appropriate plan. I hope you have the energy and sharpness to continue, but most seniors I know would not.

[JNEW]

FMF-
This a great topic and one I struggle with quite often.
Why ?
Not sure honestly. I think I have always had a (healthy) fear of running out of money. Actually, its not so much running out of money that I fear as much as being helpless and unable to take care of myself and my family. Just never wanted to be in a position where I was dependent on others or the government.
As a result I have always been a good saver and always lived below my means.
My goal in retirement, like FMF, is to live on the income that my assets generate. Probably less than the full income they generate so that there is a cushion. I plan to live below my means in retirement as well.
So the question becomes what is "the number"?

Well, my family spends (not earns) about $50K/year. So my answer is to have a net worth that is sufficient to generate enough income to satisfy my expected expenses of $50K using a conservative return assumption.
So if I plan to spend $50,000 /year I would need at least $1 Million in investable assets returning 5%. Or $1.25M earning 4%. In a year like 2013 where the S&P is up significantly more than 5%--- I would save the excess.
Easier said than done, I know.
But I am making headway.

[Sarah]

Well I figure that the average American that isn't going to live very lavishly would need maybe around 2,000-2,500 Dollars a month during retirement, but obviously that would/could change depending on how they choose to live. As far as picking/talking a/with financial planner, these days you have to be really careful, because some of them will rip everything you have out of your pockets. So make sure you pick the right one. However, you still need to listen to your gut, and do the research needed.

[Andrew Paez]

I think you're all over this. I'd encourage you to continue to make real estate a portion of your retirement system. I've found it's one asset that, as long as I continue to own it, continues to provide cash flow and generally keeps up with inflation either in terms of the accumulated value of the property itself, or the rents that increase over time. An added bonus is that, once they are paid for, and assuming you have performing properties, you can always reduce rents to meet market conditions and still be cash-flow-positive. I don't believe I'll ever be completely out of real estate as I've found it to be a consistent performer in my portfolio.

[jayden]

Excellent post, conserve the hard work, you’re carrying it out right!