When I graduated from college, my parents took me to meet with a Edward Jones representative. It was a very valuable lesson on money and planning for retirement. I’m very thankful to Mom and Dad for this introduction. However, it was the traditional way to retirement. Open an IRA and fund the 401K. Start investing now, have millions at age 65. No real thinking. Just deposit money and forget about it. So that’s what I did.
Fast forward 15 years to June of 2012, and the result of investing in IRAs and my 401Ks has been $118,722. If I were to continue to add $20,500 annually (which I’m doing now) at 8% interest until 65 , then the result would be approximately $3,000,000. Not bad huh? I would finally be “rich” , but would have spent my whole adult life acquiring it. Can you imagine being a working stiff until the day you turned 65 then SURPRISE!!!! You’re a multi-millionaire!!! Of course it’s not really a surprise, but how about working towards having some of that wealth long before you gain access to these retirement accounts at age 60, 62 or 65?
Working toward financial independence isn’t just cruising on autopilot like my traditional retirement path has been. I have to plan out how much money do I need to bridge to my 401K/IRA accounts. I need to sacrifice now to enjoy the lifestyle I want well before 65. And that ain’t easy.
My plan to get to early retirement is to invest $1,600 – $2,000 per month into two separate taxable accounts (in addition to the $20,500 going annually into the 401K). I setup the first account with my financial planner as a “wealth” account. The second account is my Tradeking account where I’m purchasing low beta, dividend growth stocks. The “wealth” account is pretty self explanatory in that it will function like my retirement accounts where I deposit the money and forget about it. My second account is where all the fun will be for me. Buying stocks, selling covered puts and selling covered calls. Quite exciting for a nerd like me. Why two accounts? I don’t trust having all my money in one place. The Enron story has stuck with me since the early 2000′s. So even though I like my financial advisor, I’m not giving control of all my funds to any one person or group. We are also keeping Mommy Pig’s Fidelity IRA accounts separate from everything else.
Retiring at 55 or earlier will also change my 401K accounts in that I won’t be making the $20,500 deposits from ages 55 – 65 so that will lower my accounts. Below is what I would expect my financial picture to look like at 55 assuming 8% growth across the board:
- “Wealth” fund would be valued at $450,000
- Sell the house and have approx. $300,000 in proceeds after securing new housing.
- Dividend fund would be valued approx. $450,000 (I really need to go into great detail on this in a later post. This is nowhere near the value of this account but just using a base 8% for illustrative purposes in this post.)
- Total funds: $1,200,000 for the bridge and another $1,300,000 that has accumulated in my 401K/IRA.
A 4% withdrawl rate on the bridge fund would result in $48,000 annually. By allowing my 401K/IRA to grow untouched would result in another $600,000 to make my 401K/IRA end at $1,900,000. Another 4% withdrawl rate on that 401K/IRA account would result in another $76,000 annually on top of the bridge’s $48,000. Grand total of income spinning off my accounts at age 60: $124,000
Alright, this is all VERY rough calculations but I wanted to illustrate that a very comfortable income level can be had and future investments will look very good even while stopping work 10 years earlier then 65. If anything, these calculations might show me that 55 is a lot later then I need to work. I’ll have to see how I can get this down to age 50. So which side are you on: Traditional retirement or financial independence?