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Modesty Allows for Early Retirement

November 18th, 2011 9 comments

The following is a guest post written by Corey at Passive Income to Retire, where he is sharing his progress toward early retirement.

How do you picture your retirement? Do you envision it sitting on a beach, with a fancy drink in hand with nothing to do? Or, do you imagine it living with your children to save money on housing and living off of social security? I’m sure no one plans for the latter, but the idea is that what you see yourself doing in retirement changes when you will be able to retire.

Typical Retirement Plan

When I grew up, I always thought of retirement as one thing. Essentially, it was working until you are forced to retire for bad health. In retirement, it meant sitting around the house, watching TV, and playing golf occasionally. I don’t know if it is just me, but this image no longer sounds appealing. I hate the idea of waiting to live my life.

My aunt and uncle changed my perception of retirement a few years back. They were smart with their money, both worked at jobs making decent salaries, and most importantly, lived a modest life. They inherited a house from my aunt’s parents and instead of selling it or getting the biggest house they could afford, they stuck with the modest 3 bedroom house that was built well before they were born. Their story isn’t anything radical, but they did decide to retire in their mid fifties. Prior to this, no one in my family had even thought about retirement until early 60′s. This got me thinking. If they can retire in their fifties, why can’t someone else retire much earlier?

A Shift in My Retirement Plan

Recently, I started thinking about how retirement doesn’t have to be the same for everyone. The possibilities are endless. That doesn’t mean that you can just choose what you want to do in retirement and not start working towards achieving that goal.

I used to think that I would like to work for most of my life, live frugally, and have enough money saved to not have to worry about money when I went to retire. That was until recently. I began to see retirement planning differently. Instead of trying to save up a lump sum from which I will live the forty years (if I live that long) in retirement, I began to see retirement as having a certain income. Once I transitioned to income each year, I began to wonder why I have to wait my whole life to do what I want.

Instead of waiting until my 60′s to retire, I plan to retire in the next two or three years. My alternate retirement plan involves having enough passive income to replace my day job by the day I turn 27. Most of this will come from online sources, but I plan to integrate real estate investments as well. I created a new website to help document my goal for early retirement. The other limit that I put on myself is to work less than I don’t work. In other words, only work 3 days a week. It is retirement, after all. Well, kind of – it depends on your definition of retirement.

Why I Can Achieve Retirement This Soon

There are several reasons why I think I can achieve this early retirement. Beyond being determined, I also know that my wife is on the path for a successful career. With her salary, it takes a lot of stress off of me. If we had to, we could survive on her income. This gives me a lot of possibilities. The number one reason why I think I can achieve this is that I plan to live modestly. Because I don’t plan on eating out or living in a big house, I can get by on a decent income. The simple fact is that by cutting down your overall expenses can make retirement come so much sooner.

When Do You Plan to Retire?

Categories: personal finance, Retirement Tags: , ,

When a Million Isn’t Enough

August 31st, 2011 22 comments

Bicycling SeniorsSaving for retirement is one of my goals for this year that I’m making progress on. I know that I’m getting a late start, but I have a bit of a cushion because I do expect to receive a pension upon retirement. However, my pension alone isn’t enough. And, according to an MSN article, I’m not the only one who may be a bit short come retirement. Not only that, the MSN article makes a point that $1,000,000 may not even be enough to retire on in some instances. Here’s the skinny on why a million may not be enough:

  • Once you begin drawing on your retirement accounts (401K, IRA’s, mutual funds, etc.) you have to pay taxes
  • The rule of thumb is to pull only 4% of your retirement savings. Depending on your cost of living at retirement, that figure may not be enough.
  • Seniors today are still paying off their mortgage (a huge drain on retirement funds)
  • Health care costs can be higher than expected


If retirement is still twenty or more years from now, like it is for me, there are some ways to minimize retirement costs and boost retirement savings. First, boosting savings is critical to make sure that retirement funds are well padded. The first step is to create a budget (almost always the first step to increasing savings and/or cutting expenses). This year, I’m working on saving 12% of my income with 5% allocated to retirement. This figure will have to increase within the next 5 years so I can save at least 10-12% of my income just for retirement. I’m predicting the missing 5-7% will come from additional income (ie. a raise or increase in passive income). Currently, my retirement savings are deposited into a higher return account, like a mutual fund. Once I increase my retirement amount to 10-12%, the additional 5-7% will be allocated to a 403(b) in my case (the equivalent to a 401K). To summarize boosting my retirement savings, this is what it will/or does look like:

  • 5% currently deposited into a mutual fund
  • 6% currently deposited into my pension plan plus an employer match
  • 5-7% to be deposited into a 403(b) in the near future

I’m counting my pension plan in my summary here but I don’t have any control over the allocated amount, so I don’t count it in my total 10-12% figure.

Next, I need to make sure that my expenses are greatly reduced come retirement. Since the MSN article mentioned that mortgage payments are taking a big bite out of retiree’s funds, my number one goal is to be mortgage and/or rent free. Since I don’t own a house yet, I have a couple of options; A.) purchase a house and pay it off before retirement by making additional mortgage payments, B.) find alternative ways to live rent/mortgage free such as building a tiny house, or C.) live cooperatively with other family members and friends (my husband would be dead set against this) to minimize housing costs.

Health care expenses also seem to make or break a retirement account. I feel I have some control over my health by eating healthy, exercising, and taking preventative measures to stay fit and agile. Of course, there’s always the unforeseen disease that I can’t control. Making sure I have access to affordable healthcare will hopefully reduce expenses.

Finally, eliminating excessive debt will allow me to live off 4% of my retirement savings each year. Paying off student loans and any credit card debt (thankfully I don’t have any credit card debt now) a few years before retirement will be essential to making that money last.

My goals for reducing expenses before retirement are as follows:

  • Be mortgage and/or rent free
  • Stay fit and healthy (eat right and exercise!)
  • Pay down all debt a few years before retirement

If I were to create a time line of events for my retirement path, it would look like this:

Save 5% toward retirement in 2011 => keep saving! => purchase or build a house by 2014 => keep saving! => increase retirement savings by an additional 5-7%  by 2016=> pay off student loans (this is my only debt right now) by 2021 => keep saving! => increase mortgage payments to be mortgage free by 2031 => keep saving! => retire by 2036

That looks doable!

I love timelines. ;) Notice, however, I haven’t crunched any numbers. That step will come within the next couple of years. Then my timeline will be more robust!

What does your retirement path look like?

Categories: personal finance, Retirement Tags: , , , ,

Visions of Retirement Dance in My Head

July 29th, 2011 9 comments
Ross Chapin Pocket Neighborhood

Ross Chapin Pocket Neighborhood

I’ve always been a bit of an envision-er (read: dreamer) when it comes to my future. I can project what I want the future to look like and work towards that goal. Sometimes my vision comes to fruition and sometimes it changes. Lately, I’ve been envisioning my future living in a small-ish house surrounded by other small houses set around a community garden and fire pit. This vision is a place where neighbors work equally together, hang out in the lush community edible garden, and sing songs around a roaring fire. Maybe that’s just the hippy in me trying to get out. But my focus is where I want to live through retirement; a community where neighbors help neighbors.

As I shared this vision with my spouse, he quickly slapped a dose of reality on me and said, “There’s no such place. You’re dreaming of utopia. It doesn’t work.” His words weren’t quite as harsh as he chuckled at the thought of himself tending vegetables in a commune-style living arrangement. (See links at the end of this post for some close fits of this style of living.)

I personally don’t know of any community where this style of living is occurring, but that doesn’t mean it doesn’t exist. Living in a neighborhood where your neighbors are helpful seems beneficial on many levels, especially as we inch closer to retirement.

First, let me explain that this would be a community that I’d want to grow into with like-minded, similar aged people. It isn’t necessarily where I’d want to move to during my retirement years. Growing old with people you know is comforting on some levels; you have a history with those neighbors and would more likely than not  have deep, meaningful conversations well into old age.

The benefits of finding a small-ish house in the perfect neighborhood would mean the house would potentially be paid off in full by the time we were 65, a definite plus during retirement. As income becomes finite, the bills need to be finite as well. Having a mortgage payment or even rent isn’t ideal.

Tending a garden with others could mean less work (hopefully!) for the same amount of bounty. It would also keep us healthy by adding fresh fruit and veggies to our diet at a minimal price. The exercise would be an excellent way to keep health costs low, an important consideration during retirement.

Sharing common land would mean lower costs and less work for maintaining a lawn.  As people get older, it gets harder to keep up the benefits of outdoor space. Sharing the space would mean sharing the expense, even if it means hiring gardeners to tend to the lawn as we aged.

As people get older, it’s not uncommon for their mobility to be reduced. If I lived in a collaborative neighborhood, we could share the expense of an occasional cab ride or combine our shopping lists and have groceries delivered.

All of these sound like terrific benefits to living in an “utopian” style community, especially with retirement in mind. The closest I’ve found are pocket communities designed by Ross Chapin Architects. I’ve posted about this designer before and I love his home designs. This might be a future possibility.

Though these may not discuss specific neighborhoods, these additional resources share some ideas that I’ve explained in my ideal community:

What’s your vision of retirement? Neighborhoods?

Categories: Retirement Tags: , ,

How I Selected a Mutual Fund; a really boring case study.

May 6th, 2011 15 comments
Retirement

Retirement

I’m coming into an age of conservation – I guess both with money and ecology. After a decade of risky financial moves (running a hot dog stand, starting a business,  creating a mobile portal) I’ve become slightly risk-adverse as I’m approaching my *gulp* 40′s! Getting a late start on my building my retirement nest egg, I decided I needed to balance out my pension and my very small stock portfolio (on the aggressive side of investing) with something stable and more conservative: a mutual fund.

Not all mutual funds are considered conservative, many are quite aggressive in nature depending on the type of investments the mutual fund consists of. For instance, some mutual funds consist of stocks, where others balance stocks, cash, and bonds. I learned this through months of research, comparing and contrasting mutual funds through MaxFunds.com. This site analyzes the quality of the fund, predicts the potential gain and loss and calculates the annual cost. I was also able to use Morning Star, another fantastic site, to compare historical graphs giving me a holistic picture of the type of growth I can expect over the next 10-15 years.

I knew I wanted to use my insurance company as my broker. I do quite a bit of banking and insurance services with them and they allowed me to select particular funds that waived the initial investment amount as long as I set up auto-debiting. This limited me to a handful of funds, excluding me from taking advantage of index funds. However, I still had enough of a selection to choose from. After reviewing three potential funds (2 equity and 1 taxable bond) that I was intrigued with, I decided to select the safer more conservative fund; the taxable-bond fund. It’s backed by the US government – steady growing and safe, for now.

At a historical growth rate of approximately 7% and a total cost of .01% annually, the safety outweighs the cost. I used CalcMoolator to calculate my total cost, which was important to me as one of the biggest complaints about mutual funds is that they are costly. Another benefit of mutual funds is that they are very easy to set up and I knew I had more flexibility with them versus an IRA. My insurance company’s online website makes it easy for me to add additional funds, transfer and sell funds very much like a stock. The changes I make are immediate, giving me peace of mind in case I decide to switch over to a more aggressive fund.

My initial monthly auto-debits won’t make me wealthy, especially after I factored in what I’d need during retirement using a retirement calculator (scary, to say the least!), but it’s a start towards a financially stable golden era. Of course, I could always retire in Belize and not worry so much about saving millions! ;)

Are you investing in mutual funds? Have you researched which funds are best for you?