Today I wanted to give you some insight into the financial process I went through to decide I had enough to retire.
We’ll review the budget I set up (both income and expenses) and I’ll give commentary on where I stand now and some steps I’m planning.
We will cover them from a pretty high level (no one wants to go through a line-by-line budget) but give enough information so you all get a good sense of the numbers.
General Retirement Budget Thoughts
Before we get into specifics, let’s review a discussion I had with some readers.
One asked me what took me so long to retire and I replied:
I took so long because I was a glutton for punishment!
Seriously, I always thought retirement would be at:
1. $4 million net worth
2. Generating $100k per year in income from assets
After doing the math, I found that $80k per year was enough and I was already generating that! So that’s when the light bulb went off!!!
Another reader then asked:
You’re at 80% of #2, can you say if you reached 100% of #1 before retiring?
To which I responded:
I can not say that, no.
But retiring with your assets able to create enough income for you to live on (without spending any of the assets) is a function of:
1. Amount you have saved
2. The return rate you get to produce income
So if you have $4 million and can earn 3%, you’re going to turn out $120k per year.
If you have $3 million and can earn 4%, you get the same amount ($120k per year).
Of course you have to deal with what assets you have access to if you’re below 59 1/2 and have a good amount in retirement funds, which is an issue for me.
So in that case, you can have access to $1 million and if it earns 8%, you earn $80k per year.
I wanted to include this discussion because it really does get to the heart of the matter.
People with all sorts of combinations of net worths, incomes, and expenses can retire as long as the numbers above add up.
I could do a gazillion combinations for you to demonstrate the principle but I think you all likely get the idea.
My Plans Limited My Thinking
Along these lines, I had always thought that I needed $4 million and $100k to retire. Since I was short of both of those goals, I couldn’t retire.
So why those numbers? Because they were nice, round figures, they seemed like way more than enough, and I’m a classic over-achiever. That’s it honestly. I wish I had a much better thought out answer, but I don’t.
In essence they were really arbitrary numbers that I picked out of thin air.
But as my job situation intensified, I began to question whether they were valid or not. Once I broke through the mental barrier that meeting those numbers was not a prerequisite to retire, I was free to question just what the right numbers were.
I started by developing a general, 30-year budget, a simple estimate of expenses and income. This showed that I likely had enough to cover expenses on the income I was earning.
But even if I had to draw down my assets, the amount needed each year would be so minimal that the assets would last for decades after my death.
I then went deeper and more specific.
I developed a line-by-line budget, by month, for the rest of 2016 and all of 2017. I have 20 years of expense information in Quicken plus a pretty good handle on what we do (and can) spend on various items, so this was rather easy. And for a numbers geek like me it was fun too! 🙂
I had to make several assumptions, of course, but I knew what I had was directionally correct. It also identified areas where I might be able to decrease expenses or increase income to improve on an already good position.
The budget was based on cash flow. I began with cash positions. Then each month I added income, subtracted expenses, and was left with a month-ending cash balance that carried over and started the next month.
Note that this did NOT include spending any of my retirement investments or even my brokerage funds, which are the bulk of my assets.
So here’s how we netted out:
- Beginning cash balance: $156k (this was in a couple checking accounts and three savings accounts)
- Aug-Dec 2016 Income: $41k
- Aug-Dec 2016 Expenses: $76k
- End of 2016 cash position: $121k
Major impacts in 2016 included:
- $28k to buy my daughter her car
- $3.5k for vacations (of which we’ll likely spend $1,500 at most)
- $2k for an estate plan I’d like to update
- $1k for some outside landscaping which we’ll likely defer to next summer
The numbers for 2017 looked like this:
- Jan-Dec 2017 Income: $99k
- Jan-Dec 2017 Expenses: $97k
- End of 2017 cash position: $123k
Major impacts in 2017 included:
- $9k for medical costs and insurance
- $5k for a vacation(s)
- $8k in a “plug” income number that I have to earn somewhere before the end of 2017
Many of you are likely interested on the income breakdowns. Here are the specifics for 2017:
- Rental real estate: $66k
- P2P interest: $13.2k
- Blog earnings: $3.6k
- Dividends: $8k
- “Plug” earnings: $8k
A few thoughts on all this information:
- Overall, the income I’m able to generate is covering all my expenses with no need to draw on any savings or other assets. Cool!
- I estimated low on the income side and high on expenses. If things go well, I could have $10k in extra income and $5k less in expenses, so the swing could be quite dramatic.
- The rental real estate and blogging numbers have upside. Real estate could be $10k higher by itself, but that would be the max. I already make the listed amount blogging as my former site is chugging along after all these years. So with focusing on it more and ramping up ESI Money, I could be well above $4k combined.
- Even the “plug” number has upside. I could get a teaching job, do a bit of consulting, or whatever and make that up in no time. Or I could let it be $0 and take the difference needed from my savings. It’s not that much. It also isn’t budgeted until the last four months of 2017, so I have plenty of time to make it up if I choose to do so.
- The dividends are simply what my brokerage account churns off each year. Instead of reinvesting the dividends I just selected to receive them.
- The P2P numbers represent an 8.3% annual return which looks like the neighborhood I’ll settle into as an average for 2017.
- One concerning issue is that so much of my income is coming from one source. This wasn’t that much different than when I was working (it’s just that the source was my job), but I had a significant backup then (rental real estate). I don’t have a significant backup now unless you count my assets. So I’d like to develop a source or two that delivers at least $20k extra each. Blogging could be that as could working 10 hours a week. I’ll keep you posted on how that goes.
- As for the changes we made, we did decide to forego some spending. We cancelled a cruise we had planned for January as it was going to be pricey and we’ve been on several before. We gave away stuff and created better storage in the house to open up our garage and negate the need for a shed. And the landscaping is something I’ll tackle on my own next summer (now that I have time) and likely spend $200 versus $1,000.
So that’s it for now. We’ve set the budget and we’ll see how it plays out over the next year and few months.
I’ll do regular updates to let you know how things turn out.
Originally posted at https://esimoney.com/%ef%bb%bfmy-retirement-budget-income-allocation-and-how-i-plan-to-diversify/