In contrast to early retirement modeling that looks for all the worst cases and failure modes, our actual life the past almost four years illustrates that good things can offset the bad events in life.
Financial planning for early retirement is pretty straightforward. Figure out how much you plan on spending in early retirement then save up till you have between 25 and 33 times your annual expenses in your investment portfolio. We initially planned on spending $32,000 per year plus a large lump sum for the three kids’ college tuition. Using the 33x multiplier (which represents a 3% withdrawal rate), that means we needed $1,056,000 plus another $100,000 to cover tuition, or roughly $1,150,000 in total investments. That’s about what we started with four years ago but now we have a lot more.
We plan for the worst and hope for the best. Fortunately, the past four year have been very positive. Maybe we used our luck making machine. Or maybe we aren’t as lucky as we think. We’re earning more than we thought and spending about what we expected, and future expenses don’t look too bad.
More Work, More Money
When I quit working in 2013, we expected Mrs. Root of Good to join me in early retirement within six months. Then her employer decided to be really really nice to her so she kept working longer than expected. Her employer met her requests to take a paid five week summer sabbatical in 2014, and again agreed to a paid sabbatical of twelve weeks in 2015. The sabbaticals were on top of a 40 hour work week with negligible overtime, four weeks paid vacation, two weeks of holidays, and unlimited sick leave. After returning from the second sabbatical in 2015, Mrs. Root of Good submitted her resignation and tried to retire.
Unsuccessfully as it turned out. Her employer offered a flexible work from home arrangement where she officially works from home for four 10 hour days per week. The boss gave her a **wink wink, nod nod** and said she just needed to work enough each week to make sure nothing fell through the cracks as they worked toward replacing her. She generally worked Monday-Wednesday for six to eight hours per day and some Thursdays, probably averaging 30 hours per week. While still collecting full time pay! This part-time-for-full-time lasted about six months before Mrs. Root of Good finally called it quits and promoted herself from part time work to full time retirement.
Mrs. Root of Good’s extra two years of work netted us around $120,000 after taxes and work-related costs in my estimate (she was earning $70,000 gross per year and we paid nearly zero federal income tax but we stilled owed payroll tax plus state income tax). Toss that $120,000 on the pile and watch it grow!
Who knew you could make money blogging?
I always wanted to do something “internet-y” and finance related while working but never found myself in a professional role that fit that desire. About two weeks after retiring, I started looking into this whole blogging thing. Mr. Money Mustache had a pretty sweet site so I figured maybe it would be fun to do something similar. I spent the weekend reading and googling and youtubing all about how to start a blog. How great is it to be able to jump into a new exciting project head first when you don’t have to deal with work all day?!
Two days after I started the intense blog research I figured out enough to register the Rootofgood.com domain name, set up my hosting service, and then I sat staring at that blinking cursor waiting for me to start typing. The first couple of words I typed were “HELLO WORLD” (of course). My little homage to all things programming/internet-y. Then I deleted it and got down to business (first ever real blog post and ALL THE BLOG POSTS EVER).
Almost four years and three million pageviews later, this blog is a little dynamo. Root of Good currently receives an average of 50,000 to 60,000 visits per month. In late 2015 I started offering Early Retirement Lifestyle Consulting. Since conception, the net profit from the blog and related activities was:
- 2013 – near zero
- 2014 – $12,000
- 2015 – $29,000
- 2016 – $31,000
- 2017 – roughly the same as 2016
Toss another $72,000 on the pile plus whatever we earn this year.
Though not all early retirees start a blog, many early retirees have a side hustle. Some early retirees turn a hobby into something profitable. Others retire from full time work while keeping the door open to very part time, flexible work arrangements by only accepting those projects or clients that fit into their early retired lifestyles. I did both when I started a blog for fun that turned profitable within the first year and I started consulting an hour or two per week (less when the weather is nice outside).
When planning for early retirement many years ago, I occasionally used a “part time income in retirement” line item for forecasting purposes. At the time I used a tiny annual income for this part time work. In one model, I assumed I might earn $6,000 per year doing something one day per week for $15 per hour. This was based on a little side hustle related to engineering data collection that I had some success with during college. But more generally, $15 per hour represents a pretty broad swath of potential jobs and hustles, and eight hours per week isn’t a huge impediment to otherwise enjoying one’s leisure time throughout the week. I could mow lawns, start a handyman business, repair appliances, run errands for the elderly and disabled, or drive for Uber (which wasn’t a thing when I was completing my early retirement models and forecasts).
The very part time work for $15/hr was more of a Plan B “what if” scenario. Adding $6,000 income per year to supplement withdrawals from an investment portfolio means you can get by on a smaller portfolio using the four percent rule.
As fate would have it, I’m blowing that $15/hr threshold out of the water (ER Lifestyle Consulting rates are currently $125/hr and I’m considering raising those given the demand). Total earnings from my side hustles are running in the $30,000 per year range right now. And I don’t think I’m putting in eight hours of effort per week. Life is good as is the financial solvency of my early retirement plans.
Spending is in line with budgeted amounts
We started out budgeting $32,000 per year for 2014 and increased it to $32,400 in 2015 to account for inflation. In 2016 we bumped the budget to $40,000 in light of all the extra side hustle income and better than expected investment results.
Actual spending since 2014 remained pretty close to our annual budget:
- 2014 – $34,352 (vs $32,000 budget)
- 2015 – $23,802 (vs $32,400 budget)
- 2016 – $38,979 (vs $40,000 budget)
- 2017 year to date through April – $9,857 (vs $13,333 budgeted)
We were over budget in 2014 by a few thousand dollars but under budget all other years so far. That underspending comes in the face of an almost $9,000 major renovation in 2014, an $8,000 minivan purchase in 2016, and paying for the bulk of a $10,000 nine week trip to Europe in 2016 and 2017 (along with several other multi-week or multi-month trips in previous years). In other words, we have a rather robust spending plan to fund a whole lotta living and the budget seems to be working out perfectly fine.
And this is with three kids! They are now age 5, 10, and 12 years old. I’ll admit that we’re still a year away from the oldest starting the typically more spendy teen years, but so far we haven’t noticed a significant spike in spending as the kids get older.
Since we’ve already replaced the exterior siding and the windows, and we’re in the middle of replacing the roof right now, we don’t have a lot of major home improvement projects planned for the near future, so spending on the home should remain modest. We just replaced the car last year, so that should last us quite a while too. Those big house-related capital replacement costs are amortized and included in our annual budget.
Another area that can bust a budget is healthcare and dental expenses. We’ve been fortunate to spend very little in this category other than a few doctor’s visits and routine dental checkups (plus a few minor procedures at the doc and dentist). We haven’t used up our whole healthcare/dental budget in any year of retirement.
We track all our monthly spending in Personal Capital. It’s a free, easy to use, and automatically pulls transaction data from credit cards and bank accounts so you don’t have to spend any time inputting transactions manually (or maintain another spreadsheet!). Review of Personal Capital. It’s also a great tool to consolidate and track your brokerage accounts, IRA’s, and 401k’s so you can track your asset allocation and keep an eye on mutual fund expenses automatically. Tracking spending is in my opinion the best way to stay cognizant of where your hard earned money goes and what expense categories are dominating your budget.
College won’t cost as much as we initially budgeted
By most objective metrics, we are wealthy. I assumed we wouldn’t qualify for any need-based financial aid for the kids’ college. I was wrong. I found out the FAFSA financial aid form doesn’t include the home value nor does it include retirement account values in determining financial aid. As a result we look relatively poor on paper due to having over 75% of our financial assets in retirement accounts and a modest adjusted gross income around $40,000 per year.
Upon entering early retirement in 2013, I expected to pay around $100,000 in total just for tuition for 3 kids and almost triple that amount if we cover room and board, books, transportation, and other living expenses.
After crunching some numbers on college costs using a few different assumptions, it looks like the worst case scenario will have us paying around $162,000 total while the best case scenario (which isn’t that far-fetched) has us paying just $31,500. Those are totals for all three kids. The updated forecasts come from better assumptions about scholarships and grants our children might qualify for given their academic achievements to date, along with a better understanding of how financial aid formulas work. When I first retired, our oldest two kids were in second and third grade, and we really didn’t know how well they would do in school once the academics grew more challenging. Several years later and they are doing great!
Great stock market returns
Since I retired early, the stock market has been on fire! As measured by the Vanguard Total Stock Market Index Fund (VTSMX), returns including reinvestment of dividends are:
- 2013 – 33.4%
- 2014 – 12.4%
- 2015 – 0.3%
- 2016 – 12.5%
- 2017 (year to date through May 12) – 7.0%
International investments haven’t performed quite as well over the same period. Our portfolio still managed to swell from around $1.1 million right after I retired up to $1.65 million today. That’s a $550,000 increase in value. About $100,000 of that increase can be attributed to Mrs. Root of Good’s extra two years of paychecks and my blog earnings (after subtracting the roughly $100,000 spent on living expenses during early retirement). That still leaves us with roughly $450,000 of investment gains in the past four years. Thanks Mr. Stock Market!
The returns have been so great that since the start of 2017 I have moved $90,000 from equities into the Vanguard Total Bond Market Index Fund (VBTLX). Those bonds plus the $30,000 we have sitting in money market accounts will provide a multi-year safety blanket should the market decide that the party is over. A six figure low-risk fixed income portfolio will help me sleep at night regardless of market volatility.
Successful travel hacking continues
I’ve been scoring huge credit card sign up bonuses and collecting points and miles from credit cards for over a decade. Upon entering retirement in 2013, I fretted over the eventual end of all these easy bonuses that translate to free trips all over the world, even for our family of five.
It turns out I had nothing to worry about after earning 1,265,000 points and miles from sign up bonus offers in the almost four years of early retirement. This gravy train keeps rolling down the tracks and shows no signs of stopping! Some of the rules of the game have changed (Chase’s 5/24 rule is a key example) but there are still plenty of fish in the sea. So cast your net wide and don’t let all these delicious morsels slip past you. Our credit scores remain a killer 800-something (out of 850 points) and card issuers generally don’t bat an eye at extending us even more credit.
All these free points and miles explain how we’re able to travel the world for weeks or months each year on a modest $5,000 to $10,000 annual budget. Without free points and miles we would be incurring an extra $5,000-$10,000 expense per trip based on the past few trips.
No more work = no more work related costs
I’m sure we save a small amount on lunches out and simpler wardrobes (shorts and polos just don’t cost that much, guys). But the biggest work-related cost that disappeared was our second car. We questioned whether we could cut back to one car and it turns out it’s not a problem at all with our current lifestyle. It’s been almost a year since we dropped to one car and there have been just a few times where it would have been nice to have a second car. But we made it work with just one car.
We walk, we can take transit, Uber is always a few clicks away (though we’ve never used it so far). Postponing or combining trips and smartly scheduling appointments help. We also enjoy spending time at home or within walking distance in the neighborhood, so there are multi-day stretches were our car doesn’t leave the driveway (but our feet still do!).
The money savings are unquestionable – maintaining one car costs half of what it does to maintain two cars. One set of tires, one set of oil changes, one set of routine maintenance, one set of inspections, registration/licensing, insurance, and taxes. The time savings are even more important – fewer trips to the auto shop for repairs and maintenance. It takes less time to check the tire pressure and fluid levels in one car versus two cars.
For us, simplifying saves time and money without being a detriment to our lifestyle. Of course others’ experiences might differ. We only drive about 300 miles per month (unless we’re on the road completing a multi-thousand mile road trip). Many destinations are walking distance in the neighborhood. Our kids aren’t overloaded with after school and weekend activities (though we stay busy!).
I feel like we need a counterpoint to “The Good” so I’m sticking “The Bad” in here.
Health Insurance in a Post-ACA World
The future of health insurance is our biggest unknown going forward. There’s a new sheriff in town and he’s adamant that the Affordable Care Act is horrible and must be repealed and replaced. The replacement bill, the AHCA, recently passed the House and now sits with the Senate for further sausage-making. What will we end up with? Your guess is as good as mine. The following is an excerpt from my April 2017 Financial Update article where I opine about the current health insurance situation in the US:
“Let’s look at the details of the AHCA as passed by the House. Here’s the best summary I’ve seen of the current version of the AHCA compared to the ACA (courtesy of the non-partisan Kaiser Family Foundation).
- ACA premium subsidies continue through 2017, 2018, and 2019 (so it’s not an immediate “repeal”). Your subsidy declines as your income increases up to 400% of the federal poverty level.
- Starting in 2020 those buying individual coverage get a $2,000 to $4,000 tax credit per person for qualifying insurance (and policies don’t have to be purchased through the official Healthcare.gov Marketplace to qualify for the tax credit). Tax credits vary with age (older = larger credit) but not with income, however there are income limits where the tax credit phases out
- Cost sharing reduction subsidies disappear in 2020 (currently available to those earning under 250% of the federal poverty level – it’s what makes my deductible $100, max out of pocket $1,200, and my copays $5-20)
- In 2018, HSA contribution limits double to $13,100 for family coverage.
- If a state chooses to allow it, insurers can charge more for pre-existing conditions for those that have a lapse in coverage. Possibly much, much more. Maintaining continuous coverage seems to be the way to go to avoid paying a lot more for pre-existing conditions.
- Increase the age banding of premiums so that the premiums paid by older people aren’t capped at three times the premiums charged to the youngest people (under AHCA older people will pay five times what younger people pay – while only getting an extra $2,000 in tax credits)
- No more individual mandate to have health insurance retroactive to 2016
Those are the basics but trust me, I’m leaving a lot out. Medicaid and Medicare are tinkered with too.
The Senate will most likely make significant modifications to the AHCA, so it’s pure speculation as to what we’ll actually end up with once all the sausage is made.
My main takeaway as a 30-something early retiree that will be 40 by the time the ACA premium subsidies go away in 2020 is that I’ll be paying more for health insurance that will come with higher deductibles and copays. Mrs. Root of Good and I will each get a $3,000 tax credit to use toward insurance that will probably cost $4,000-$5,000 per year per person for a basic plan, and possibly much more if healthy people choose to go uninsured (since the individual mandate will be gone and many people will pay more for health insurance, making it less affordable). I don’t know what the kids’ policy pricing will look like or if they’ll end up on Medicaid (if that’s still an option given the possibility of AHCA-related changes to Medicaid), but I understand they’ll be eligible for $2,000 tax credits too (based on their age) if we purchase individual policies for them.
In conclusion, I’m mentally penciling in an extra $4,000 or so for health insurance and healthcare costs starting in 2020, but also accepting that a lot can change with the AHCA before passage (or it might fail altogether). There might be a subsequent health care bill passed later on in 2018 or 2020 as the political winds change that could put our costs back in line with where they are currently under the ACA.” (end excerpt)
If this bill passes then the near-term damage of this law won’t be horrible. But it’s still a lot of uncertainty in our early retirement financial plan.
A silver lining of the Republican controlled White House and both houses of Congress: tax cuts. I’ve heard mutterings about higher child tax credits and larger standard deductions, which could save us some money on taxes to partially offset higher health insurance costs (or, rather, lower health insurance tax credits versus what we get under the Affordable Care Act). Tax cuts can potentially benefit the economy depending on how they are structured, so it’s possible we’ll see investment gains too.
Have we reached the top in the stock market?
I’ll be the first to admit I have no clue but I know it’s been on a winning streak the past four years. That’s not to say it can’t keep going up for several more years. However, there’s a lower chance of strong continued gains year after year simply because there’s less room to grow when the market is already at high valuations compared to long term historical averages. It’s the exact reason you would have expected big stock market gains in the long term back about 2009 when the market was valued at a third of what it is today. From deep valleys rise tall mountains.
Our portfolio might experience several years of sideways movement or suffer a double digit percentage decline. Either of those scenarios are fairly common in the recent history of investing and it’s most certainly not different this time around. That’s not pessimism speaking but rather realism. It won’t mean the end of everyone’s early retirements but it will certainly mean we will keep a closer eye on expenses and income. However our $120,000 of bond funds plus money market funds will provide a lot of stability for several years in the event of a market downturn.
Spending more on travel
I roughly doubled our travel budget from $5,400 when I first retired to $10,000 today. We didn’t really know how much we would travel since our working lives were filled with work work work and just a few weeks of vacation time each year. Travel is our safety relief valve – when our portfolio fills up to the top, this is where we let out the monetary steam. We spend more on travel. If we have to tighten our belts we can cut back in this area.
We’re also taking advantage of geographic arbitrage by traveling to places where the foreign exchange rate makes everything cheaper. In 2015 that was Mexico (though we would have saved even more by waiting till 2017!). In 2016 that was Canada. 2017 is a perfect time to visit Europe with the euro trading at the cheapest levels of the past decade. If foreign currencies grow significantly stronger (= overseas travel becomes more expensive) then we might knock a few US destinations off our bucket list.
And if our portfolio drops by a half million dollars, we can cut out a huge chunk of spending simply by traveling less or choosing less expensive destinations. I’m sort of looking forward to spending a lazy summer at home at some point in the near future, and a financial reason to skip a summer filled with travel wouldn’t be entirely unwelcome.
Spending more on travel is a good thing because it’s so easy to trim this spending versus other areas of the budget that are more rigid like housing costs or transportation costs.
Almost four years into retirement, where are we now?
In a few months I’ll celebrate four years of early retirement. From a financial perspective we are doing great. We earned close to $200,000 extra that wasn’t anticipated due to starting this blog and Mrs. Root of Good working a couple years longer than expected. Our investments have grown by an even larger sum. And we’re keeping our spending generally at or below budget.
Our living expenses in retirement are funded from roughly $10,000 dividends and interest per year plus $30,000 income from Root of Good. That means we don’t really have to sell any investments on a routine basis for living expenses. Nor do we have to worry about withdrawing investments from IRA’s, 401k’s or my 457 account.
It also means the Roth IRA Conversion Ladder I planned to set up is partially on hold for now. I still managed to convert around $4,000 from traditional to Roth IRA in 2016, whereas my Roth IRA Conversion Ladder plan called for conversions of $24,000 per year. However, I was able to contribute $18,000 to my solo Roth 401k and $11,000 to his and hers Roth IRAs during 2016. Yes, I have a Root of Good 401k plan and I play a shell game by living off the income from Root of Good while shuttling taxable funds into the Roth accounts. You could say I’m “living off my portfolio like a real early retiree” and saving the $30,000 Root of Good income, which is also a legitimate way of describing my early retirement finances if one wanted to downplay the significance of the side hustle income (I don’t). It’s a game of semantics.
The net result is $33,000 of additional Roth assets from conversions and contributions during 2016. In other words, I didn’t follow my original plan but I accomplished a similar goal – increase the amount of funds in the Roth space so I can withdraw the contributions/conversions penalty free and tax free well before age 59.5 should that be necessary.
The unexpected income from Root of Good also means my decision to choose the Roth IRA Conversion Ladder over the competing 72(t) Substantially Equal Periodic Payments method of withdrawal was a sound one. The 72(t) method is extremely rigid in the amounts you must withdraw each year once you start your initial withdrawals. However, I knew going into early retirement that my income needs would vary year to year and there was always the chance I would have earned income (or get bored and go back to some form of work). As a result, I rejected the 72(t) withdrawal method mainly because of the lack of flexibility in withdrawals. I would really hate to be taking $30,000 of 72(t) taxable IRA withdrawals while earning another $40,000 between this blog and dividends and interest.
Now where are we headed?
Things look pretty rosy. I took my financials and dumped them into the wonderful early retirement calculator at cFIREsim.com and determined that we could spend somewhere around $65,000 per year with almost zero chance of running out of money before age 90 even when we make conservative assumptions about income from the blog and other side hustle income. Helping shore up the forecast is roughly $25,000 of expected Social Security income that we’ll start drawing in a little less than 30 years.
I don’t know that we’ll spend $65,000 per year but it’s reassuring to know that money isn’t a real constraint to our lifestyle. We could increase our budget by 50% to cover a lot of unknowns such as higher health care/insurance costs and higher kid-related costs during the teen years.
Four years into retirement and our potential standard of living is approximately double what it was when I quit working. It’s not entirely surprising given the conservatism of the worst case analysis performed under the “four percent rule”. Most of the scenarios modeled in the four percent rule (which is closer to a three percent rule for very early retirees) leave the retiree with several times their initial portfolio value. End result: a growing net worth in real terms for most very early retirees.
However I keep in mind that we might be at the top of a stock market bubble that’s about to burst and that we might see hundreds of thousands of dollars of our net worth disappear in a short period of time. In that case, I’ll have to revisit what we are able to spend. Until then, I’m not gonna worry about money and I’ll keep an optimistic but flexible attitude toward the future.
Any early retirees in the audience that ended up with substantially more than they started with? Or did early retirement lead to new ventures or interests that turned profitable? For those planning on retiring soon, do you have any plans to hustle on the side? Let me know!