See our Advertiser Disclosure here.
This November my in-laws are hoping to take a cruise around South America, depending on what the entry requirements will be at the time. My family won’t be able to go for several reasons. First, the kids won’t be vaccinated by fall, so that’s that.
But even if they were, my husband would have to take off more than two weeks, and that’s a deal breaker at the company he works for. I mean, it’s possible to do it under extenuating circumstances, but unfortunately wanting to take a cruise isn’t one of them.
And what a neat itinerary it is, plus the price isn’t that crazy considering the fact that you get to sail for two weeks around Cape Horn with a stop in Falklands:
Sure, balcony cabins cost $2499 per person, but I still think it’s a relative bargain. Of course, while you are in Chile, might as well add an extension to an Easter Island. How can you not, right? Alas, we won’t be able to do this type of a trip for several decades. Or will we?
It has planted an idea in my mind that maybe if we save enough, my husband can retire in 10 years or so. The truth is, while dreaming of this cruise has sealed the deal, it’s something I’ve been pondering for awhile. My husband has a nice boss, and the company he works for has always been fair to us. That said, an IT job is full of stress, late nights and working on weekends. In addition, my husband’s health has been steadily deteriorating, and I can’t help but think his daily schedule has something to do with it.
On the other hand, we are a middle-class family and will not be getting an inheritance (not that it’s expected). We’ve been regularly putting away money for retirement since we got married at 19, but the amount we have so far is not anything to brag about. Still, it’s a solid foundation, and with some changes, I believe retiring in 10 years is within our grasp.
My love/hate relationship with FIRE movement
The FIRE (stands for “financial independence, retire early”) movement became all the rage about a decade ago. Several popular blogs and communities have sprung up all over the internets. At least on paper, there is a lot me and these folks have in common.
I don’t like the US culture of overconsumption. Part of it is because of the way I grew up. We were quite poor, and it was instilled in me to make use of what I got for as long as possible. We didn’t set out to be frugal, it’s the way life worked out. After I moved to US and got access to a lot more money, I kept the same mindset.
Unfortunately, at times FIRE community can take things a bit too far. Do you like to use A/C in the summer? According to many of them, you are a loser. You should get used to warm temperature and save money on power bills. Enjoy eating out? You are a sucker, should always cook food at home because it’s cheaper. Do you spend money on travel? You are a sheep, just go pitch a tent by the river and enjoy glorious outdoors for free.
Well, I must be a loser/sucker/sheep. I sleep much better when it’s 73 degrees at night, and even early retirement isn’t enough of a motivator to raise the temperature. I also really enjoy eating out, or takeout at the moment. I love brick-oven pizza made by a local restaurant, and look forward to having it every week. Yes, I can make one cheaper at home, but it won’t taste the same. I don’t have a brick oven.
I absolutely hate camping. Sleeping in a tent by the local river that’s full of alligators doesn’t sound like a vacation to me. I like decent hotels with preferably nice amenities to entertain my kids. Because if the kids aren’t happy… and you know the rest.
My point is, FIRE movement can be an “all or nothing” deal, at least according to most “believers.” It often doesn’t make allowances for various strong preferences one might have, where giving them up will have an extremely negative effect on life enjoyment right now. It also doesn’t take into consideration the fact that one spouse might not be as committed as the other.
For example, I’ve always felt that you should buy a used car and drive it until the wheels fall off. Unfortunately, my husband feels differently. Before we had kids, I forced him to drive an old, beat up Toyota Corolla. Keep in mind, my husband is a big guy and that car is tiny. Anyway, one time he made a remark that he would like something better, and that despite making the most money in the department, he has the most embarrassing-looking vehicle.
I told him that’s something to be proud of, but he wasn’t amused. That month I started putting away money, and two years later we bought him a gently used Ford Mustang for $15k cash all-in. In 2016 we actually took out a loan (at 0% interest) to buy him a brand new Mustang for a bit more than $15k. Was it what I wanted? Nope. Was it a financially smart decision? Not even a little. But it’s what my husband wanted, and marriage is about give and take. You can make the smartest financial decisions in the world, and end up with the spouse who resents you. To me it’s just not worth it.
Being married to him has been the best antidote to my cheapness. I’ve learned that it’s ok to splurge and treat yourself now and again. Like that time I’ve paid an extra $140 per night in Bora Bora just so we could have this view:
Totally worth it
So, what’s the plan anyway?
Warning! Lots of numbers ahead, but I wanted to share the specifics of how my husband can quit his job in 10 years without us having to eat cat food for the rest of our lives. Keep in mind, he is almost 42 now, so would be 52 at that point. By then, our youngest will hopefully graduate from local community college and will be expected to get a job.
Let’s get the main number out of the way first, shall we? I would feel comfortable with my husband quitting his job if we had around $600k in retirement accounts. A couple of assumptions: we won’t have Weimar republic type hyperinflation over the next 10 years, and Obamacare won’t be repealed. I’m also assuming spending $33k per year, give or take.
Generally, the experts recommend having 25-30 times your annual living expenses saved up, way above my number. But I think it depends on your age. If you retire at 30, sure, you will be walking towards lots of unknowns.
However, at 52, you are only 10 years away from collecting early Social Security. If your income was substantial up to that point, you can count on a decent payout which just might cover most of your expenses going forward. A spouse would be entitled to half of her husband’s benefits.
Yes, Social Security may evaporate in two decades, but I doubt it. And in the worst case scenario, there is always a reverse mortgage. I don’t expect anything from my parents, and don’t feel under pressure to leave anything for my kids either. Except for happy memories, of course.
According to this handy calculator, at 62 my husband would be entitled to around $1700 per month in inflation-adjusted dollars. That means I would get $850. Assuming we are both alive, that means we would be getting around $2550 per month, a small fortune!
Obamacare subsidies kick in if you stay under a certain income threshold, but you can’t make too little either. Fortunately, distributions from a Traditional IRA count for this purpose, so it’s currently possible to pick up a health insurance policy in Florida for under $150 per month for two 52-year old retirees.
But what about early distribution penalties? It’s a valid concern, but there is a trick to (mostly) avoid them. Let’s say we will have $600k I’ve mentioned earlier. We’ll assume that:
1) My husband has $400k from his 401(k) that we’ll roll over to Traditional Vanguard IRA.
2) I have a $125k Traditional IRA in my name, as well as $75k Roth IRA (with $45k being the original contributions).
Here is the main thing to remember. You want to draw from your Traditional IRA up until you reach your standard deduction. The reason is, you don’t pay federal taxes on that amount and if you live in Florida, no other taxes either. Right now that standard deduction for a married couple is close to $25k. In 10 years it will be around $28k if they don’t change laws.
Unless you qualify for exceptions (like large medical bills, college etc), you will pay a 10% penalty on all traditional IRA distributions if you are under 59 1/2 at the time. You pay it even if your income is wiped out by standard deduction. But there is one trick to avoid it and it’s called a 72(t) rule
I’ll let you read an article that explains it in detail, but the gist of it is that as long as you draw substantially equal periodic payments, you don’t owe the penalty. There are several methods that calculate your payments, and you can run various scenarios via this handy calculator
Right now would be a very bad time to take advantage of 72(t) provision since the mid-term rate is so darn low (0.53%). But last year has been somewhat of an outlier. Let’s be optimistic and assume that in ten years the rate will be 2%, which is still fairly modest. Here is how the math would break down if we started drawing money from my husband’s $400k Traditional IRA:
So, we could have access to $17,278 per year penalty-free. We would have to draw that exact amount for five years or until we are 59 1/2, whichever comes later. That’s OK, but not enough to live on. But remember, we still have access to $200k. On top of it, my husband has a small pension from his previous job that he can start drawing at 52 via reduced payout. It would be only $2400 per year in inflation-adjusted dollars, but it won’t be subject to early distribution penalty since it’s considered an annuity.
Anyway, if we add those two amounts, we are already up to almost $20k. As I’ve mentioned earlier, we would want to take advantage of standard deduction, so we draw $8k per year from my traditional IRA next. Unfortunately, we would be stuck with $800 penalty, but that’t not a deal breaker. Keep in mind, when I put that money away, we saved 12-15% in taxes, so we are still coming out ahead.
Plus, that’s assuming neither one of us would have any part-time jobs. Between two people, it shouldn’t be that hard to make $8k per year via Ebay or taking advantage of bank account bonuses. But let’s assume we make zero.
Anyway, we need $33k per year, and for that remaining $5k I would dip into my Roth IRA. Well, technically it would be close to $6k because we need to cover that $800 penalty, but you get the point. Any original Roth contributions can be withdrawn without penalty or taxes at any time. Only earnings are subject to tax and penalty when you are under 59 1/2. We would need to hang on for only 7 years.
Borrowing unforeseen occurrence, I think $600k would be more than sufficient to take the plunge, especially if the kids are grown and have their own jobs. Yes, the market may tank, and this or that might happen. I didn’t say there is zero risk.
So, to summarize, if you are a middle-class family and plan to live on a modest income in early retirement, you would want to put a bulk of your retirement savings in a Traditional IRA or 401(k). However, it’s prudent to have some money in a Roth IRA to give more room to your budget.
There are other tricks, like maximizing your HSA contributions while you work, and delaying getting reimbursement for medical bills until you actually retire. But we won’t go into that here. Google is your friend.
But how do we save $600k?
With what we contribute to retirement now, we will not be able to reach that goal. Period. So, after playing with this compounding interest calculator, I found out we need to increase my husband’s 401(k) contribution from 6% to 15%.
I’ve always advocated contributing to 401(k) only up to employer’s match, and dumping the rest in Vanguard. However, I’ve changed my mind. There is something to be said about “out of sight, out of mind”. If the money is automatically deducted out of your paycheck, you are less likely to miss it. Plus, his employer plan offers several Vanguard funds as an investment option.
That’s a substantial jump, but there is no other way around it. Having him work more is out of the question. I wish I could give you some weird trick on how to retire early, but it essentially amounts to saving more and/or spending less. There is no magic involved.
It took a minute to put in a request online, and we are off. Our current allocation is 50% stocks/25% bonds/25% inflation-protected securities. The stock portion is invested in Vanguard Equity Income fund (VEIRX). This isn’t an advice, I’m simply sharing what works for us.
I’m assuming interest rate of 5% going forward because I fully anticipate a market crash in the next year or two. The bull cycle has lasted way too long as is, and P/E (price to earnings) ratio indicates that stocks are currently overpriced. A fair historical number is 16-17, yet here we are at 38 and climbing:
So, why invest in stocks at all? Simply put, I don’t see any better alternative with current measly interest rates on bonds. I’m not a fan of gold funds due to their volatile nature. Plus, it’s a non-income producing asset. Bitcoin is useful for those who live in authoritarian regime countries with long history of inflation (like Belarus where I grew up). Otherwise, I just don’t see the point.
I don’t buy individual stocks. Well, I did the other day because I’ve discovered that I have a $385 IRA at Etrade I totally forgot about. So, I’ve decided to run an experiment and buy some beaten down stocks. That’s the extent of my willingness to “gamble” on individual companies. I’ve been able to successfully time the market a few times in the past, but I don’t attribute it to a special skill. I simply got lucky. I’m not willing to bet my husband’s early retirement on luck.
What we have to cut back on now/then
In normal non-Covid time, travel expenses comprise a decent chunk of our budget. I’m not willing to give that up, no way. Who knows what our health will be like in 10 years. Fortunately, we may not have to. We are almost done with paying off my husband’s Mustang, so the freed up amount will simply be used to increase his 401(k) contributions.
My husband wanted to get a loan for a brand new Ford Mustang Mach-E, but that’s no longer an option. Instead, we will buy one that’s 3-4 years old with cash. Since it will technically be my car, he didn’t mind. Fortunately, electric vehicles (except for Tesla) tend to depreciate like crazy in the first few years of ownership.
It goes without saying that annual $33k budget assumes having no car payments or loans of any kind. We will simply keep that Mach-E until we are 59 1/2. I have a van that’s currently 12 years old and has 164k miles. I plan to drive it for another 3-4 years, so this isn’t anything out of the ordinary.
As far as retirement travel goes, that’s where our hobby would come in really handy. I believe that we could accumulate enough to have several trips per year covered entirely with miles and points. Just maximizing two credit cards: Chase Freedom Flex and Amex Everyday Preferred (personal referral link) would give us around 60K flexible points per year, when used strategically. And that’s assuming we would be prevented from signing up for any new cards, which I doubt will be the case.
Wrapping it up
If my plan works out, great. If not, that’s OK too. The important thing is, we have a plan, and that’s half the battle right there. I don’t have any illusions that my husband’s early retirement is an end all be all. I know having more time would give us extra opportunities to volunteer and do other things that are important to our family. And of course, it would reduce my husband’s stress and hopefully have a positive effect on his health. It’s a goal worth sacrificing for.
But you can’t put off life and happiness until some specific age or how much you have in your IRA nest egg. As they say, life is what happens when you are making other plans.
I know I’ll be sailing around Cape Horn someday regardless.
Readers, are you contemplating an early retirement? Any tricks you are willing to share?
Opinions expressed here are author’s alone, not those of any bank, credit card issuer, hotel, airline, or other entity. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post.
Leana is the founder of Miles For Family. She enjoys beach vacations and visiting her family in Europe. Originally from Belarus, Leana resides in central Florida with her husband and two children.