Financial Independence

Dad’s and my ultimate goal by being frugal is to “retire” early.  We have a long way to go, but we’re starting the process.  We both expect to continue working for the foreseeable future, but we’d like the ability to not *have* to work.  We’ve already got our expenses (minus debt repayment and daycare) down to one of our salaries (which are pretty similar), although it would be tight, and not much wiggle room.

“Financial Independence” is the keyword you’d want to search for if you’re looking at it on Google.  Basically, it’s the ability to live off your savings and investments.  Of course, how much you need in your savings is a subject of great debate.  Most financial advisers still recommend the 4% rule – you can withdraw 4% of capital/principal from your investments every year for basically forever.  It makes some assumptions about your investments though – that your investments are growing about 8% each year, and that your living expenses will decrease as you get older.  I’m a bit more cynical, and expect my living expenses to go *up* when I retire.  Partly because I’ll have time to do things I want to do, like traveling, and as I get older and older, medical expenses will get higher and higher.

And unlike many “can you afford to stay at home” calculators that suggest living expenses decrease for non-workers, it’s not accurate in my case.  I wear jeans to work, I don’t have to maintain a “work wardrobe” (Dad does, but it’s still pretty much khakis and polos),  I probably wouldn’t save any money on commuting since my commute is so low, and Daughter Person and I would be getting out of the house more – so if I stopped working, I’d expect those little daily expenses might actually go up (not near as much as daycare costs, but still).  So I’m fully planning on being able to support 80-90% of our current income in retirement (whether we use that’s another story, but I’m planning for the worst).

We’re saving for retirement in several ways – even while paying off debt.  I’m contributing up to the max match in my 401(k), which is 4%, and Dad is contributing 10% – mostly because his 403(b) retirement account has some really funky matching rules, and we figured that 10% would give us all possible company matches, even if it’s not a 100% match.  Once the non-mortgage debt is paid off, we’ll be maximizing those withdrawals to the legal limit.

We *may* be able to contribute to a Roth IRA this year – depends on where the cards fall as far as our MAGI. If we meet the income limitations, we’ll contribute as much as we can afford.

We don’t have much outside of tax-advantaged accounts yet, since we haven’t maxed out those, but I’d like to start a Fidelity brokerage account to start playing around with dividend investing – all our other investments are mutual funds – and potentially increase that to provide us with a decent income each year – I realize that that’s quite a long way off, but I can dream 🙂

Finally, we’re going to put aside $60,000 for Daughter Person’s college, and then pay off our mortgage – which has a guaranteed return of 4.125%.  Once our mortgage is gone, we can live quite comfortably on about 25% of our current income.  Projections have the mortgage being paid off in 10-12 years from now.

And maybe social security will still be around by the time we make it to 70 – although I’m not holding my breath.

Tell me your thoughts