Basic Financial Plan to retire in 7 years

by Keith

Me and my wife made up our minds that we want to leave corporate America and get out of the rat race in 7 years give or take. We are not exactly debt free but we have no credit card debt. We always pay our balance on our cards every month.

Following some of the guidelines like you have in this article we reviewed our finances and it is reasonable to think that we can save about $70k per year for the next 7 years if we simplify the way we live. Maybe could save a bit more but she does not want to live without heat and cable. I humor her because she makes five times what I make.

So...we will be about 47 years old in 7 years and have a separate 401k account which got creamed by the stock market crash but hopefully will provide all of our income from age 62 and on.

The plan is to turn the 70k a year x 7 years plus whatever we will get for selling our house and goods into enough cash to live on our RV from age 45 to 62. Drive all over the USA and then some...

Figure the RV is going to eat about 20k a year or so (more in some years when you need new tires, parts, repairs etc., hopefully less in others). I figure we need another $30,000 a year to live for food, medical, entertainment, and insurance if we can get it. I hope that isn't too low.

So we need a income of $50k. Since our tax rate will go from absurd to almost zero, I am thinking the best investment plan would be something that is somewhat tax defered. The two things that come to mind
are spiders (S&P500 index shares purchased like stocks SPY) and inflation indexed 30 year US I-bills. I think you can only purchase 10k a year per person in I-bills, so that would be 20k total for that and then the remainder 50k a year put into spiders. The I-bills do not pay out the interest until you cash them in, so tax deferred, and the spiders are sort of tax deferred since you will not realize any gain other than dividends until you sell them. This seems better than a mutual fund which might have to distribute gains several times a year.

Can we do it? I mean, assuming we manage to cut spending and actually save 70k a year, will the above strategy net us 50k a year from age 45 to 62? I guess aside from the I-bills, a lot would depend on the stock market recovering over the next 10 years. Although ideally it would wallow around at low levels for the first few years while we are dollar cost averaging into it. Any other saving or investment strategy that might be a better way to go?

Alternative strategy: win lottery, find rich uncle.

LM says: Keith, that's an awesome plan. Very cool that you and your wife sat down to hash this out.

I would suggest you look at ways to create some side business that interests you both that you can then continue in your retirement. So even if you meet your savings goals and your money grows like you predict you still have some income that still allows you to live the life you want during retirement.

Whether it is real estate properties, some internet based business, consulting opportunities, freelance work, etc. Just start now building something that you can keep going during retirement.

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think again
by: Anonymous

I think your goal is admirable, but UNREALISTIC. First off, the market is so uncertain to even rely how it will perform in the next 7 years. The best bet you can make is save 70K a year x 7 = $490K sock in a regular savings account. 2 people x 40 years of expected retirement. That's rough $6,125 per person or $12,250 a year living on a boat. That's not taken into account, inflation or uncertainty in the market or emergency (medical).

The alternative would be: Not retire and continue working until you can actually afford it.

My 2 cents
by: Paul

I would say it is possible, although maybe not probable. You need 17 years @ $50K=$850K (he said he has a separate 401k for 62+). If you save $490K and get some decent appreciation you might make it. It all depends on how much you can cut your expenses and sock away, and how the market performs between now and then. The worst thing that happens is maybe you have to work to 47 instead of 45. Just working that 2 extra years would give you 2 more years of saving and cut your needed funds by $100K. Plus you will prepare yourself for a lower standard of living, which you will most likely have to accept. Why not give it a shot?

As for whether the other 401k can support you from 62 on, that is a different issue.

Re: Basic Financial Plan to retire in 7 years
by: Keith

I sort of forgot to mention that we own a house currently appraised at $360k and it will be almost paid for in 7 years. Figuring we can clear $300k from the sale of the house and other assets, that would pump our total up to $790k with zero appreciation in our capital. Rigging our boat for blue water sailing is going to knock 100k off that total though.

The hard part will be adjusting to the lower standard of living. But then again, is eating some chips and a hamburger watching the sun set while anchored at some secluded island in the south pacific really that much lower of a standard of living than dinner at TGI Fridays and a hollywood remake movie?

The real question. Do I have the stomach to watch the $50k a year that goes in the the S&P500 go up and down. The 20k in the US bonds should be ok. If the USA goes bankrupt I am getting on the sailboat with as many canned goods and guns as I can find and getting the hell out anyway.

Edit: The 401k account is separate and should have about $400k in it in seven years at our current 15% contribution level. Allowing it another 17 years to grow untouched and I am hoping for at least a million in there by age 62. Then maybe we will get something from SS considering how many thousands we have pumped into that.

Re: Basic Financial Plan to retire in 7 years
by: Lisa

Health insurance doesn't make it impossible. But definitely something to think about.

I'd also be wary about the "my tax rate will be 0" thing. Sounds like you are in a pretty high tax bracket and that will probably go down. But you also won't have any deductions. (No mortgage, no 401k, no IRAs?). Assume a flat 20% tax unless you can manage your investments extremely well tax wise. (Even well managed investing can be pretty hit and miss. Too many factors; taxes extremely complex). {I am a tax professional and my moderate-income retirees pay far more income taxes than most working people would guess}.

Retiring so early comes with lots of risks. Expenses go up, inflation, dynamics change. Who knew healthcare would be so astronomical today, when a decade ago it was quite reasonable? What's next?

But I don't see the harm in trying. It would certainly put you in a good place, even if you are not ready to retire in 7 years. You'd be WAY closer, and nothing wrong with that.

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