Budgeting for Early Retirement: Part 2

Okay, folks. Last Friday, I wrote about how I was suddenly thinking about retiring early, but quite a bit daunted by just how exactly I’d go about doing that. I haven’t been actively budgeting for a while, and I started to take a look at my spending habits, trying to figure out just how much I’d need to comfortably retire. It was a lot. That didn’t mean I was giving up on the concept of retiring early, but it did mean I was resolved to the fact that I was likely going to have to budget like a madman to get anywhere near where I wanted to be.

Well, my brother happens to be a fancy-pants financial planner (that’s the technical term. I checked.), and he saw my post and said we should really talk about this. It took me all of one second to agree that was a good idea, and Sunday, we had a nice long chat, and the bottom line from that chat is that I feel a whole lot better about my financial future. I will try and share what I took notes on, so that you too might possibly feel the same. (Except about your financial future, not mine. I assume you don’t care nearly as much about mine as I do.) Some of this is stuff I’d read about on different blogs already, with the big difference being that Joel had some very important additional observations that cast much of that in a different light. So with a disclaimer that I might get some of this wrong, and I am definitely not a fancy-pants financial planner, here’s what I walked away with.

Figuring out how much you need to retire is pretty straightforward. If you can build a basic budget now, you can build a basic budget for some future point in time. Will your house be paid off, or will you still have rent or a mortgage to worry about? Will you still have two cars? Do they need to be nice cars? Do you want to go on vacations? How nice of vacations, and how many? Do you want to lavish your kids with gifts? Imagine you’re old enough to retire today, and make a budget for that. Then, you need to account for inflation. How much will what that amount you need to live on cost when you need to retire? From 1960 to today, the average rate of inflation in the US has been 3.7%. Say you want to live on $40,000/year right now when you’re retired, and that’s twenty years from now. At that point, it will be more like $83,000/year. (Take 40,000 and multiple it by 1.037 twenty times.) That’s a base line. Could it be more? Yes, if inflation is steeper on average. Could it be less? Also, yes. But it’s close enough to plan around.

From savings, you can reliably count on withdrawing 4% of your savings/year, and have that last you for 30 years. (This is based on a study that looked at people who might have retired from the 1920s through today, and calculating how much money they would have had if they spent 4% of their savings per year, and how long it would have taken them for that money to disappear. Over all that time, 4% was the worst case scenario.) So if you want to be prepared for retirement, you should have enough money saved up to withdraw 4% of that savings each year, also anticipating that the money that’s still there will continue to appreciate in value. (Joel used 7% for that amount of appreciation.)

However, you also have social security to factor in. Yes, the glib “I don’t think any of that will be left for me” answer is fine and dandy, but it’s very much overly reductive. There’s a lot of money left in social security. (A lot.) Even if the system totally breaks down, there’s enough there for it to keep paying people 70% of what they’re owed for 50 years. You can figure out exactly how much social security benefits you’ll have by logging into their website. Your benefits are calculated off the 30 highest years of your earnings, and it has a calculator that does all of that for you. You get a certain amount per month if you start taking it before 67, a standard amount at 67, and even more if you start taking it at 70. Joel likes to tell his clients to assume you’ll get the “retired at 67” amount if they end up retiring at 70.

But wait! There’s more! Your spouse also gets social security. How much? That depends. If they worked, then they can also go onto the site and see how much they’re going to get. However, a spouse is entitled to 50% of your social security benefits, even if they didn’t work a year in their life. If their earned benefits are greater, then they get that greater amount. (No extra 50% or anything like that, though.) Basically, between you and your spouse, take the greater social security benefit, chop it in half and compare that to the lesser benefit, then count on getting whichever is greater.

That’s money they get while you’re still alive, by the way. It’s not some “survivor benefit.” So let’s assume your spouse gets the 50% benefit. That means together, you get 150% of your calculated benefit each month. (And good news! That also goes up with inflation, so it sticks with you.) Bottom line is that if you can make it until you’re 70, social security will kick in and give you a steady source of income. (Though be aware that the social security calculator assumes you’re going to keep the same job until you retire. If you plan on retiring early, you need to account for that, something the calculator also lets you do. Math will be involved, though.)

I realize this all seems pretty complex, but the good news (for me?) is that it all makes sense in my head. Big takeaways to this point:

• Calculate how much it would cost you to live as a retired person today, and then project outward based on that.
• Don’t forget social security will help you out once you’re around 67 or 70, more or less.

This all ignores any additional money you might get from anything else. Do you want to work part time, for funsies? That lowers your monthly expenses. What about your spouse? If both of you simply want to go from working full time to working part time, that might be very doable to do much earlier, depending on your savings and the money you’ll make working part time.

After looking at all of this with Denisa, it was very clear to us that we need to make some decisions now, to be able to plan for then. What is it we want to do when we “retire”? What will that look like? There are plenty of people out there who end up still working, because that’s what they enjoy doing, and they’d rather not do anything else. That’s totally fine. I personally would love to shift over to writing books full time, sooner rather than later. Denisa would like to still teach, it sounds like. That means between the two of us, we should still have some steady income, even if we do throw in the towel on full-time employment.

Of course, one big disclaimer is health insurance, which you have to factor in, since America has this broken system where unless you’re working full-time, you’ve got to pay through the nose to have insurance. The good news is that there is private insurance out there, and the Affordable Care Act made it at least somewhat more affordable. But you need to look into that.

How about some good news? Most retirement sites out there talk about you needing something like 70% of your pre-retirement salary to live on. That’s basically garbage for many people. Don’t use a rule of thumb like that. Actually figure it out for yourself. But also, those articles ignore a basic fact: most people begin to spend less, the older they get. As much as we’d like to keep traveling the world and living life to the fullest, our health will sooner or later begin to put a hamper on that. You get to the point where you start telling your family they’re going to have to come visit you, not the other way around. And the thought of traveling to Europe and seeing the sights just doesn’t have the same appeal. So you stay home more. Do less. Spend less. Do take that into account as well. (Joel said to plan roughly on that switch happening when you’re 80, but you do you.)

So what does this look like in practice? I’ll use myself as the test case. Denisa and I are thinking of retiring to Slovakia. The cost of living there is about 60% what it is here. Health care coverage is also much cheaper. I’m planning on continuing to write. Denisa plans on teaching some. We’d like to travel a lot, and we’d also like to serve some church missions. (Quick aside on missions, if you’re a Latter-day Saint. You can check right now what missions are available to senior couples, and that includes a “price per month” for that mission. Denisa and I could go on a 2 year mission to Slovakia, and it would cost us around $2,750/month, which includes housing and health care. That’s $33,000/year, which is a pretty darn cheap way to live, though yes, it’s far from being retired. It’s just something we’d like to do. So we can do it.) We’ve thought about buying a house in Slovakia, but we’ve also talked about renting there, and then living sort of . . . on the move for a while. Rent for a month in Slovakia, then a month in Italy, then a month in Germany, then a month in New Zealand. There are online jobs Denisa could get, and I can write literally anywhere. It’s something to think about.

Once the kids are out of the house, our expenses drop by a good deal. Vacationing also becomes much less expensive. Our house will be close to paid off, and we could also sell it and reinvest the money if we don’t outright buy a place right away. We’d really like to have very little “stuff,” and focus on “experiences.”

Say we wanted to live on $40,000/year until we’re 80, and then $30,000/year after that. If we save an additional $22,000 each year for the next 8 years, we could just stop working then. Completely. Don’t write any books. Don’t teach any classes. Just be done. Denisa wants to live until she’s 100, so that’s how long I extended it out. When we’re 100, we’d have $4,200 left to our name. (Don’t spend your inheritance all in one place, kids.) (Though of course, when we’re 90, we’d still have $260,000.)

Is $40,000/year enough to live happily on? No idea. We have to look into just what living in Slovakia entails precisely. We’re also not sure we’d want to head to Europe right away. If the kids are still in American universities, we might want to be around them for a while. Though we could always sell the house and just bum around the country for a while. (Oh, and that $40,000/year retirement doesn’t take into account anything about the money we’d make from selling our home. If we took all that and reinvested it, we’d have quite a bit more money to live on.)

But I’m no longer in the mindset of “I shouldn’t think about retirement, because it’s around 25 years away.” It isn’t. Depending on what I want it to look like, it’s as close as 8 years, if I play my cards right. One of the biggest takeaways I had from my talk with Joel is that right now is the most important time to invest. Generally speaking, properly invested money can double every 10 years. If I put $10,000 away this year, in twenty years, it will be worth $40,000. If I wait to start seriously saving until ten years from now, that $10,000 would only be worth $20,000 at retirement. The earlier you can sock money away, the better. But there’s no use worrying about what you should have done earlier. Worry about where you are now, and what you need to do to get to where you want to be.

Oh, and one other takeaway I had from Joel is that becoming an ultra-budgeter right now isn’t necessarily the best decision, either. My kids are with me. We’re doing fun things. Living it up. Enjoying life. That’s great, as long as I’m preparing for the future. I won’t have these same opportunities when my kids are all grown and moved off. This is a one time deal. That was good advice.

And one other takeaway was don’t pay off your mortgage. Well, generally speaking, don’t. Right now, my mortgage rate is 3.75%. If I put money into paying it off, I’m basically “making” 3.75% on that money, best case scenario. If I take that same money and invest it in retirement, I’d generally make around 7%. 7% is more than 3.75%. You take it from there. (If your mortgage has a much higher rate, this advice may be different, clearly. But much of the “pay off your mortgage” advice comes from back when rates were more like 10% or more, back in the 80s. It’s no longer relevant.)

And . . . that’s about all I’ve got for you. I’m happy to try to answer questions, with the big disclaimer that I probably don’t know any more about what I’m saying than you do. Joel might pop up in my Facebook feed, though. He’s a pretty helpful guy, though he sadly generally only does financial planning for fancy-pants people, when they’re not directly related to him. (Otherwise I’d be giving him referrals like hotcakes.) Many thanks to him for taking the time to talk this through. (Did I get anything wrong, Joel? I’ll edit, if so . . .)

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