I just realized I have no idea what you think about retirement. You probably aren’t thinking about it very much, considering the student loans you still need to pay off. But when you hear the word “retirement,” what do you think of?
Growing up, I thought of retirement as for only the very old. You got old, you couldn’t work anymore, so you had to stop working. It wasn’t a choice so much as a stage of life. And in the northern Midwest, you had 2 options:
- Become a snowbird. This was the usually preferred option for those who could afford it. Move someplace hot (like Arizona or Mexico) for the winter, and return to the Midwest in the summer (to a lake house).
- Stay in the Midwest year round. This was the option for those who didn’t want to change their way of life. During the cold winters, they’d watch TV and play BINGO.
As you might guess, I’m not into these options. No gray haired communities in a brown desert. No BINGO. I want travel, adventure, and good food. Mostly, I want the freedom and flexibility to decide later. I can’t be sure what 65 year old Rich will want (or, more importantly, what 60 year old Mrs. Rich will want), but I want enough dough to do whatever our future selves want to do.
So how will I get there?
Recently, some personal finance bloggers started a series called the Retirement Drawdown, so I thought it’d be interesting to analyze my own retirement plan and join the series. Please refer to the end of this post for more information and links to all the bloggers who have contributed.
RICH’S RETIREMENT PLAN — WHAT WE’RE STARTING WITH
As you’ll see in the chart below, most of my net worth is in retirement accounts — 401k and IRAs. 63.4% of my net worth, to be exact.
Aside from retirement accounts, my biggest investment by far is in an LLC I own with my brothers. We started the business in 2010 and we invest in farmland, commercial real estate, and one small business. Every year it seems we find 1-2 new investment opportunities.
My share of the LLC is currently worth $198,370. I’ve contributed $69,000, so it has done well. We receive occasional distributions from the rental income and the sale of properties. I’ve pocketed $38,670 so far. In retirement, I’m hoping it will produce regular income — more on this later.
THE NEXT 15 YEARS — PREPARING FOR RETIREMENT
My working assumption is that Mrs. Rich and I will both be working 15 more years. She’s younger than me, so maybe she will work a few years longer. Our kids are 5 years old, so in 15 years they will be 20, and by then we’ll have a good idea if they are “launching” as they should. We’ll see.
There’s another reason 15 years is a good estimate for running our numbers. We are in the lucky position of having a company pension. In around 15 years, I’ll be able to receive the full pension benefit, more or less.
So, what’s the plan over the next 15 years? Get ready for an exciting, unprecedented, and innovative answer …
We’ll keep doing what we’re doing. Managing cash flow, investing opportunistically, and maxing out retirement accounts. It’s a low-risk ride.
Here’s what I expect from my various net worth categories over the next 15 years, in 5 year blocks:
Ok, so this will take some unpacking.
Cash: Easy, this is just a gradual build.
HSA: I’m going to start maxing out an HSA in 2018. Currently, one can contribute $6,750 per year. That number may go up over time, and there might be investment gains. Then again, I might spend some of it on health expenses. So, I’ll assume no increase in contributions and a 0% rate of return here. The calculation is just $6,750 x 15.
Opportunity Fund– Opportunity Fund? Well, I don’t like the stock market very much right now, so I want a fund that will earn some interest and give me some dry powder for future investment opportunities. I’ll initially use my state’s Municipal Bonds for tax free 4% dividends. I plan investing $1,000 per month for 2018, and increasing this by $250 per month every year until I hit $3,000. At 4% compounding, it’ll add up fast. Finally, I’m assuming that I’ll use $200k of this on college for the kids, either by transferring it to a 529 or just withdrawing the money.
I should note that I’ll probably find other investments along the way, so this fund is a place holder.
Alternative Investments– I’m always looking for new and different investments. For example, I’ve earned a total of $30,000 investing over several years in marketplace lending via Prosper.com. I do this now primarily in a Roth IRA, for tax efficiency.
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LLC– My assumption is that the LLC keeps growing at a decent pace. Even without appreciation, the land and properties are creating good cash flow. I assume $10k each year for the first 5 years, $12,500 each year for the next 5 years, and $15,000 each year for the final 5 years. These are actually fairly conservative numbers, around 5% return on investment.
There’s a bump in value to the LLC in the final year due to an expected farmland inheritance.
Retirement: These accounts are on autopilot, and my estimates are very conservative at 2-2.25% compounding, which is currently the rate on “risk free” treasuries.
Thus, at the end of 15 years, my pie chart will hopefully look something like this:
All well and good. A $3MM nest egg!
At first I thought my retirement plan was boring, but there’s nothing boring about a $3 Million nest egg. I try to remember this every month as I’m slowly but surely saving.
And now, my plan for income …
RETIREMENT DRAWDOWN / INCOME PLAN
Here’s the key to a comfortable retirement: income. Without income, one needs to just start selling assets, aka drawdown. With income, one can preserve assets.
Here are my income estimates:
I’ll admit, these calculations are on the back of a very big napkin.
You can see how important pensions and social security are, and why many older workers decry the loss of defined benefit plans. They provide security. Even with my large potential nest egg, our pensions will be significant.
Regarding social security, I’m assuming we would start collecting at age 62. I got my numbers from some calculator, I can’t remember where just now.
Notice, there’s no blogging income here! I’m not counting on a side hustle in retirement. Although, big announcement, I should mention that we did earn 96 cents the other day. I think I’ll keep my day job.
Finally, the income from retirement accounts and investments is calculated at 3%. If the accounts are earning 3%, I won’t need to draw much at all.
An income of $17,000 per month would be more than enough for a very comfortable retirement, even 15 years from now. Our current income is $21,667 per month, but we have high taxes and payroll deductions and all sorts of money shenanigans going on. Our current take home is closer to $13-14k. Plus, in retirement, we won’t need to save for retirement!
I wonder if these numbers are still too rosy. A lot can happen in 15 years. The good thing is we could probably retire comfortably with less, so there’s a built in buffer here.
BUT WHERE WILL WE LIVE???
There’s one big issue I’ve left out: Where will we live? We don’t own a home, so paying for lodging will probably be a continual expense.
Our dream is to live part of the year near the beach and part near the mountains, with a few months a year in great cities across the US and Europe. It’s hard to tell how this will work. Perhaps we’ll buy a small apartment somewhere to use as a home base. Depends where the kids are. So, I’m not wasting too much time on this part, too many unknowns.
I’m keenly aware of unknowns, which is part of the reason I’m not sacrificing the lifestyle I want today for some future lifestyle. Again, a lot could happen in 15 years. So we’ll keep taking those vacations to the beach and the mountains and great cities rather than saving them all for later.
The overall point is that if we manage our money well, we should retire comfortably even with very conservative rates of return and a fun lifestyle in the meantime. The key to this whole plan is not anything risky or magical, it’s the result of good income and consistent saving.
AND THEN WHAT?
Some people say die broke. No thanks. I want a generational legacy. I’m not exactly sure what that means yet, but it’s more than just leaving a bunch of moolah to the kids. Maybe they can take over the LLC, or start a foundation, or own a business. The main point is I want to teach them to be wise, and after we’re long gone I’d like them to tell their own kids: “Grandpa was smart about saving and investing, and look at these opportunities we have because of his work.”
That’d be nice.
Penny, when you’re back from your technology hiatus, tell me what you think about all this. What’s your ideal retirement vision? Is it BINGO related? What would you do differently, if you were in my shoes?
PS — “The Chain” as explained by The Retirement Manifesto
A great blogger over at The Retirement Manifesto started this idea of looking at how various people are planning for retirement. My plan is a bit different from many FIRE bloggers, but I appreciate seeing how people approach this.
Mr. Manifesto explains it better than I can, so here it is, in his words:
We’re “Building A Chain” of blog articles, where different bloggers are sharing their detailed Drawdown Strategy. To help keep track, I’ll edit this post as new “links” are added in the chain. Eventually, we’re planning on compiling these into an e-book, and donating all proceeds to charity. Thanks to the following bloggers who have joined “The Chain Gang”!!
Anchor: Physician On Fire: Our Drawdown Plan in Early Retirement
Link 1: The Retirement Manifesto: Our Retirement Investment Drawdown Strategy
Link 2: OthalaFehu: Retirement Master Plan
Link 3: Plan.Invest.Escape: Drawdown vs. Wealth Preservation in Early Retirement
Link 4: Freedom Is Groovy: The Groovy Drawdown Strategy
Link 5: The Green Swan: The Nastiest, Hardest Problem In Finance: Decumulation
Link 6: My Curiosity Lab: Show Me The Money: My Retirement Drawdown Plan
Link 7: Cracking Retirement: Our Drawdown Strategy
Link 8: The Financial Journeyman: Early Retirement Portfolio & Plan
Link 9: Retire By 40: Our Unusual Early Retirement Withdrawal Strategy
Link 10: Early Retirement Now: The ERN Family Early Retirement Captial Preservation Plan
Link 11: 39 Months: Mr. 39 Months Drawdown Plan
Link 12: 7 Circles: Drawdown Strategy – Joining The Chain Gang
Link 13: Retirement Starts Today: What’s Your Retirement Withdrawal Strategy?
Link 14: Ms. Liz Money Matters: How I’ll Fund My Retirement
Link 15a: Dads Dollars Debts: DDD Drawdown Part 1: Living With A Pension
Link 15b: Dads Dollars Debts: DDD Drawdown Plan Part 2: Retire at 48?
Link 16: Penny & Rich: Rich’s Retirement Plan
Link 17: Atypical Life: Our Retirement Drawdown Strategy
Link 18: New Retirement: 5 Steps For Defining Your Retirement Drawdown Strategy
Link 19: Maximize Your Money: Practical Retirement Withdrawal Strategies Are Important