My quick plan for financial independence

My goal for FI is $1.2 mil net worth. I’ll call $1.2 mil my “number“. My primary residence is excluded from my number, since it doesn’t produce cashflow while living in it. I’m also not including any stock we hold from old privately-held employers. I hope we can cash those out someday but have no idea if/when that’ll happen.

I wrote about the 4% rule, but after further research, I’m confident I could use a 5% rule. Meaning… I’m confident that by withdrawing 5% of my portfolio annually or $60,000 (mostly post-tax) per year, my nest egg will not run out. Using a 5% rule means every $1 withdrawn annually will require $20 in my portfolio. Compared to many bloggers, $60k seems a little high. I’m planning about $1500/month for housing expenses and $900/month for healthcare. Those 2 items consume nearly ½ the budget. Healthcare is a big ❓here in America, and one I’ll have to constantly navigate as a Type I Diabetic. I wouldn’t be surprised if we choose to live internationally for awhile, which could reduce both housing and medical costs. Maybe we find a cheaper area to live within the US.

My FI Net Worth Calculation

Friends have asked how I value rental properties in my number. I see 2 options. I’ll use numbers from one of my properties, where I owe $145k, its current market value is $215k, and my average cashflow is $450/month.

  1. Equity value: This calculation is simple. Property Value – Amount Owed = Equity. For my property, my equity value would be $70k.
  2. Cashflow multiplier: My rental generates $450 monthly or $5400 annually. As mentioned previously, a 5% rule requires $20 of portfolio value for every $1 I can withdraw. So my annual rental profits, or $5400 * 20 = $108,000 toward my number.

I use Option 2 in calculating my FI number.  I expect to hold my rentals for many years, so the equity won’t help fund my living expenses unless I choose to sell. Also, real estate values will fluctuate up and down, but I expect my cashflow to stay fairly reliable. There are also taxes and transaction costs associated with selling that can eat into your equity.

Net worth is often calculated with this formula: Net Worth = Assets – Debts.

Since I exclude my primary residence from Assets, I also exclude its mortgage from my Debts. Rental property mortgages are also removed from debts, because the Cashflow Multipliers account for the mortgage payments.

For me Net Worth = Cash + Investments + Real Estate Cashflow Multipliers – Debts

How I’ll reach my number

In 2017, I set my FI goal for 5 years out (2022), which will be just before my 36th birthday. At that time, I was thinking my number was $1 mil. To get there, I estimated I’d need to add $70,000 to investments (index funds or real estate) per year for 5 years, and estimated a 8% annual return. I also assumed we’d receive a windfall from stock options from one of our former employers by 2020.

I’ve had to adjust my numbers a little bit. Like I said at the beginning, my number is now $1.2 mil. I think I need to assume closer to a 5% annual return. This may still be wishful thinking, because a market correction in the next 12 months wouldn’t surprise me. However, I’ve been able to save more than I expected in the last year, and I’ve moved a lot from cash to investments. I still think we’ll get one windfall from some stock options. 🙏

What I invest in

Friends ask this a lot. I love learning about investing, asset allocation, stock market trends, etc, but the more I learn, the more I feel like I just need to KEEP IT SIMPLE. Think The Simple Path to Wealth. I wrote another post about how I’m not cut out to be a stock trader. We max out my wife’s 401k in cheap S&P 500 and international index funds. I’ve fidgeted with Roth-401k quite a bit, but now it all goes Traditional. We max out HSA. The first $2k must be in cash, and everything else goes into S&P 500 index funds. I’m self-employed and max out a SEP-IRA with Vanguard index funds. Seeing a pattern here? Cheap index funds. Mainly VFIAX and VFWAX. Pretty boring, right?

When we get to about $200k in retirement accounts, I’ll probably only contribute to retirement accounts up to the amount of employer matches. I don’t have a lot of science into the tax implications of that decision. $200k by age 35 will likely mean about $1.5 million at age 60. And I want enough money to live off from ages 35-60, almost as much as I want money for 60-100.

I also like to invest in real estate. The last few years in my local market has seen a greater increase in home prices than rental rates, making it difficult to find properties with what I think is a satisfactory return. You can read my post about this, but in short, I’ll buy rental properties if I expect my annualized return on capital to be greater than 10%.

What’s next?

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After hitting FI, we expect to buy a travel trailer or Uncle Rico van and hit the open road.

Camper on Beach

Although I hope it’ll more-so resemble this: We’ll travel until we decide we want to do something different. We have stockpiled hotel, airlines, and other travel points that could keep us going if we tire of the van life. Baby #1 is on the way. I wouldn’t be surprised if we have another by the time we hit the road. We’ll see how we’re feeling, but maybe camper life won’t last too long.

In the present day, much of our travel is vacationing, where we are rushed to see the sights and squeezing in activities before returning home to the grind. One of our hopes during the slower-paced travel is to discover if we want to set roots in a different state or country. It’s rare to be able to thoroughly vet lots of locales, before making a decision on where you want to stay. If we find a cheaper place to live, our money would go further. If it’s more expensive, we may want/need to return to full-time work for a few years to make that a possibility. Either way, I’m certain we’ll get sick of full-time travel. When that sets in, we’ll likely settle somewhere. Maybe returning home right where we started.

Wherever we settle in, we’ll be very deliberate about spending time on things that matter to us. That could mean a job, new business, civic involvement, volunteering, kids’ activities/coaching, religious activities, or personal hobbies. 

I have lots of hobbies and bucket list items I expect to devote more time to. Maybe they will produce income, maybe they won’t. I think I’ll be able to feel productive either way. I’d like spend more time playing basketball, playing the guitar/piano, learning Spanish, and learning computer programming. 

How I’ll access my money

Here’s my order of spending in FI:

  1. Any business income: I’m a Realtor, so I may still have an occasional sale, commission splits from referred away business, or lease renewals. If a website produces income or another hobby produces income, that’ll be included in this bucket.
  2. Rental Properties: I’ll spend the profits from my rentals. I’ll keep a few thousand in the business accounts as reserve for repairs and vacancies, but the rest will go towards spending.
  3. Non-retirement trading accounts: I’ll take the rest of what I need from my stock portfolio. Haven’t decided if that means taking dividends first or just withdrawing a defined amount. Future me will solve that mystery.
  4. Roth IRA: If numbers 1-3 are insufficient, I’ll have the ability to withdraw from Roth IRAs without paying penalties, so long as my withdrawals don’t exceed the amount of my contributions. I don’t see this happening in the first 10-15 years of FI, but maybe I’m wrong. I think I’ll always be happy to know it’s there if I need it.
  5. Traditional IRA/401k: When I reach age 60, I can withdraw from these accounts without penalties. We won’t touch this before then.

Closing

That’s the plan. Does my logic seem flawed anywhere? Am I missing anything?

4 thoughts on “My quick plan for financial independence

  1. Great post. I need to write my plan out like this.

    I’m curious, is your number just for you, you and your wife, or the whole family, and then have you thought about how many kids your number supports?

    Why did you feel the need to increase your number to $1.2m?

    Also, I don’t see any flaws or gotcha’s in this plan but I am curious how you think about some slightly more trivial things like your new truck. Do you count the value of your truck towards your number? It seems like you wouldn’t since you can’t earn off of it.

  2. Good questions…

    I increased my number for a few reasons… 1. I feel like $1.2 mil gives me a little buffer if I really don’t want to work for money at all. I think the extra $8-10k/year (from $1 mil to $1.2 mil) will allow for that. 2. It’s possible we overspend a little in the first couple years if we really travel a lot. 3. If I want a home a little larger/nicer than the ones I have currently, I may need to spend a little more on housing/utilities. 4. I’m not sure how expensive kids will be 😄. May as well have a little extra since I don’t have a good measure on it!

    I’m hoping my number will support the whole family, including 2 kids. We have 7/9 of one right now and expect we’ll have at least another.

    My cars, electronics, furniture, etc aren’t included in my numbers anywhere. We probably have $50k in paid off vehicles right now. If we set out on long-term travel, I suspect we’ll sell one and buy a trailer.

  3. Pingback: The Million Dollar Club: How To Become A Millionaire | Budgets Are Sexy

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