Oh what a year it has been! We started on this journey to financial independence a year ago and I am so happy we started down this road. At this point I really can’t imagine going the old route of working until my mid-sixties as I am just dreaming of enjoying my days doing what I want each and every day. And I will fully admit that I have been enjoying the whole process so far.
I still dream daily about what our “retirement” might look like but one this is certain, it will give us freedom. So with this we continue on with our more frugal lives and saving as much as we can. There are still areas of our lives that need some improvement, most notably our food budget, but we are making some great process. We have cut out unnecessary spending and have been making more conscious purchasing decisions. No longer do I go on random shopping trips to my favorite clothing stores just because I want to freshen up my closet. I have plenty of clothes already and we are realizing that buying things doesn’t make us any happier but experiences do. We do have a vacation planned next week and although we are doing this as cheaply as possible, it will cost some money but it will be money well spent on an adventure together (assuming there is some good snow).
Where Do We Stand?
When I started estimating our FI date last year I figured it could take up to 10 years before we could be financially independent. But now as I run our numbers I think that our goal might be only 5 years away. This is insanely exciting news! If we were trying to reach financial independence just on investment assets we would need approx. 25 times our annual spending amount in order to give us a “safe” withdrawal rate of 4%. But as we will be supplementing our income with some part time work (Mr. SFF has a side business he wants to continue to grow) and our investment properties we don’t need as much. And the primary reason our goal date got moved up so much is due to the purchase of an investment property in January.
For year the past 4+ years (aggressively for the past year) we have been saving for an investment property. This money has been sitting idle in a savings account earning only 1% interest. But now that we have purchased this new property this money is finally working for us and greatly improves our passive income stream. This property in addition to the income from our owner occ duplex should cover almost half of the income we will need in retirement. This is HUGE!
Initially our plan was to save and buy a single family home for ourselves once we purchased the investment property but even over the past month this plan has changed (“all plans are soft” as our family would say). The reason for this change in plans is that the rent on our duplex covers the mortgage and part of the taxes so this will leave us much more flexibility as we enter into retirement. This means we can funnel all of our savings (what we were saving plus the additional income from the new property) into our taxable investment accounts instead of another down payment. The reason we are saving this money into our taxable investment account is we will need money that is accessible for the first 5 years of retirement. I would like to double this account value in the next few years and then envision drawing down this account during retirement at a higher rate of around 7% until other income sources come available.
As approx. 85% of our investment assets are in qualified accounts (Roth and traditional IRAs) we have limited access to this money. We will likely use our Roth accounts during the first 5 years of our retirement to supplement our income stream. We can do this as we will be accessing the basis (contributions) during this time and leaving the earnings alone. This, in addition to the other income streams, will hold us over until we can access the traditional IRA money.
Once we hit our FI goal, we will start a Roth Conversion Ladder. What this means is converting a portion of our otherwise unavailable traditional IRA accounts into a Roth IRA. This money will be taxable so it will be important to convert only the amount we need to avoid a unnecessary tax burden. Then once this money is in the Roth we will have to wait 5 years to access it. This is the primary reason we are going to be focusing on increasing our taxable accounts over the next few years.
But How Did You Get to Within a 5 Year Goal in Such a Short Amount of Time?
Although I outlined above how we went from a 10 year time to about 5, I haven’t really gone over what we have done in the past to get to where we are now. Thankfully we have both made a lot of very good financially decisions and stayed out of a lot of the pitfalls that the average American falls into. Here is a list of some of the things we have done right:
- Right out of college Mr. SFF started his 401(k) plan and invested in the stock purchase plan with a 15% discount.
- I didn’t know how to save when I was just out of college but knew I needed to. I have some very boring paper savings bonds as proof. I have been doing 20% to my 401(k) for many years now.
- Neither of us has carried a credit card balance since graduating (I had a small one in college).
- We never lease cars and always pay off auto loans early. Yay, no car payments for years now!
- When Mr. SFF bought his (our) first house he bought one for way less than what he qualified for, using the stock from the stock purchase plan as the down payment. (We moved in together but the house was solely in his name as we were just dating.) The house was a modest split level home and we made modest improvements (DIY when possible) while we lived there. We also made extra payments to the mortgage giving us a lot of equity when we sold 8 years later.
- Our next property was our current duplex where the rent now covers all of the mortgage and part of the taxes.
- As we live in town Mr. SFF started bike commuting. He donated his car 3 years ago so my 9 year old Honda Fit is our only vehicle.
- We have always lived below our means, never trying to keep up with the Joneses.
- Many of our closest friends don’t pretend to be Jonese either.
- The majority of our home furnishings are second hand or family pieces.
- Although I believe in quality, I don’t feel the need to buy the latest fashion trends costing oodles of money.
- We put an emphasis on experiences instead of things.
- We haven’t had cable in 8 or 9 years (honestly, we can’t remember when we cancelled it). We do although have Hulu, Amazon Prime and high speed internet.
- We are both naturally savers.
- We aren’t afraid to buy used.
- We aren’t afraid of a DIY projects to save money (and I actually really enjoy DIY projects!)
- We aren’t afraid of investments or the market. Down market? Great, everything is on sale!
- We discuss our finances all of the time. This is certainly not a weakness in our marriage.
- We set financial goals and work on them together.
So with a solid base and now with these new more frugal changes to our lives we will continue to chug along and hopefully make FI a reality in 5 years or less.