Where Will Our Retirement Income Come From?

The journey towards Financial Independence is all about saving money but what about once you hit your FI goal?  That is when things change and you go from savings mode into spend down mode.  When in the car the other day both Mr. SFF and I admitted that the thought of actually spending our hard earned money was a little terrifying.  Yup, terrifying is the word we both used.  When you are a natural saver, like both of us have been our whole lives even well before starting this journey to FI, the thought of not only stopping saving but spending that hard earned money is a completely foreign and scary prospect.  I think this is part of the reason I am overestimating how much money we will need.  But in addition to overestimating our needs we are also trying to create other income streams so that we don’t actually have to rely on just our investments.

Now I think the term “spend down” might be slightly misleading for us as ideally we don’t want the value of our investments to go down over time.  Once we hit FI we need our investments to not only keep up with inflation but also cover any unexpected costs that could come up over the decades that we will be spending in our retirement.  This is even more important for those of us who will be spending so many years out of the full time workforce.  If you retire well into you 60’s and you haven’t been diligently saving over the years then you will likely be drawing down your money but as we likely have 40 or more years in our retirement we need to make sure our investments are still growing and ensure our needs are covered.  This means either making sure we have more than enough saved in our investment accounts or create other income streams.

So far we have a great income stream from our rental units (3 units between our 2 duplexes).  The rent from these apartments covers about half of our expenses which is absolutely amazing.  This means our investment accounts don’t have to be quite as big as such a large portion of our income will come from the rental income.  I have many spreadsheets to track our FI progress.  Interestingly I have one that estimates when we will be FI without taking into consideration any extra income we might have, like this real estate income.  It highlights green once our investment accounts are 25 times our annual spending amounts (the easy way to calculate the 4% rule).  On this same spreadsheet I have a separate column that does calculate other income sources.  In all reality we will likely leave our full time jobs somewhere in between these two time frames.

We could plan on using just our investments to cover the remaining half of our income needs but we are planning on working part time once we reach our FI goal.  We plan to do things that we like, even if it doesn’t pay all that well, and limit the number of hours to something reasonable so that we still have plenty of time to get out and play and enjoy life.  The most important thing is that we want to be more in control of how we spend our time and not get tied down to a 9-5 job.  I will admit that I like the idea of having something to do periodically that also brings in a little money.  Mr. SFF is going to continue to grow his side business and maybe I will even start to help out even more once we hit our FI goal.  I estimate that this business income will cover approximately 20% of our income needs.  This is likely a conservative estimate as this is based on the current net amount he brings in from this business but once we don’t have full time jobs we will have more time to dedicate to this side gig and should be able to bring in more money.  But I would rather under estimate income and have a little extra play money than overestimate and feel strapped for cash so all of my calculations use just the current net income amount.

In addition to Mr. SFF’s business we both might also pick up other work.  If Mr. SFF is able to keep working with one of his current clients where he works only around 5-10 hours per week this will also put a little dent in our income needs.  We also have both batted around the idea of working seasonally for a ski mountain as this would give us not only a little income but also free ski passes which is a great perk.  Depending on how much we are able to earn from these other jobs, it is possible that we will only have to withdraw a very small amount from our investments.  If we are able to earn what Mr. SFF is estimating for his future business earnings, it is possible that we won’t have to touch our assets at all.  Although this might be possible I would rather play it conservative so most of my calculations are not quite so optimistic.

Now I suppose you could look at this situation with all of these part time jobs and say that we would not actually be “retired” as we would be working some hours.  But many retirees, regardless of age, do something in their spare time so why not make a little money while you are at it?  My old boss who just retired in November of last year (at the usual age of 65) is even picking up little jobs here and there just to keep busy.  I think this part time work might also be an easier transition to our new way of life.  It would appear from the outside that we still working and supporting ourselves instead of just being ski bums and we would have something to do to keep us from going totally stir crazy as you can only ski/snowboard/hike/play, etc so many days in the week.

Here are some charts showing estimates of our income stream once we hit our FI date (in 3 years) and some details as to what they show.  These numbers are likely to change but are a nice illustration of how things are currently stacking up.  They include our rental income which I have increasing annually by only ½% per year.  We don’t raise rent every year if we have a responsible tenant who takes good care of the apartment and pays on time so I am conservative here.  Based on our current mortgage payments one property will be paid off in 2038 and the other in 2042 which is why there is a bump in income in those years.  One chart shows a more aggressive income stream from part time work while the other is much more conservative and requires taking a little more from our investments.  I do include social security income at age 68 which is also likely underestimated as who knows what is going to happen to Social Security by the time we get there.  One thing I am not illustrating here is when we will have to start taking Required Minimum Distributions (RMDs) from our traditional IRAs at age 70 ½.  My plan is to do Roth conversions in the first 20 years to provide some income but it is going to be an interesting balance of converting only enough to not jump us up in tax brackets.  I want to convert some so that we have access to it down the road if needed and spread out the tax burden over time which will also help reduce the amount of the RMDs we will have to take down the road.  It’s going to be an interesting game to play to figure out the right amount to convert.  But then again I love doing this number crunching stuff so it will give me another thing to estimate once we hit FI.

According to either of these of these charts we should be just fine.  Even with the higher withdrawal amounts from our investments we would only be tapping approximately 1.5-2% of the values which is well below the sustainable rate of 4%.  On the other hand I am very much aware of how drastically things can change if a big monkey wrench gets thrown at us.  And even in the next few years before we hit our FI date we are likely to have some big changes that will alter how these look.  We are hoping to buy a property closer to the mountains that would be our full time residence and rent out the unit we currently live in.  The interesting thing with this plan is depending on the price of the property and associated expenses, the additional income from the unit rental should cover these new housing costs and leave us pretty much in the same place.

The great thing about these charts is that they give me comfort that we can make this work.  All of our hard work and diligent saving over the years means we can make this a reality, regardless of how much we work in retirement.

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