That’s right. 1,500 days.
Yes, you read that right. 1,500 days until we can potentially retire.
If that name rings a bell, you’re not alone. There are other more famous people out there who have launched websites based on that number and their own calculations. I only point it out because that number came up for me, too. According to the countdown clock on my enormous financial spreadsheet, 1,500 days from today, in June 2020, we should be able to quit our jobs if we want to.
This is what I refer to as QT (Quttin’ Time), a time that Maeby enjoys all day.
Please wake me up to have my meal
What goes into this calculation?
I project out all of our savings based on our predicted income and where our savings will be saved. We (probably) won’t have $1 million in 1,500 days. But I will be 38 years old and will have put in exactly 15 years at my current workplace.
With that many years, I will be able to claim retirement at age 55 and begin getting 16% of my final average salary. Unfortunately, there’s no accounting for inflation. It will be 16% of what my final salary was 17 years earlier. But as I showed in my classic post pitting a defined benefit pension against a DIY “pension,” having a pension at your job acts like a weak pair of golden handcuffs. Saving on your own, you can make much better returns. Especially if you’re using savings to buy rental properties.
And if we wanted to quit our jobs in 1,500 days, that would be how we (potentially) could do it. In 1,500 days, we probably won’t have enough financial assets that they will be worth 25 times more than our annual expenditures. But bring expected rental income into the picture, and we have enough, between income and assets, to cover our 2015 average expenses of $3,000 a month. After the pension kicks in at age 55, we would have more than enough, and we could sell the rental property.
So… Annual Rental Income of $15,000 + Some Withdrawls From Savings + No Debt + Pension Kicking In At 55 = Ability to pay for 2015’s expenses ($3,000/mo) adjusted for inflation, for all time.
I’ve been thinking a lot lately about income during retirement. In the personal finance “blog-o-sphere” it’s always about hitting that financial independence milestone, where your annual expenses are 4% of your total investments, so you can live off of entirely passive income.
That’s a nice idea. But who said you had to rely just on dividends and withdrawls from your investments in retirement? There are other options. Today I’m going to be comparing and contrasting two other options we have available.
The pension
Rabbits: Content without a pension
I work for a huge employer that still offers an honest-to-god pension. So the pension has always been a part of my retirement planning. And so it is for everyone else who works for this employer. In fact, from the way they talk, you’d think they were all planning to be completely reliant on the pension to cover their living expenses!
The talk is always about how many years they’ve put in, or how many years they “have left.” Like it’s some kind of prison sentence. I don’t know if this is an actual reflection of people’s financial standing, or just a misunderstanding of how pensions work, but everyone seems dead set to work at least 30 years, no matter how old they would be by that point.
Hopefully this picture will illustrate how many numbers we’re looking at today
The basic pension rules
Under our pension system, for up to 20 years of work, you get 1.66% of your final salary for each year worked. Once you hit 20 years, you get 2% for each year. And then at 30, it drops down to 1.5% for each additional year. So between years 19 and 20, you get a jump from about 31% to 40% of your income. Then it becomes less lucrative to stay longer than 30 years.
Pensions aren’t paid until you’re at least 55, and there is a penalty if you don’t have at least 30 years at that point. That penalty is reduced for each year you delay taking a pension until age 62, when you are not penalized at all.
But what does it practically mean to take a pension early? Let’s look at someone with a salary of $70,000:
Taking retirement at age 55:
| 15 Years of Service | $12,770 |
| 20 Years of Service | $20,440 |
| 25 Years of Service | $25,550 |
| 30 Years of Service | $42,000 |
Taking retirement at age 62:
| 15 Years of Service | $17,493 |
| 20 Years of Service | $28,000 |
| 25 Years of Service | $35,000 |
| 30 Years of Service | $42,000 |
So, you want to retire early. That’s great! It’s probably one of the best ideas you’ve ever had, so I commend you on that.
Saving up to retire early isn’t a goal shared by many people. So you might be surprised to learn that, for the few people looking to go whole hog in saving for retirement, there is a shocking variety of accounts to choose from! Once you decide to start keeping your money instead of spending it, where the hell are you supposed put it? Under a mattress?
Today we solve that dilemma!
But first, there are a few Golden Rules to follow when it comes to investing your nest egg responsibly that I assume you have to know:
- Buy hugely diversified mutual funds instead of individual stocks. (Something like VTSAX, Vanguard Total Stock Market Fund, and its international cousin VGTSX)
- Make sure those mutual funds charge very low fees.
Diversifying between stocks and bonds, international and domestic, and small and large companies is simple and pretty fun*. But one area I found myself lacking knowledge in lately was the difference between retirement account choices. IRAs, 401(k)s, Roths, 457s, SIMPLEs,.. There are enough acronyms to fill a letter factory!
So I made a little summary for myself of the common options:
| Account | Max Contribution | W/D Taxed As | W/D Can Begin | Penalty on Early W/D |
| Roth IRA | $5,500 | No Tax | Immediate / 5 Yrs | N/A |
| Traditional IRA | $5,500 | Ordinary Income | Age 59 1/2, with exceptions | 10% |
| 457 Plan | $18,000 | Ordinary Income | Whenever | N/A |
| 401(k) | $18,000 | Ordinary Income | Age 59 1/2, with exceptions | 10% |
| HSA | $3,350 | Ordinary, unless for Medical | Whenever | 20% under Age 65, on non-Med |
How many do you have access to? Well, I can tell you right now that you have access to a Roth IRA. Because everyone does. The 457 Plan and 401(k) Plan are only available through your employer. The 457 Plan is optimal for early retirement planners because it lets you withdraw before age 59.5 for any reason, without a penalty.
As for the Traditional IRA, you have access to that, too, because everyone does. But there’s a hook, and it always messes with my head: You can invest post-tax dollars and take a tax deduction for that amount, essentially making them pre-tax dollars, but only if you do not have an employer-sponsored retirement plan.
If you have access to a retirement plan at work, your available deduction for a Traditional IRA starts getting phased-out when your income reaches $52k for individuals and $83k for couples. Oh, and did I mention the $5,500 limit covers your Roth and Traditional IRAs together? The Traditional IRA seems to have the most annoying rules to deal with, but we’ll leave that aside for now.
We had been doing most of our retirement investing in Roth IRAs as a way to guard against tax risk. Our income was taxed at 15%, and by saving in a Roth IRA, we wouldn’t have to pay taxes on that money again. We don’t know the future, but I would be willing to guess that tax rates will go up at some point. And who knows what the income brackets will look like? By investing post-tax money, you eliminate your risk that future tax rates will be sky-high.
But I realized recently that sometime in the past few years, we had entered the 25% tax bracket! So by investing mostly in a Roth, we were essentially gambling that our tax rate in the future would be more than 25%. At this point, I kind of doubt that, and here’s why:
You see, since we manage to live well on only about half of our income, then in the future, if we are only withdrawing that money which we need from our retirement accounts to live on, say $50,000 a year, we will be in the lower (15%) tax bracket. Again, assuming all tax brackets and rates remain level.
So what was I supposed to do? Invest it all in my employer’s 457 plan, or Marge’s 401(k) plan? What about those fees! What’s the best option?? Where are the best returns??? I demand only the best retirement option!!! Continue reading