Early Retirement: What’s our Roadmap?

I’ve been seeing a lot of new articles about early retirees recently who have been clocking out from full time work. Intriguingly, these are folks that are in their early 30′s, mid 30′s and even early 40′s. It’s a topic that has been coming up recently in the Integrator household.

 

It’s no surprise that early retirement articles tend to be really popular. I imagine that there are cubicles full or workers all around the world whose hopes lift each time they read the eye catching headline about the power couple who quit their jobs at 30 and are now living a life of leisure. If only life were that simple.

Unfortunately, one’s own early retirement roadmap is going to be very heavily influenced by a bunch of factors including your age, how much cash you bring in, whether you’re part of a “power couple” and whether you’ve got any dependents who are relying on you not to provide them a life time of Ramen Noodles and Pizza .

Retiring at 30 simply isn’t possible for us (actually for both the wife and I, that landmark has come and gone!). Retiring at 40 still is theoretically possible, but I’m really going to have to knock it out of the park with some holdings in either the growth portfolio or the venture portfolio!. Though given the recent performance of the Venture Portfolio, that could be a distinct possibility :).

Given the likelihood that I’ll miss both 30 and 40 as early retirement windows, I really have my heart set on 45. I think for more and more people in the workforce, an early retirement in their 50′s is increasingly becoming of an option . I’d dearly love the flexibility that a few extra years in my 40′s could provide. It would be great to be able to take some extended vacations, maybe do a spot of travel and enjoy all that life has to offer while still having energy and enthusiasm to do it all.

As the years progress, the odds of some joy-killing ailment increasingly emerge, and all those dreams of doing those things at retirement in your 60′s once you have all this cash gradually dim. I know my wife and I have seriously discussed being able to get to a stage where at some point within the next 10 years we can really look at having the flexibility to walk away if we want to.

I’m convinced that being able to have the option to walk away from it all, if we truly want, within the next 10 years, is a realistic outcome. Here’s where my blueprint from what an early retirement should look like for us

Passive Income

This is going to be the the horse that does the heavy lifting for us in retirement. The combination of dividends plus rental income should see us comfortably pass $65k  passive income within the decade. While it’s a little fear inducing to even contemplate actively living off just this income and nothing else, we have already started down the path of trying to integrate the passive income into our financial plan to see how dependable this income is.

Once this kids are out of daycare and in school, we expect to see a nice expense tailwind that we will ride to retirement. Expense wise, I feel that we should have reasonably good coverage of our expenses with this level of passive income.

There are a couple of concerns that I have with the nature and structure of our passive income however.

Aussie Exchange Rate

Right now, Australian dividends will probably account for almost 50% of the near term passive income. Assuming equal growth of the Australian and non Australian passive income, I’d expect Australian sourced passive income to represent close to 35-40% of future passive income in a decade also.

While such a high dependence on the Australian dollar to fund passive income may have been okay when we had plans to return back to Australia, such a large dependence on the Australian dollar is not ideal or optimal at present, given our plans to remain in the US  for a more extended period of time.

Investment Income Taxation

The beauty about having dividend income and extra back up income in the form of potentially realizable capital gains is the generous taxation treatment of this income. This $60k in passive income is worth more than than a $60k wage income, not only because it can effectively be pulled out at concessional rates of dividend taxation, but also because I won’t have to pay a raft of other taxes including social security and medicare taxes on this income.

At least, that’s the position today. Who know’s what changes future governments may make to the taxation of investment income (both dividends and long term capital gains).

Even in the event that taxation of investment income increases, a $60k wage equivalent will still go quite some way to keep us in good shape.

Retirement & Growth Assets

To pad the passive income kitty a little more, we should have a nice stash of assets in the 401k as well as other growth and venture assets that should be available to be disposed off if required by that time. Maxing out the 401k plus employer contributions should continue to add a steady $40k annually in retirement assets, which should continue to grow over time.

Keeping Busy?

I think the biggest issue that we’ll have to contend with if we are actually able to hit our target at 45 and have enough cash to meet our expense needs is exactly what the heck do we do with all our time during the day. i think that’s one of the biggest challenges for early retirees. Frankly, I can’t see a blog sustaining all my spare time. Perhaps it may mean just shifting to a role that’s part time or just several hours a week.

Although  I don’t really feel like what I’m doing now is actually “work” in the traditional sense. It feels more like an enjoyable passion that I’m able to exercise. Of course, we’ll see if that same feeling survives all the way through the next 8 years. Corporate environments being what they are, that’s highly unlikely. If by some miracle it does however, that would be an interesting question to deal with at that time.

We’ll still have school going kids. There won’t be any real option to just disappear and take off for a few months. That will have to wait till they are in college! The question then really is, what do we do in the time between when they are at school and when they are home. I’m not really the TV type. Starting most, if any new business takes much time and hard work.

Still I guess having the option at the relevant time is the key thing. Hopefully I’ll have more of a solid idea what to do if we are lucky enough to have the option to do whatever we want independent of income and cash at that time.

Post Retirement Location

This is also something that we’ve tossed around. Being out on the east coast of the US takes it toll during the winter, particularly for someone who has grown up with and has a love of warmer weather. In any case, we’re committing to sticking around here for the duration of our kids schooling.

But no way I’m going through an extra winter beyond that if we don’t need to. Heading back to Australia could be an option (the free healthcare sounds pretty appealing compared to a high cost deductible plan, but I would have been out of Australia for an awfully long period by then). Somewhere warmer in the US could be a real option too.

Combining good weather and a low cost of living is probably the ideal combo. It’s a good thing we still have quite a few years still to settle on somewhere appealing :)

Comments

  1. That looks a great game plan Integrator. I like the way you laid out your plans and options. It gives ALL of us food for thought
    -Bryan

    • Dividends provide a tax efficient form of income, which currently provides more bang for your buck. As you mentioned there are preferential rates on dividends today, plus not FICA taxes. Plus, you can move to a no-income state.

      For a married couple today (no kids), $92.500 in dividend income is equivalent to $147,600 in salary income ( assuming no state income taxes).

      Good luck in achieving your goals Integrator!

      Dividend Growth Investor

      • Integrator says:

        Wow, DGI!. I have never done the actual calculation to assess the equivalent gross salary income of tax effective dividend income, but that difference is pretty staggering! I need to investigate the tradeoffs off a no-income state, and what could meet our needs.

    • Integrator says:

      Thanks Bryan. The uncertain thing with planning is knowing whether what you think will be enough is actually really enough, particularly with making a significantly early departure from full time work. I feel like we have a solid enough plan, but it will be hard to know till we get there.

  2. I think $65k in passive income should do the trick! Especially if you have a few years yet to further diversify its sources

    • Integrator says:

      I agree. $65k is more than what we are living off today. With a tail wind from daycare expenses drying up, we’ll have a pretty significant buffer in there. I think if we can’t make $65k/yr work, we’ll probably struggle with even higher amounts than this.

  3. FI Fighter says:

    I’m one of those who wants to attempt early retirement at 30. It may or may not be possible in the U.S… but to keep things simple (literally), and easy, I’m going to attempt it in a cheaper country.

    Perhaps it’s b/c I don’t yet have kids, or my own family, but I’m trying not to overthink or over-complicate the matter. If things don’t work out, well, too bad… I’ll just have to go back to work like everyone else… Only one real way to find out and that’s to try! For those who have more to lose, I can see how this becomes a bigger (and more important) decision that needs to be thought through with the most care…

    Best of luck!

    • Integrator says:

      FIF, 30 would be an amazing achievement. I think back to my own situation at 30, and there’s no way I could have even attempted something like that. I think that flying solo is a definite help, not a burden in doing that. You have only your own lifestyle that you need to control, not 3 or 4 other peoples as well.

      The cost of living in south east asia is pretty cheap. Decent availability of health care across the region as well.

      All the best in achieving your goal, that’s quite inspirational!

  4. Integrator,

    I think $65k should definitely be enough. That’s more than triple what I’m going to attempt FI on. :)

    If you’re looking for somewhere warmer and cheaper I might suggest the northern part of Florida. No state income tax on your dividend income, and you don’t have to deal with brutally hot summers like we get down here in Sarasota. While the winters get a bit chilly, it’s nothing like where you’re at now.

    Although, I’m considering moving back up north. Definitely not looking forward to winters, but I miss my family a ton. It’s tough to live so far away from them, which makes me doubt I could seriously live outside the US for an extended period of time.

    Best wishes!

  5. Integrator says:

    DM, I think $65k/yr should be more than enough to get by on as well. I guess when it comes down to it, we’re still a little conservative (venture portfolio nothwithstanding!) as far as not wanting to burn out resources way too early, but I feel like the passive income, plus other growth assets should be sufficient. Having kids throws an additional element of caution into the planning that I feel we probably wouldn’t otherwise be too concerned with.

    Northern Florida would be an amazing retirement location. I didn’t realize there were no state income taxes there, which is even better! In our case, a potential move back to Australia to retire is obviously made easier with family, but cost of living there is now very expensive.

  6. Great post. Even 55 is early. Just make sure you count for unforeseen expenses.

    • Integrator says:

      NoNonsense,

      Agree on the unforseen expenses. Healthcare, unexpected emergencies can creep up on you when you are least aware. Good insurance coverage and a significant buffer are all ways to hedge that I think. One of the upsides for early retirees is that Obamas Health Care Act has made early retirement all the more achievable with lower cost access to insurance for those not supported by employer plans

  7. Great info, especially the investment income taxation section. And $65K in passive income sounds amazing, best of luck on your way to that goal!

  8. Stephane says:

    Thanks for your nice post.
    Just a few things to consider:
    - when getting older, people usually expect more confort, which often lead to more expenses. E.g. I’m in my 40ies, and now I tend to expect a much more luxurious hotel than what I was 10-20 years ago. I still can go out camping, but there are other occasions where I’m just aiming for more.
    - about choosing a place where cost of life is cheaper, this is a certainly a good idea, but keep in mind that cost of life is increasing just about everywhere in the world. And the differences over time can sometimes be staggering, even on a 5-6 years timelap.

    • Integrator says:

      Stephane, I do agree that we tend to prefer more comforts as we age. I think back to when I first backpacked around Thailand years ago and stayed in budget, 1 star accomodation. There’s no way that I could do that now, even if I wanted to (besides the fact that my wife probably wouldn’t allow it!). We are certainly budgeting to lead a comfortable, yet frugal life within the parameters that are important to us.

  9. Currently, I’m on course to retire at 55. Not quite early retirement extreme but it is still well ahead of the norm. Seeing those trying to retire at 30 and 40 is really quite impressive! In fact, those personal stories have provided me with that extra motivation to push a little harder and hopefully retire before 55. I have to say that I am starting to see that I am gaining some traction in our family’s retirement roadmap as we now have several growing income streams. So who know, 55 is not for another 13 years… a lot can happen from now until then.

    • Integrator says:

      55 is still pretty impressive. Even if we financially manage retirement earlier, I’d still like to keep myself gainfully employed in a more formal capacity till my kids head off to college, after which I’d like to pack it all in and achieve some combo of travel and work, rest and relaxation!

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  1. […] Early Retirement Roadmap – Financially Integrated explains his family’s plan to reach early retirement, what it takes to get there and what to do once you are free. […]

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