We’re getting out of the rat race. Would you like to join us?
After slaving away many years for “the man” with no real goal in sight, we’ve decided – enough is enough. We’ve been inspired seeing several people well on their way to financial independence and early retirement (including some of our best friends). So finally, we’ve bit the bullet and crafted a solid plan for ourselves. It’s time to escape to a better life!
That doesn’t mean we’ll reach it tomorrow, but we’re starting to see the big picture of how money can work for us and grow over time. Every dollar of income can be turned into a little soldier that’s out there creating more dollars for us while we sleep!
Here’s how we’re going to do it.
Our Plan for Financial Independence & Early Retirement
There are many paths people have taken over the years to get to a point where you could actually retire early and never have to work again.
These could include any of the following:
- Winning the lottery <— Nope
- Inheriting a large sum of money <— I wish
- Acquiring a sugar-momma or sugar-daddy <— Nope
- Building a business
- Building multiple income streams
- Saving & investing your money over time for long-term gains
See the first two there? If you ask enough people in America how they could possibly retire early, they’ll most likely spit out one of those two answers – which is why they’ll never be financially independent. The 3rd answer one was for fun, but some people unfortunately still find it a valid strategy. By definition, though, that’s actually financial dependency.
The next three involve hard work, sacrifice, and discipline. They can also be combined and are not mutually exclusive.
The bad news is that the average worker today most likely has a retirement plan that consists of contributing a small percentage (maybe 3-5%) of their paycheck to their 401k, throwing it blindly into some fund, waiting for social security, and one day retiring at the normal retirement age of 65* (if they’re lucky and haven’t imprisoned themselves in debt first).
Retiring at 65? Seriously? Let’s see if we can do better with a strategy to accelerate that timeline.
*Currently 65, but now for youngins such as ourselves (born after 1960) — it’s 67
The Plan
When we began our plan in 2015, the maximum contribution for 401ks was $18,000 per person and for IRAs $5,500 per person. A measly 3-5% savings rate wasn’t going to cut it if we were looking to ramp up our savings as fast as we could. Why would we drag out the time it took to get to freedom, slaving away at a job if we didn’t have to? Only maxing-out everything we could at 100% was going to give us the most bang for our retirement buck in terms of tax-savings.
Not paying taxes (legally) is one of the best ways to supercharge your savings rate. Combine that with a few other tactics and now you can live off your gains for the rest of your life.
The main strategy we’re pursuing for early retirement is:
- Lower expenses – The less we spend, the more we can save (We use Personal Capital ← Check it out)
- Save hard to the goal – Save much more than spending (>50% savings rate), goal of 25x yearly expenses (4% withdrawal rule)
- Lower taxes – Lower our taxable income through maxing-out tax-deferred accounts (401ks, IRAs, HSAs, etc.)
- Diversify – Invest in broad-based stock market index (S&P 500) for long term (80-100% stocks, 0-20% bonds)
- Low fees – Funds should be Vanguard VTSAX (0.05% fee) & similar extremely low-cost funds
- Roll old 401ks to traditional IRAs – to gain more control for lower-cost & better fund options (Vanguard)
- Roth IRA laddering – For low-income to no-income years (or early retirement years) begin converting traditional 401ks to Roth IRAs (taxable event) up to first tax-paying bracket (considering deductions & credits) to pay no taxes; wait 5 years, we can then pull out source contribution tax & penalty-free, leaving gains for actual retirement year (59 1/2 – which is also then tax-free since it’s now a roth)
- Long-term capital gains (taxable) – Additional taxable money goes to a brokerage account (with the same broad-market strategy)
- Crash? Convert bonds or cash to stocks – On crash years, sell bonds or use cash to buy stocks on sale
- Crash? Use tax-loss harvesting – Lock in losses on stocks to save on future taxes
- Retirement years? Heavier in bonds or cash (slightly) – for smoother sailing, convert some stock to bonds or cash (80/20 stocks/bonds up to 50/50 stocks/bonds)
- Rule: 4% withdrawal rate – Broad-based stock market should provide 7% returns over the long-term paying dividends along the way, withdrawing 4% per year to live on should sustain a portfolio indefinitely with high confidence (see retirement calculators – FIREsim & cFIREsim)
There are several pieces to our strategy that work in combination with each other. Doing one thing by itself doesn’t help as much as doing several things as the same time or in sequence. This can be thought of as “the whole equaling more than the sum of its parts.”
One main thing to keep in mind is there’s no magic check box on your tax return that can give you early retirement. It’s really just a lot of little things (multiplied by time) that add up to a big deal.
Simplifying with this formula (generally speaking):
(Earning + Saving + Investing) x Time =
Financial Independence
Don’t forget to take this into account — each category inside this formula also needs a solid strategy to get the maximize impact!
Wrapping Up
So this is basically the outline of our plan to financial independence. It is likely to change depending on any lifestyle changes we make, if we decide our goal has changed, new strategies that arise, or even negative unforeseen circumstances like losing a job, but this is what we’re working towards.
Over the course of 10+ years, we could realistically achieve our goal and never have to work again. Like anyone who’s come to this realization, wouldn’t it have been great if we had started this in our early 20’s instead of our 30’s?
Wouldn’t living life on your own terms, free of debt, and being able to travel and pursue your true dreams be worth the effort in the short-term? How about it.
Hey Mr. Saturday, our plan is to get out of the rat-race next year. We have Roths and will be rolling over 401Ks to traditional IRAs. We probably won’t convert those funds so we can keep income lower for Obamacare.
That’s awesome Mr. Groovy! Man, to be that close to leaving the rat race. That must be exciting knowing you’re there and having so many options for the rest of your life.
I like the detailed plan! It is good to have a plan before just jumping in and saying you are going to do it. This way you know what you actually need to do to be able to achieve FI.
Curious – Did you mention how long, using this plan, it will take you to achieve FI? It is a pretty aggressive plan so I would think you would be able to do it rather quickly if you can stick to it!
Thanks Thias! We definitely plan on sticking to it. After the past 10 years of having the roller coaster of layoffs and uncertainty, we’ve had about enough of that.
You’re right, we didn’t put an actual FI date as of yet since we’re still figuring out several bullet points like selling our home vs. renting it, buying vs. renting, more vacations and travel, where we want to live, getting a more accurate long-view of our actual expenses, etc.
In the near future after answering a lot of those questions, I think it’ll come more into focus, but for right now, it could be anywhere in the neighborhood of 7-13 years? I know that’s a large range, but there’s more we need to figure out. The first step was getting the retirement part figured out. Next is, how long! I’d love to know that since it drives you harder towards the goal.
Great plan, Mr. Saturday.
I’d also add tax efficient LOCATION, too. Since you mention having a brokerage account, the investments that historically have the lowest capital gain and dividend distributions should be placed there (ex. VTSAX). On the other hand, the bonds should be in tax deferred accounts like an IRA.
I like to place the most aggressive investments in a Roth IRA as it will be tax free (if the rules are followed, of course) and the most aggressive investments should have the highest long term returns. This really max’s out the tax free benefit.
Keep up the good work!
John
This is the first blog I’ve found my same system to increase ROI for my portfolio; Crash? Convert bonds to stocks – On crash years, sell bonds to buy stocks on sale.
Excellent strategy.
P.S Great site!
Thanks Rudy! I’m sure once you’re in the thick of a crash it’s hard to keep your cool, but as long as that’s the plan, that’s what we’re going to do.
This is a good summary/framework. We didn’t start being purposeful about early retirement until last year, but we had been frugal and saving in general before then. Likely the most important principle is to save more and spend less.
Since then, we’ve been sharing our net worth monthly and we shared some thoughts on our 2018 investing plan here: https://www.smartmoneyandtravel.com/2018-investment-plan/
You seem to be ~ 3 years into the early retirement plan now. How is it going? Any updates on numbers/progress?
It’s nice to see more people taking control of their finances and planning their future. It looks like you guys have the right idea! Yes we’re about 3 years into our progress so far when we started blogging. We don’t post numbers but made our goal July 4th, 2025 so about 88 months from now! We’ve been continually ticking down the numbers and should be right on track. Hopefully we can speed it up along the way with raises and side hustles, but we also want to be careful and be conservative with contingency plans.