How We Created a Simple Financial Independence Plan

As I’ve noted previously, we have a goal to retire in our late 40s, and this post elaborates on the details behind our financial independence plan. Even late 40s would be a bit earlier than the traditional retirement age in the United States. Retirement ages can vary depending on what retirement benefit you are talking about. For example, the age you can jump on to Medicare is 65, and the earliest you can pull money out of your 401k or IRA without the 10% penalty is 59.5 years old.

For Social Security, full retirement age is 66 for people born in 1943 through 1959. It is 67 for those born in 1960 or later. (Assuming it is still around.) But, you can see the age jumps around.  Nevertheless, it looks like September in the year Mr BA turns 49 is the goal. And, at this point we are more tied to a number than a specific date since we’d like to avoid having to return to work in our later years for living expenses.

So, What IS Our Financial Independence Plan? 

Now, we aren’t going to share our actual dollars here since everyone’s expenses are different.   Spending in retirement will differ for everyone, as it is driven by different costs of living in different locations ,plus everyone has their own ideas about how they  want to prioritize spending money. And, I don’t want to go down that rabbit hole (…hair cut/colors cost how much per year!? And, that’s just what’s going on in my own head about my own hair!)  Overall our plan:

For the time period of retirement age (a little after when Mr BA turns 49) to 59.5 years old, our plan is to live off of

• Taxable saving in our brokerage and savings accounts 
• Mr BA has a small pension (< $350/month) we’ll start taking when he’s 55
• Leverage the Roth conversion ladder
• Utilize the IRS Rule of 72(t) (SEPP). We’ll need to tap into this rule given we’ve been saving in our 401k for much much longer than our taxable brokerage account
• Being flexible with our spending

For the time period of 59.5 years old and onward, our plan is to live off of  

• 401k and IRA accounts
• Mr BA’s small pension
• Being flexible with our spending
• We have no plans for taking Social Security since the future of Social Security is unclear

Financial independence plan phases.

Roth Conversion Ladder and 72(t)/SEPP

Perhaps you are wondering why we are planning to use both the Roth Conversion Ladder and the 72(t)/SEPP rules to take money out of our retirement accounts. Well, it comes down to how much we’ll be able to save for early retirement in our brokerage accounts before we reach our early retirement date. 

Ideally, we’d like to be able to fund our early retirement years until Mr BA’s age of 59.5 out of our brokerage account and savings. But, it doesn’t look like we’ll be able to put away enough over the next 6 years to do so.  Of course we’ll reevaluate each year and continue to save as much as possible.

But, to mitigate our risk, we are planning to take advantage of the Roth Conversion Ladder to fund the majority of our living expenses in the years Mr BA is age 55-59.5. We can complete conversions from ages 50-54 while we live off the brokerage account and have no income. It will be important to ensure that we don’t convert too much from the retirement account since any withdrawals are treated as income on our tax return, and we’ll have to pay income taxes on the converted amounts. So we’ll convert just under the amount required so our income stays low enough to keep us in the 0% tax bracket on capital gains. 

Then, when Mr BA hits 55 years old, we can look to set up the 72(t)/SEPP for some additional funds as needed (assuming we’ve depleted our brokerage account) and keep it in place until Mr BA reaches 59.5 years old when we can tap into his retirement accounts.  

We also plan to pay for the taxes on the Roth Conversion Ladder out of the brokerage account, so that’s the other thing putting pressure on those funds during the time when Mr BA is 50-54 years old.  I had no idea how much tax planning is involved with early retirement! And, I’m sure tax laws will change along the way, so flexibility will be key. 

Pay Off the Mortgage or Invest?

I’d love to include that we pay off our home before we retire, but right now our plans don’t take this into account but things could change. With the drop in mortgage rates last week due to Coronavirus (COVID-19) and oil prices, we are refinancing our mortgage which will help us pay it off a little earlier.  Right now, our plans have us paying off the home nine years after we retire when Mr BA is 58 years old.

We assume an average 6-7.5% rate of return annually from our 401k, IRA, HSA and brokerage account and 3% rate of inflation. The Trinity Study 4% rule of thumb (25x expenses) adjusted to the 3.85% rule (26x expenses) is also part of our plan.  Some work in retirement which may bring in income would be fun, but we don’t want to have to rely on it for our living expenses.  We invest in broad based index funds which cover the entire stock market and will need to incorporate more bonds index funds when we get closer to pulling the trigger on retirement. Probably when we get within the 5 years range.

Rental Property as part of our plan? Maybe.

We’ve never had a rental property. So we are looking to try that out this year before incorporating it into our retirement planning.  A rental property has been on my radar for a while, but we’ve never gotten serious about making a purchase.

We are currently saving up for a down payment, learning the rules of thumb. Then, applying them to listings we see to check if we can pick out a good investment. We live in a high cost of living area, so are weighing the options of purchasing something locally (where we could be more hands on, but perhaps have not as good cash flow) or, buying something out of town (where we’d have to be more systematic right from the start, and hands off with our management – and perhaps have better cash flow). 

While personal real estate has not been our best investment in the past, I think it could be a fantastic long term buy and hold investment. Plus it would be something we’d have fun maintaining and growing when we have more time in retirement.

Our Home in our Financial Independence Plan

We plan to live in our current house for the long-haul, so we don’t factor home value into calculations.  We have saved money for a home renovation project and hope to make smart choices to make maintenance easier. If our project requires more cash than we’ve saved, we’ll cash flow the difference.  I wish we could wait until retirement to take on this monster renovation project together. Full time! But, Mr BA says things can’t wait that long. I’m looking forward to figuring out this puzzle!

Insurance

Our plan has factored in our current spending and bigger purchases, like a car every 15 or so years.  For healthcare, we are both on our employer plans now. But in the future, we’ve factored in purchasing healthcare on the open market (ouch) from retirement until we can jump on to medicare when we reach 65.  Perhaps, the healthcare climate will change in the future, and we’ll adjust our plans when it does. Healthcare is something we’ll always have to seriously factor in since both Mr BA and I have had back issues that will need to be maintained as we get older.  Of course, we take preventive measures to keep healthy. But, we are fairly active so injuries are just par for the course. 

We don’t plan on purchasing long term care insurance given the costs are so high, but we plan to self insure particularly for this expense.  Lastly, we have life insurance to cover us until we reach financial independence and umbrella insurance as well which we’ll maintain on going.

We believe in being generous and giving of both time and money as part of our plans. In the off chance we have money left over in the END, we’ll have plans for how our legacy should be distributed in our wills. But overall, we plan to live on what we’ve earned and saved.  

Bottom Line

Our financial independence plan isn’t 100% set in stone, however I’ve documented the details for 2 main reasons. One, I want Mr BA to understand our plans. Plus, I think it’s helpful to see how others are structuring their early retirement spending plans. Learning from others financial independence stories and plans have been key to our success. And two, I’d love to know what you think. What are we missing? Leave me a comment below. I’m sure we’ve forgotten something – please point it out! 🙂 
~ Ms BA