Posted by Tim Stobbs on October 13, 2010
Occasionally I sit down and reflect on plan to retire at 45 and wonder if I’m going about it all wrong. Why? I know there is a significantly hole in my plan. I assume during my calculations that I never earn a dime of money again after I retire despite the fact I do intend to do some work. I even found out the other day that my wife is toying with the idea of continuing to do some work once we are financially independent. So the question becomes am I doing this all wrong because of a false assumption?
Perhaps the way I should be looking at my savings if the liberation from having my day job (but not all work) and treat the money as a giant version of an income stabilization fund. That way my savings would have just two phases: money for actual retirement around 60 and then backup money for the years that we don’t earn enough to cover all of our expenses.
So in that case let’s say I need about $200,000 for actual retirement (I’m picking round numbers out of thin air here so don’t take the value seriously). Then if my expenses are about $25,000 a year, an additional $250,000 would provide a giant income stabilization fund. So that fund would be 10 years of completely not working or 20 years of just earning $12,500 between my wife and I. The advantage about thinking in these terms is you only need your ‘income stabilization’ money to keep pace with inflation since you don’t have to rely on the income generated from that money.
Also because you only need that ‘actual retirement’ money at 60 you don’t need to save the full $200,000 before you quit your current job. A portion of that can be gained from compound interest over the next 20 years. Obviously you don’t to pick too high of a rate of return in your plan if you don’t save all the money upfront, as that could set you up for failure later on. Yet a modest rate could likely take care of some of your savings for you. So in reality if you earned a 4% real return on your money for 20 years you only need to save about $100,000 before quitting the day job.
So in theory I could get by with a ‘retirement’ savings target of $350,000 rather than double that for full financial independence at about $700,000 in savings. If that were the case I could potentially hit the lower target in about five years. It’s a tempting line of thought to explore.
Yet temptation also exists on keeping working the day job just a year or two more beyond the $350,000 mark. Why? Because at that point every year worked plus compounding interest gains approximately another $100,000 in savings which continues to reduce your reliance on income from a job.
So where is that line in the sand if you choose semi-retirement? On hand you can leave earlier by relying on your ‘work’ more in semi-retirement and the other hand you can reduce your dependence on any work. Which freedom do you want more: freedom from your day job or freedom from all work.