Posted by Dave on August 19, 2014
An early retirement plan is an inherently risky thing to take part in. The risk in following through with the plan is that money will run out before you are readily able to make more of it, but there are still bills remaining to be paid. On the other hand, there is the risk (although less detrimental) that I could be one of those guys that drop dead at 52, while walking up a steep hill, or shaking my fist at a bunch of punk kids to get off my lawn.
My wife and I live fairly cheaply – beyond my golf habit and my wife’s desire for warm vacations, we really don’t have expensive lifestyles. Beyond the possibility of health problems causing significantly increased monthly expenses, I wouldn’t expect much in the way of lifestyle inflation to take place.
I like measuring sticks to show progress. In the past, I have written about slowly knocking off individual bills through investment returns – slowly taking chunks out of monthly expenses until they’re all taken care of (with a buffer). From my standpoint, it will be difficult to tell myself to keep working (especially on a full-time basis) at the point when all of my annual expenses are taken care of. The risk at that point will be that my investment portfolio gets wiped out and I’ll end up sitting in a dark, cold house eating beans and rice.
I’m sure I’ve read this somewhere else, but I’m not sure who to attribute it to, but living off a portfolio of 20+ diversified stocks and bonds does seem to be a lot less risky than my current dependence on a paycheque. Even though this pay has been continually deposited for over a decade, and I don’t expect it to end, it is dependent on me continually showing up and working for the next 10 or so years.
If I have adequate cash flow to cover my lifestyle at age 45, with enough of a buffer built in to cover major expenses within a diversified portfolio how much risk exists? If, for example, I have $750,000, yielding annual returns of $25k, and my household expenses are only $20k – should I work until I get to $1 million?
How long would you stay working? How did you arrive at your comfortable “exit number” ? Did you err on the side of caution, or plan on exiting the workforce as quickly as possible?