When I worked through my retirement numbers earlier this month, I was pretty excited to see how things worked out as far as retiring before age 65. I thought that 5 years from now, I might not have quite enough money, but should be in a position to start making firmer plans. I.e. retirement would be affordable just a few years after that.
After a few days, though, I realized that I would like the freedom to leave work sooner. Working another 5 years and then recalculating how much more I’d need to save–this started to sound like an interminable process.
Surely, I thought, I can make things go faster.
The Problem
I thought I already had 25 times my previously recorded expenses, which is the minimum recommended savings for retiring. However, I hadn’t recorded (or accounted for) some significant expenses in that 25 times number.
I calculated I would need to save another $650,000 to cover property taxes, home owner’s insurance, travels, and charitable giving in retirement.
If I had nothing saved, it would take quite a few years (8-13) to save up all that money; but because I have been saving for retirement for a while, I think it will likely take only 5 to 8 years. This all depends on my savings rate, of course, and my returns on the investments I already have saved.
So, this week’s question is: how can I shorten the time to retirement?
Save more
An obvious answer is just to save more.
I’m not sure just how much I can save each year, because until last year, most of my extra money was going to pay off my mortgage. This year… well, this year we have a pandemic, which means the household expenses are different.
I suspect the pandemic will affect whether or not I get a yearly bonus, and how much it might be if I do get one. A pay cut doesn’t look likely right now, but if the pandemic drags on, I would not be shocked if that became an issue.
In any case, here is the table of how long I thought it would take me to save $650,000, given that I have investments already:
As you can see, the chart suggests that it will take anywhere from 4 to 10 years.
If I have $500,000 saved, and put away a respectable $19,500 a year, it will take 10 years.
If I already have $3 million saved, and put away a gargantuan $84,000 a year, it only takes 4 years to get the additional $650,000.
In my case, I can delete the top 2 rows, as I already max out my 403(b) (with the catch up provision since I am over 50), and also contribute to an IRA.
Suddenly this chart only has cells that go from 4 to 8 years.
Looking at the middle of the chart, it is very clear that the more I put away each year, the quicker I will get to my goal.
If I can manage to put away more (work harder, get more bonuses, moonlight, whatever), then I can clearly accelerate my savings.
Given the uncertainties around the pandemic, I don’t feel comfortable setting a hard savings goal. I want to feel comfortable spending money if truly needed. However, setting a default plan of saving as much as possible seems like a good idea. I ought to be able to invest the equivalent of our (former) mortgage principal and interest payments each month, if I decide to.
Earn more on investments
We all know the phrase, work smarter, not harder. That’s what I think of when I think about looking for better returns. After all, earning money on my earnings isn’t supposed to be hard work, so I might as well earn 8%, or even 10%, if I can, rather than 6%.
Here is what the table looks like if investments return 8% instead of 6%. You can see I can hit my goals a good 1-3 years earlier if the market is kind to me.
Of course, getting a higher return on my money usually means investing in riskier or more volatile investments. This might look like investing 100% in stocks, and maybe even concentrating stock choices into riskier sectors.
The other phrase that comes to mind is pigs get slaughtered. I don’t want to risk all my money, I just want a better chance of getting a return than stuffing it under my mattress.
Market returns are something that, on the whole, I don’t have any control over. I can certainly pick investments that will give a lower return (cash, bonds), but unless I do something crazy, the market will return what it is going to return. I am not going to get better returns using stocks.
I don’t know that I am going to change my plans to pursue higher risk investments to boost my portfolio returns, but it is nice to think that if the market continues to go up rapidly, I could retire earlier.
Need less
The last method to shorten the time to retirement, something that is more under my control than the stock market, is to have less to save. That is to say, if I need less money, it won’t take as long to save it.
I decided to take another look at our monthly costs.
Lo and behold, I saw some expenses that can definitely go away once I retire: My private disability insurance policy. Staff gifts. CME costs. Poof! An average of $493 each month gone.
Looking again at last year’s spending, I see that we did actually spend money on travel last year. Since I set my overall savings goal based on the assumption that we hadn’t spent any money for travel, I can take the $434 per month we did spend out of the budget. (I can’t actually figure out how we spent that much money; I suspect much of this was refunded when trips were canceled for the pandemic.)
Voila! Expenses are now down by $927 a month. And that’s before even trying to cut out anything that I like.
Suddenly my savings goal can be reduced.
$927 per month x 12 months x 25 = $278,100. That’s how much less I need to save before I can even think about retiring. I will still have to figure out taxes, realistic home repairs, and health insurance, so I’m not home free, but this is a huge drop in required savings.
If I round up (i.e. err on the side of saving a bit more), I still am talking about needing to save $375,000 instead of $650,000, which is a big difference.
How much of a difference? Here is an updated chart (assuming 6% investment returns, nothing crazy) showing how long it will take to save $375,000.
Just for comparison, here is the chart for saving up $650,000:
I feel much better about working and saving for 3 years, and then reassessing the situation.
Depending on the market, and our savings, I might not yet be done with working and saving. But the opportunity to shave 2+ years off this part of the journey is very freeing.
I am so curious to see what 2023 brings.