Early Retirement Blueprint
I don’t think a single day goes by that I don’t think how I can invest and get to early retirement. The reason I think about my investments so much is I always think there might be another option out there. Because I do not see a blueprint for early retirement I decided to share my own, something I’m calling my Early Retirement Blueprint.
I wrote the Early Retirement Blueprint as more of a business plan, not an executed financial statement ready to be published and audited by the SEC which is important to remember when reading my plan and putting it together with your own. I’m going to touch on each bullet point later in the post and where I am currently in my journey. Most of the research that was done for this was based off of my experiences and what I find to be working in the early retirement community.
Make Sure All Personal Debt is Paid Off
Most early retirement plans are anywhere from 5-17 years in length depending on your savings rate, which is well documented in MMM and ERE. The math comes down that if you want your savings rate to be as efficient as possible you should have all personal debt paid off, this is really financial common sense. If your student loans take away $200 of your monthly income and you pay them off, your savings rate increases and thus the number of years needed to early retirement go down. Young Adult Money makes a good argument against this, but I can’t say it’s one I agree with. He mentions in his article that this is a math problem only, which in this scenario makes him close to being correct. My argument would be too many things are assumed that I can’t jump on board for example: taking emotion out of the equation, you will pay off your loan in 10 years or less, the stock market will give you a 8% return or greater in that time, and lastly I don’t see paying taxes on this money involved in the equation(I understand this could open up Pandora’s box, but either way I didn’t see it mentioned) Very few if any early retirement bloggers mention to keep personal debt(mortgage excluded) and for that reason alone making sure your personal debt is paid off is first. While I do not think you should stop your life financially, I do believe this should be your number one priority. For example a savings plan of contributing to your 401K should be included, but if we are on the true path to ER and 5-17 years, the minimum goal when on the path to early retirement should be a 50% savings rate, anything below this and the term early retirement loses some of it’s luster.
Have a Major Investment That Will be Your Catalyst
There is 2 common schools of thought on investing.
Don’t put your eggs in one basket
Put all of your eggs in one basket and watch it like a hawk
I tend to think both are correct just at different times of your life. I believe that when you start out you should put all of your eggs in one basket and watch it like a hawk. The investment can be of your choosing and your comfort level. After you have put all of your eggs in one basket and made a significant amount of your early retirement nest egg this is when you need to put your eggs in different baskets. I think the best way to relate this type of investment strategy is to compare it to a successful business. When Coca-Cola first started out they sold Coke and that was it, now if you head to their website they sell over 100 different brands. Another example is Google which originally started as a search engine and now do everything, social media, cars that drive themselves, investments in other start-ups, this list could go on for days. Here’s the thing, they started out with one catalyst, one big investment. Coke didn’t start out with 100 different brands instead they built the one most important to their success, branched out to diversify and created other income streams. A few examples of this in the the blogging world are Dividend Mantra with a catalyst of dividend investments, 1500 Days with a catalyst of individual stock investments, JL Collins with a catalyst of Index Funds, and Afford Anything with a catalyst of real estate. Great examples of a major investment and having a catalyst, they put all of their eggs in one basket and watched it like a hawk.
Have a Secondary Investment(s) That Will Bring Passive Income
This is the one that goes under the radar so often. Having that initial catalyst investment is so important but like any good business all of their income does not come from one source, it’s just to large of a risk. The most comment investments for early retirement are real estate, index fund investing, and dividend investing. Other sources not so commonly talked about are a small business side income, bonds/preferred stocks, REIT, personal lending (hard money lender, peer to peer, etc), CD’s, Money Market, and many others that could be considered a secondary investment.
Let’s highlight some great Early Retirement blogs that make it known that one investment is a great start but they subscribe to creating multiple streams of income. While Mr. Money Mustache doesn’t openly talk about his investments as much as frugality, savings rate, and many bad-assity references which most of us enjoy he only briefly mentions in his Getting Rich post that he uses real estate, dividend investing, peer to peer lending, and a casual mention of index investing. Retire by 40 has a similar approach to the my the Early Retirement Blueprint method, he mentions dividends, rental income, online income, and peer to peer lending in is 2015 Update. I mention 1500 Days one more time as he is in the process of switching from his catalyst of individual investments(which is rarely found in ER), but even he realizes that tech stocks are a roller coaster ride, but diversification is needed as he looks more to index fund investing and his recent attempt at guerrilla real estate investing, and peer to peer lending. Financial Samurai mentions stocks and bonds, online income, real estate, investing, and even CD’s as his investment of choice(s) which happens to be one of the more conservative approaches I have found, but also appears to be one of the more wealthy bloggers out there.
Diversification comes in many income streams and if you are not using one or many of these I expect a downturn in your future. At this point in our journey towards financial independence we are currently looking at 75% in Real Estate Investment(Equity) and 25% in our Stock Investments of our total Net Worth(which I don’t share because Mrs. Even Steven says so!), which for being a little over 5 years away from retirement I feel good about. Over the next couple years I look forward to getting this closer to a 50% Real Estate, 25% Stocks(Retirement), and 25% Dividend Stocks, Bonds, and Peer to Peer Lending(Online income would be nice as well;) I think if you have more than 50% of your portfolio for your early retirement income you are asking for a kick to the groin and nobody likes those.
Have Your Tax Deferred Retirement Accounts Prepared For Your Official Retirement Age
For some of you this might be a little counter intuitive, while I certainly suggest stuffing your tax deferred investment accounts full during your working days, with our Early Retirement Blueprint approach to early retirement we do not want to rely on one form of income. Also if you take a look at some of the savvy tax deferring individuals they are not relying solely on a 401k/Traditional IRA transfer to Roth IRA to live off of. A couple of my favorites on this topic include the Mad Fientist who talks about the Traditional IRA vs Roth IRA which in the comments get more talk about the small amounts you will need to take out to avoid taxes and the 5 year waiting period on the conversion. The Mad Fientist talks about having at least 5 years worth of individual investments to get through this waiting gap. I’m going to take this one further and recommend not touching any of the conversions to your Roth IRA at all and instead wait till 59.5 to take out this money, it will have more time to grow and also importantly it will act as a bonus of sorts in retirement, I look at this as a fail safe in our retirement approach. Most early retirement bloggers seem to plan retirement in the 35-45 year old range and with most calculations that come up from any study on a 4 percent rule tend to lean towards a 30 year window. Briefly reading observations about the Trinity Study and Monte Carlo simulations there is still a failure rate, what if instead of allowing an entire 30 year window it was condensed to 15 or 20 years, then the remaining 10-15 years are instead supplemented with a Roth IRA full of money, plus don’t forget another retirement only account in the H.S.A which the Mad Fientist details here and I support him with my own emergency account for health agreement. Go Curry Cracker who is officially retired talks about his cash management strategy, while I can’t match what real life experience he has I can agree with many of the points he makes, specifically his talk about 401k / IRA / Roth, a great addition to read if you are more interested on this topic.
I think most of this discussion really goes back to making sure our early retirement income is diversified. Even based off the most simple budget of $2,000 month/$24,000 a year, the early part of your retirement stage will need to depend on accounts other than tax deferred. The only ER blogger/Dividend blogger that I read on a more regular basis Dividend Mantra uses only dividend producing stocks in taxable brokerage accounts, while I think he still uses his online income as a secondary investment, my money is on him spreading out his investments more over time, but as of right a dividend investor would be the closest to an outlier. I still think that this is not the best approach to have all investments in a taxable brokerage account, I’m actually not sure why he wouldn’t take advantage of these accounts while he is working based on the time table I mentioned above with 20 years to retirement age as a baseline, because eventually those dividends and eventual sales of assets will be a taxable gain. I don’t disagree with his method because 99% of personal finance bloggers are smarter than I am, it just doesn’t fall into my suggested Early Retirement Blueprint.
Just a quick note, while I mentioned H.S.A and IRA’s for retirement accounts, don’t forget about pensions as some companies and many government agencies(police, fire, military, government) actually offer them and can add on to your retirement bonus. For some early retirement would just be a bridge to the bigger payday, in my case I’d probably be able to buy an extra 6 pack of beer a month, but I’ll take it, Craft brew for everyone…..well 6 of us at least!
Have an Emergency Fund That Fits Your Comfort Level
First off I want to make clear this is for when you retire early, this is not going through the journey. My plan is to have a revolving door of cash during early retirement, so in my perfect scenario I would defer touching any income until 1 year later. My investment strategy is real estate heavy, but this strategy could be used for almost any investment income. Let’s say your expenses amount to $24,000 a la MMM, in this example I would want $24,000 sitting in my checking account(I find it hard to believe that years from now interest rates will be at almost zero) earning nearly nothing. During the year that we are using the $24,000, the real estate income each month will be put in a separate account to accumulate over the year. For our purposes the real estate income will cover our yearly expenses and any overages that would occur. However since we are following the 50/25/25 Blueprint from above, we will also have additional funds coming into this account. Ideally we would like the 50% to cover 2X our expenses or in this case $48,000, while the additional 50% is reinvested to create more wealth. Even if this is not the case and your 50% covers 1/2 of your expenses, while the other 50% covers the remaining portion, you are still creating a rolling emergency fund that builds in security. We are looking for 1 year’s worth of expenses, but even in a worse case I would recommend 3 months in cash, but it really is a comfort level that needs to fit your individual blueprint. My real estate example relies on cash flow so a large emergency fund would be considered a wise choice, where as a 50% dividend income strategy might feel more comfortable with 3-6 months since companies like Coke and Johnson and Johnson are funding their retirement rather than my house in Chicago.
My Early Retirement Recap
In the Early Retirement Blueprint from above I mentioned many early retirement bloggers out there and some of the strategies they are currently using that are similar in nature to what I have written. I also mentioned a few details about where I am at with my personal Blueprint, but here’s a better picture of what Even Steven Money Early Retirement Blueprint looks like.
- Make sure all personal debt is paid off-I currently have an outstanding student loan that is on goal to be finished by April 2015, I also have a personal loan to my parents that is scheduled to paid off June 2020, however my above student loan was scheduled for May 2020, so I have built in some room for these in my Blueprint.
- Have a major investment that will be your catalyst for early retirement-I currently have 2 investment real estate properties that I consider my catalyst, both properties have equity with one scheduled to be paid off in 2016, I’m holding off on making any concrete predictions for our Chicago property at the moment, but the current plan is for the pay off to be July 2020 aka Early Retirement D-Day
- Have a secondary investment(s) that will bring passive income for early retirement-Currently this is at the very early stages and one topic I think about on the daily. I think the problem is I have not made up my mind on how much this will be factored into my passive income and what is the best for me, I’ll provide more clear thoughts on this later after I get my student loan paid off.
- Have your tax deferred retirement accounts prepared for the official retirement age- What I mean by this is when you turn 59.5 these accounts could take over in case of failure of your major investment or secondary investment. My plan is for this to be a bonus income during the later stages of retirement. Because this is considered a bonus and/or fail safe during our early retirement this is an ongoing contribution, we are working together to make this contribution higher each year, 2015 will be one of the best.
- Have an emergency fund that fits your comfort level-My goal for this to have a revolving account that has 1 year’s worth of expenses, during the year I will use this money for every day expenses while my passive income builds for the following year. This also is in the early stages of being built up while we pay down our house and create a larger amount each month to build to our current comfort level.