financial independence – Just One More Year! http://www.justonemoreyear.com One couple's story of escaping 9 to 5 until 65 Fri, 15 Jul 2016 13:52:47 +0000 en-US hourly 1 https://wordpress.org/?v=4.5.11 Celebrating Our Blog’s One Year Anniversary http://www.justonemoreyear.com/celebrating-blogs-one-year-anniversary/ http://www.justonemoreyear.com/celebrating-blogs-one-year-anniversary/#comments Thu, 12 May 2016 23:00:29 +0000 http://www.justonemoreyear.com/?p=1318 This is a quick update to celebrate one year ago today that the Just One More Year blog was launched. Hmmm, why am I still working after one year?  How many “one more” years are there going to be for me?  Why continue to work after reaching financial independence?  It might make you wonder why […]

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This is a quick update to celebrate one year ago today that the Just One More Year blog was launched. Hmmm, why am I still working after one year?  How many “one more” years are there going to be for me?  Why continue to work after reaching financial independence?  It might make you wonder why I named this blog Just One More Year if I really did not want to retire within a year.

Believe me; I did want to retire in less than one year.  These are all excellent questions that I will attempt to cover in next week’s post.

Since we are a Personal Finance oriented blog, maybe this is an appropriate image for one year.
Since we are a Personal Finance oriented blog, maybe this is an appropriate image for one year.

Stay tuned next week as I attempt to explain my thoughts around the realization that I have been unable to walk away from the perceived comforts of a steady paycheck.  I knew that I would suffer from the “Just One More Year Syndrome” once we reached the magical and logical point for us to stop work.  It is darn hard to walk away from a nice paycheck at the top of your career.  Especially true when you are in your mid-fifties where the odds of making more money in your career begin to dwindle!

I know my wife and I will both retire early.  For her it will happen by the end of this year.  For me, I am guessing that it is now less than a year from now.  It is interesting because in this post last year I mentioned that by July 4, 2016 I would have arrived:

“This year’s holiday is special for me since it will be the last July 4th Independence Day I spend dependent on an employer for income!  Next year my wife and I will celebrate an entirely new experience when we declare ourselves Financially Independent!  July 4, 2016, here we come – only 363 days to go!”

These darn blogs have a way of making you accountable.  I have found writing down goals has the same effect too.  So now, we have made it to a point that neither my wife nor I need to work for our employers to afford our lifestyle.  I can say that we have partially accomplished the goal because we have not yet actually stopped working.

So why not get on with quitting already and stop working another day filling out TPS reports, receiving the new cover letters (also PowerPoint & Word templates, new reporting systems, processes, etc.) to use as we deflect any work away we can for someone else to complete?  Unfortunately, I think it will come down to an emotional decision for me.  I will get super pissed off one day with my employer and decide I had enough.  That will be the last straw and I will give a one-month notice of my leaving.  I will be building my internal justification with every new stupid task and email I receive.  It will come to the proverbial last straw that broke the camel’s back.

I think I will go ahead and write that resignation letter now to be prepared.

It has been an action packed year!

We have been on a path toward early retirement and reaching our comfortable financial independence level that gives a sense of security.  Reflecting back over the last twelve months, we have had a lot happening in our lives.

  • I started the Just One More Year blog. I posted twice a week for most of that time period and have posted 90 articles counting this one today.  I guest posted on Retire by 40 and Angry Retail Banker.  We had the opportunity to meet Steve and Courtney at Think Save Retire and Abby and Tim at I Pick Up Pennies last December in Phoenix.   Steve Miller and ARB guest posted on our site.
  • We took our house off the market after nine months with no luck listing it with a realtor. Important lesson:  Houses are not liquid investments – it can take a while to sell them.
  • I celebrated as my oldest daughter graduated from college and got married in September.
  • My youngest daughter graduates from high school in three weeks.
  • Through word of mouth, we sold our home to a co-worker’s parents. We had numerous inspection issues to fix as part of the sale that took time and money.
  • We nearly upsized to a McMansion in a different city located 20 miles away. What the hell were we thinking?
  • We became debt free!
  • We downsized into a smaller place and have been remodeling for the last five months! We are only three of four weeks away from finishing.
  • I celebrated my 55th birthday in style.
  • I have begun focusing more on my health by walking at least 10,000 steps each day and eating a healthier diet.
  • I booked non-refundable tickets to Germany for September to visit family and friends. I have been studying half an hour each day to improve my German speaking skills.

Thanks for reading!

There are several upsides to writing about various topics on your own blog.  You begin to meet and know other bloggers and readers that can relate with your situation.  I do not consider myself a natural writer; it is often difficult to string my thoughts together into a post that conveys my ideas.  I would much rather talk.  I have been invited by two blog sites to do a couple podcasts that will give you a chance to hear my voice.

What does the next year look like?  That is a great question!

I have already found that my focus has changed once we became debt free and built up a large cash emergency fund.  I believe I will be discussing more lifestyle design and travel related topics as we wean away from our employers’ clutches.

It is amazing how quickly the last year has gone.  Thank you dear readers, for visiting our blog site, for emailing me your thoughts, and commenting on our posts.  I appreciate your support!

 

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Step 6: Achieve Financial Independence http://www.justonemoreyear.com/step-6-achieve-financial-independence/ http://www.justonemoreyear.com/step-6-achieve-financial-independence/#comments Fri, 11 Sep 2015 00:10:33 +0000 http://www.justonemoreyear.com/?p=747 This article is the sixth in a series of seven that discuss our approach to reaching financial independence, and determining key criteria for success. If you have not already read the fifth step, about becoming debt free and celebrating freedom, please take a minute to visit that post. This article will discuss how to determine when […]

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This article is the sixth in a series of seven that discuss our approach to reaching financial independence, and determining key criteria for success. If you have not already read the fifth step, about becoming debt free and celebrating freedom, please take a minute to visit that post. This article will discuss how to determine when you have reached financial independence before retirement.

Achieving Financial Independence
Achieving Financial Independence

To recap, in Step 1, we outlined the many benefits of setting up a budget to take control of your financial life. In Step 2, we discussed the reasons it is important to have a side hustle and create a passive income. In Step 3, we covered the need to plan for replacement and maintenance costs in the journey toward financial independence and retirement. In Step 4, we explored the concept of “test driving” living on less income. In Step 5, we reviewed the importance of becoming debt free and the impact it has on financial independence and retirement.

These steps illuminate that if we do not manage expenses and design income sources independent of work, we may be choosing a long and rough road to financial independence. Now we’ll take a look at how much money is required for financial independence in our early retirement plans and how to know when we have succeeded.

Your spending will determine your Financial Independence Number.

Knowing your spending is crucial to determine your Financial Independence Number. If your spending is unknown, inconsistent, or simply out of control, it is difficult to determine how much is enough for retirement. Following a detailed budget and tracking your spending, as described in Step 1, provides a roadmap to your expenses and lifestyle.

“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to.”
“I don’t much care where –”
“Then it doesn’t matter which way you go.”
Lewis Carroll, Alice in Wonderland

To become debt-free requires following a budget, saving, and building a passive income stream… each requires discipline. Without having learned to live within one’s means, planning for financial independence is nearly impossible.

Predicting your Financial Independence sources of income.

It’s important to invest and set up future sources of income, such as:

  • A passive income stream.  This could include rental real estate, dividend income, stock investments, and bonds.
  • Savings.  Savings accounts and funds set aside for specific purchases.
  • Part-time work.  This could include part-time, contract or temporary work.
  • Roth, 401k, IRA retirement accounts.  Money saved in employee or individual retirement accounts.
  • Annuities.  The use of an insurance product to create a guaranteed income stream for a period of time.
  • Social Security.  This can be accessed as early as age 62½—or earlier with a qualified disability.
  • Pensions.  A company-sponsored program that could provide additional retirement income; these are, unfortunately, going the way of the dinosaurs.

Timing of income and expenses are crucial to plan for cash flow.

There is a movement in the United States among many frugal-minded folks to retire quite early. The retirement ages for these people are often in the thirties or forties. The early-retirement crowd will need to plan for living expenses lasting decades without the ability to draw on Social Security or pension incomes. Understanding how your income sources match up with expenses once work stops is important to make sure you do not run out of money before you run out of time.

We expect our spending will be greater in our early years of retirement and decline in our later years. Many of our bucket list items involving RVing and travel are likely to happen earlier in our retirement, rather than later. The passive income and side hustles are initially the most crucial income sources for those years before drawing on Social Security or company pensions.

We presume that once our “travel bug” has run its course, other costs will soon begin to increase. These could involve projects like remodeling our existing home, upgrading to a new home, or increased medical care and more social and community-based activities.

What does your financial independence cost?

We can anticipate our Financial Independence Number, deriving it from years of budgeting and the specific costs we expect in retirement. Here are the tools we are relying on to predict our expenses:

  • Retirement budget. The post-work budget based on normal living expenses.
  • Saving funds. Money set aside for specific spending purposes. This includes taxes, insurance, and an e-fund.
  • Savings due to retirement. This is where you can lower your budget, taking into account what will be saved by retiring (commuting, clothes, cars, etc.).
  • New retirement costs. We anticipate that we may join clubs, gyms, and other organizations.
  • Replacement costs. The costs we discussed in Step 3 to replace those appliances, floors, cars, and other things that wear out.
  • The bucket list. The list of those items important to us—things that we want to do before we leave this planet.

 

The 4% Rule for safe withdrawals.

It is time to grab another piece of the financial independence puzzle. This is commonly referred to as “the 4% Rule.” This rule was established through a Trinity Study using Monte Carlo simulations to determine the probability of your life lasting longer than your retirement account balance. That is always a good thing—to outlive your income!   🙂

The quick and simple “rule of thumb” is you can withdraw 4% of your nest egg balance each year and never run out of funds.

Dianne and I are quite conservative, not the most frugal with our spending, do not plan to receive income for work after retiring, and wish to use a 3% withdrawal rate for our planning. We also have additional income streams that will include pensions and Social Security that we are not factoring into our Financial Independence Number, therefore providing an additional safety buffer.

Several blogs I follow have explained this 4% Rule quite well, discussing how it affects planning. I recommend you check out their articles:

Let’s put the financial independence numbers all together.

The saying goes that a picture is worth a thousand words. Then how about we provide a picture of a spreadsheet? This is a simple spreadsheet created for our income and expense planning. More importantly, we are using it to determine whether certain passive income streams are enough to fund the lifestyle we wish to enjoy in our extended retirement.

Calculating Financial Independence
Calculating Financial Independence

Do you know how much is required to afford your early retirement lifestyle?

We have determined that, for our first 10 retirement years, the expenses will be $51,072 annually. This is a more “lavish” budget than many in the extremely frugal camp would have for their expenses. For us, these numbers include and represent the costs to replace items, take on new hobbies, and allow for our bucket list items. All of those expense numbers are linked to separate tabs of this spreadsheet.*

Note: The passive income balances are not our actual numbers but used as an example to show sources of funds needed to cover our anticipated expenses.

Let’s do some analysis on a couple of numbers as an example. Using the more conservative 3% as a guide, we would need to have saved $278,055 to pay for our bucket-list dreams.

However, using the 4% Rule, we would need only $208,750 set aside $8,350 to cover our annual bucket list costs (25 x $8,350 = $208,750). Notice that the lower the costs in your retirement, the lower the need to have a passive income base.

Pensions and Social Security can have a significant impact on the income estimates. Assuming that you are able to draw funds from these sources around age 62, you will have an additional safety margin in your retirement.

I hope that you can see how the planning can get quite complex trying to match up purchases, travel, and other costs with the flow of income. If we were to go on a YOLO bender the first year of retirement, we would need to dramatically draw down a combination of savings and retirement accounts or—worst case—borrow money. So, we need to work out a smooth path to enjoy the activities we plan for the rest of our retirement.

Bottom line: If the balance of your passive income source today is greater than your estimated post-work expenses, you have reached financial independence.

Why not simply use FIRECalc or other online retirement calculators?

Many financial retirement calculators look at only a few items in the early retirement calculation, such as your age or number of years you expect to be in retirement and the balance of your retirement accounts. They often ignore passive income, other income sources, and the timing of those funds becoming available to you. All these variables need to become part of your model, to help determine if your nest egg is enough and to provide some additional clues about the timing of the income needed to support those expenses.

In the example provided, we estimate that, without Social Security and pensions, our balance needs to be $1,584,198 for a 30-year retirement. Using those numbers, here are the only three inputs required by FIRECalc.

FIREcalc Retirement Input Numbers
FIREcalc Retirement Input Numbers

The FIRECalc Results

Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.

FIRECalc looked at the 115 possible 30 year periods in the available data, starting with a portfolio of $1,584,198 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 115 cycles. The lowest and highest portfolio balance at the end of your retirement was $539,751 to $10,110,900, with an average at the end of $3,914,153. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.

 

FIREcalc Retirement Results
FIREcalc Retirement Results

Note: FIRECalc bases its estimate on a portfolio of 75% stock index and 25% bond funds, with a 0.18% fee to the fund.

The results indicate that after drawing $51,072 a year and adjusting for inflation we will have an ending balance from $539,751 to $10,110,900. Wow! It appears that we have all that is needed if we stop working right now. Can that possibly be right?

FIRECalc, like other calculators, does not necessarily allow for multiple and diverse income sources such as business income, side hustles, part-time work, pensions, and annuities. The challenge for me is how do you place a value on rental real estate? I have based our own personal calculations on what the safe annual cash flow will return from those business operations. Retirement calculators have difficulty allowing for multiple passive income streams, periodic expenses, and early retirement scenarios.

We created a model to determine THE number.

We now know where the income is coming from and what the anticipated expenses are for a 30-year retirement. The spreadsheet is a model we created to indicate how one knows when he or she achieves financial independence and the impact later, when additional income sources such as Social Security become available.

Factors in Financial Independence
Factors in Financial Independence

We determined how much is enough. In this case, $1,584,198 is required to pay for a $51,072 a year lifestyle. We have smoothed all these numbers out for replacement costs, bucket list items, and have not considered the effects of inflation. These estimates are derived from a conservative 3% withdrawal rate. At a 4% rate, we would need $1,201,800 set aside today to reach the Financial Independence Number.

The example we provided shows that we have enough to retire based on either a 3% or a 4% withdrawal rate with a zero percent chance of running out. Why not retire now since the examples state financial independence has been achieved?

We will have the opportunity to review this in our article regarding what it takes to make the final leap toward retirement. Please check back for “Step 7: Retirement” next week.

 

What tools or processes are you using to determine if you are financially independent? Have you considered the timing of income sources and expenses in your retirement scenarios?

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Celebrating Independence and Personal Freedom July 4th http://www.justonemoreyear.com/celebrating-independence-and-personal-freedom-july-4th/ http://www.justonemoreyear.com/celebrating-independence-and-personal-freedom-july-4th/#comments Fri, 03 Jul 2015 00:05:24 +0000 http://www.justonemoreyear.com/?p=295 Every summer, we have the opportunity to celebrate our country’s independence.  For me, I am grateful that I was born in the United States, and for the independence we have obtained as a nation.  We live in a wonderful time of innovation, technology, and new personal freedoms.Our forefathers spoke for us as a nation when […]

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Every summer, we have the opportunity to celebrate our country’s independence.  For me, I am grateful that I was born in the United States, and for the independence we have obtained as a nation.  We live in a wonderful time of innovation, technology, and new personal freedoms.Happy Independence DayOur forefathers spoke for us as a nation when they declared our independence from Great Britain.  This was accomplished through that famous document recognized as being signed on July 4, 1776.  We have 239 years of history as a country that had its humble beginning with those 13 rogue colonies wishing to remove England from its rule over our states.

Today we still have many challenges that need to be solved; however, in comparison with other countries, these are first world problems.  It is great to be alive today with the freedoms we enjoy and defend in this great nation.

This year’s holiday is special for me since it will be the last July 4th Independence Day I spend dependent on an employer for income!  Next year my wife and I will celebrate an entirely new experience when we declare ourselves Financially Independent!  July 4, 2016, here we come – only 363 days to go!

 

The Constitution and Declaration of Independence envisioned our freedoms and became law

 The resolution of the Declaration of Independence  was Congress’ announcement that the 13 Colonies would become independent sovereign states from Great Britain.  This was the formal statement and explanation as to why the United States should become independent of the British Empire.  That was a big goal for sure.

In 1787 the Constitution was created, setting into motion the separation of the government into the legislative, executive, and the judicial branches.  Just two years later in 1789, we had James Madison propose the 39 new amendments to the constitution that would help define and limit the powers of government.

The first 10 of these amendments became known as the Bill of Rights, which gave us such liberties as our choice of religion, the right to bear arms, freedom from search and seizure, free assembly, free speech, and a free press, just to list a few.  The Bill of Rights was intended to give individual liberties and limit the control of the government.  It is clear that over 200 years ago our new government strived to bring freedoms to individuals that would be backed and protected by the law.

It is unfortunate that it took so many more years to get past slavery, voting rights, women’s and gay rights, discrimination and many other social issues that faced our country.  But, hey, we are moving forward and our country is a “work in progress”!

 

How about our Freedoms with Personal Financial Independence?

As I mentioned earlier, this July 4th is special to me –  the beginning of the last year that we will be bound by personal finance debt!  Next year at this time, we will be debt-free and able to live off our passive income.  To me, this opens up a whole new list of freedoms that weren’t included in our Constitution, Declaration of Independence, or Bill of Rights:

  • Freedom from working for an employer. We will not need to work for an employer just for the sake of collecting a paycheck.  I certainly want to be in the position to determine if my attitude changes toward work.  Who knows, maybe I will enjoy work more knowing I am not stuck.
  • Freedom to work on projects I enjoy without pay. I will be able to choose to work on things that make me happy, even if there’s no money involved.  This could be a win-win for me and for my community.  Either way, I will have more options to pursue work for its own sake and not just for pay.
  • Freedom from debt and our debt snowball. No more talking about debt and how to pay it off.  I hate to even think how much time and energy we spend on this subject.
  • Location independence. We don’t have to stay in one place as a result of being tied to a job.  We can travel and see the world, as much as our budget will allow.  Work won’t stop us from experiencing our travel bug.  The good news is our passive income is location independent and thus can “follow” us wherever we may roam.
  • Freedom from limited thinking. I think the biggest improvement for me will to take on directly my most common excuse for not trying some new experience or project: my work.  With work gone, I will have freed up my time and eliminated the need to wait to try new things.

We are truly in pursuit of our own happiness.  The country set us up to succeed.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of HappinessAbraham Lincoln Gettysburg Address in 1863

 

Have a happy and safe July 4th Independence Day!

I am really looking forward to experiencing our new financially independent life next year.  We are certainly curious how our mood, attitude, energy level, happiness, and other aspects of life will be different from what they are now.

My plan is to reflect back on this post next year to see how my opinion and perceptions of financial independenBe freece have changed.  Will it be nirvana or simply just another day of life?  Will I still be working?  Has a new financial goal now appeared that seems important enough to keep working for money’s sake?

We are counting our blessings with respect to our national and personal independence.  We are grateful for what we can achieve with hard work, help from others, and a free society.  That would be incredibly difficult to do in many places in the world today.

I would like to wish everyone a safe and happy July 4th!  Take care.

 

How about you: do you feel truly independent? Do you have your own declaration of independence?  Are you seeking financial independence to go along with our country’s freedoms?

 

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