The Wealthy You #4: Considering Post-Retirement Needs

Hey everyone,
Anyone else watching the football game? Close one tonight. So in my last post I finished by mentioning that you could count on other factors to improve the results of your financial independence calculations. We are going to dig into those and built onto the example we started in that post.

Mortgage Payments

If you are currently paying down a mortgage on your house, you will want to finish paying it off before thinking about early retirement. Once those payments are gone, the required percentage of your pre-retirement income required post-retirement will be significantly diminished. A big mistake that most people in today’s society make is to buy a house that is too big for their needs and too much of a financial burden. If you are able to find the cheapest property that will make you happy and fulfill your main needs and pay that property off over your capital accumulation period, it will make achieving financial independence much quicker.

Student or other loans

I am still paying student loans now, and they eat up just about 12% of my after-tax income. Unfortunately, I have 6 years of payments left. While some people might want to pay it off as soon as possible, I prefer to take advantage of the low interest rate I pay on that loan and save/invest more money. That being said, this 12% of my income won’t be needed anymore once this debt is paid off, so that’s 12% that won’t be needed for financial independence in the future.

Kids

Kids are obviously a big one. There’s a reason most people wait for their kids to be off to college, or even joining the workforce, before they retire. If you have kids and they will be able to take care of themselves by the time your plan on leaving the workforce, you will want to take that into account in your calculation as well.

Back to our example

We will stick to the one scenario going forward, where you earn 65k, live on 45k and save the other 20k, inflation is 2% and your average returns are 8%. This rate of return is arguably high, but it is definitely achievable with an aggressive risk profile and a bit of cooperation from Mr. Market.

In my previous post we calculated that assuming 4% annual withdrawals you would need to accumulate $1,125,000 in 2019 dollars to reach financial independence, which, using the assumptions above, would take roughly 26 years. Now let’s see how this changes once we include the items above.

Let’s introduce the following assumptions: you currently pay 5k per year for mortgage payments, and 8k per year for your children. Once those are expenses of the past, you will only really need 32k to maintain your current lifestyle. Now you might decide to increase your standard of living and go on more vacations and so on, but for the purpose of this example we are only concerned about maintaining the same purchasing power post-retirement as you had pre-retirement.

So, 32k a year. Again, assuming 4% annual withdrawals, you now need to accumulate a total of… $800,000 2019 dollars to reach financial independence. This is quite a significant drop from the previous amount of $1,125,000. The most interesting part of this is now finding out how this translates in terms of years. Instead of taking 26 years for you to accumulate the required capital, it will take you roughly 22 years! So what do you know, financial independence is actually 4 years closer than you thought. 4 years is a lot of time to do what you love to do instead of going to the office every day. You may have expected a larger decrease in the number of years; the reason that isn’t the case is that much of the capital accumulation happens in later years due to compounding. Still, 4 years is pretty solid if you ask me!

I hope this helped give you guys some more motivation to begin your journey to financial independence. If you enjoyed this post please comment below and resteem to share the knowledge!

Enjoy today,
William