This is a question that I find myself going over on a daily basis. I’m consistently counting up all of our magic beans to figure out what number is right for us. I came up with 3 key questions that have helped me narrow down our magic number.
1. Do we want our investments to cover all of our expenses?
2. What withdrawal will we use?
3. Do we want to pursue part time work?
Now let’s go over each one in some detail to see what our magic number is.
Do we want our investments to cover all of our expenses?
The answer to this question is interesting because it can be divided up in to many parts. Do I want our investments to cover all of our expenses in the first 5-10 years of our early retirement? No. I believe the first 5-10 years of early retirement are the most important for future success; therefore, I plan on having some extra income from part time work for at least the first 5 years. Now after the first 5-10 years have come and gone, I will be much more comfortable leaning more heavily on our investments, but my guess is, being relatively young, healthy, educated, and motivated people Mrs. MBC and I will probably have enough income from other sources (part time work, side businesses, etc) that we will probably be able to continue to just let our investments grow.
The withdrawal rate
I touched on this in my previous post and I stand by my 3% number. I’m a conservative guy by nature and while I think 4% is a fantastic SWR, and considering my retirement will be 50+ years I think it best to play it safe. Now 25 years in to our retirement, we may change this up to be more aggressive, but at least for the first half (25+years) I’ll probably stick close to 3% when/if we need to withdrawal funds.
Do we want to pursue part time work?
I kind of touched on this a little bit already and the answer is ABSOLUTELY! I always joke with my wife that my dream job in retirement is to be a crossing guard for the elementary school behind our house. I could walk to the end of the block, and “work” a few hours in the morning, and then a few hours in the late afternoon giving me the middle of the day to myself. Perfect! Seriously though, we both plan to do some kind of part time work in retirement, and honestly I imagine we’ll be doing some kind of income generating activity for the rest of our lives. The key being, we will be doing things we enjoy, so it will never seem like work.
So let’s break down the numbers
I’ve already established in our March Financials post that I think we can comfortably live off of about 24k per year. I also went over the fact that we plan to implement geographic arbitrage, which will help eliminate the need for a mortgage, property taxes, utilities, gasoline, etc. Our planned retirement date is 5/31/2021 (when my son finishes up elementary school). So with desired spending of 24K and a SWR of 3% we need $800,000 to retire. Of course, since we plan to do some work upon retiring, do we really need to reach this number? Probably not, but we’ll use it just so we can have a goal to strive for.
How much will we have on 5/31/2021?
We will have exactly $950,021.23 on this date. I know this because as The Magic Bean Counter, I’m able to see in to the future. OK, OK, I don’t know how much we will have at the time of our retirement date and honestly it doesn’t matter. Our plans are flexible, and if the market tanks and our returns aren’t what we anticipate then we may decide to work an extra year. On the flip side, if the markets continue to be bullish, we may be able to call it quits by the end of 2020. That said, assuming we continue to contribute to our taxable savings account with Vanguard and my 401k and we earn just an average return over the next 4 years, our account value should be pretty close to the $950,000 mentioned above. Which would of course put us $150,000 over our goal of $800,000 and would allow us to withdrawal up to 28.5k/year at 3% or we could get even more conservative and lower our SWR to 2.53% to meet our $24k annual spending.
So there it is. Our magic number is roughly $800,000. In writing this post I realized we only have 4 years left of full time work! That’s pretty exciting considering I’m only 36!
What’s your magic number?