Six years ago my wife and I came upon the term FIRE (Financial Independence – Retire Early) and mapped out a course for reaching it. Our plans have evolved since then. For example, we’re no longer thinking of moving abroad after early retirement, but our goals are pretty much the same.
Last year we reached the first goal of FI, yay, and then continued to save for a house while cushioning the retirement accounts. To cushion our early retirement funds, we increased the target amount by a bit after reaching a “lean” FI of 25 times our projected annual spending. We did it because we needed to stay put until other non-financial life priorities are taken care of.
We had a very strong 2017, on the financial front. Now we’re on the homestretch. Folks, this shit is getting real. We’re approaching our FIRE year. Being free from a work schedule is so close that it feels unreal.
So what’s the latest on our FIRE journey?
It’s a great time to do a recap and see where we stand, so let’s start by reviewing our master plan!
Our FIRE funds, which make up the Freedom Fund Portfolio, are in three “buckets”: 401(k)s, Roth IRAs, and a brokerage account. In addition to that, we have the NCF account and those funds are set aside to buy a house when we’re ready. If you count the NCF, we have four buckets to fulfill before we retire. Our buckets are almost 84% full.
Buckets to fulfill by FIRE date
|Name||Actual Percentage||Est. Percentage||Accessibility|
|401(k)s||61.7%||60.4%||5-year waiting period after quitting through Roth-IRA conversion ladder|
|Roth IRAs||3.3%||4.4%||Immediate / Restricted access|
|Brokerage account||1.8%||15.2%||Immediate access|
|NCF (Nuestra Casa Fund)||17.0%||20.0%||Immediate access|
In order to save on taxes, we’ve been maxing out our 401(k) accounts for several years now. We’ve met our target amount for our 401(k)s. This is great news because we’ve been reaching financial milestones after milestones on the backdrop of a bull market. Twenty-six percent of our net worth can be attributed to portfolio investment returns, so it’s been a phenomenal run so far.
However, we know the party will end at some point. Since we’ll continue to max out 401(k)s, if we enter a bear market soon, we’d still have ammunition to keep it around our target number. We also shifted to a more conservative allocation last year to soften the blow on our net worth. Yes, that would reduce our returns for now, but we need to feel confident enough to walk away next year.
A 40-50% drop in net worth (which is all comprised of income-producing assets) due to a recession/market crash would not give us the confidence needed to hang our boots if our assets were mostly in stocks.
We finished front-loading one Roth this year. 🙂 We’re now moving on to front-loading Roth number 2 and have another year to fund them before we say goodbye to the corporate world. That should get us close to our target number. We might even surpass it if REITs do well for the next couple of years. This is where we have our REITs concentration. We can withdraw our contributions at any time, but can’t withdraw the investment gains until traditional retirement age.
This bucket will be the equivalent of roughly five years of spending. Right now we have less than 2% of the funds needed for this bucket! Mamma mia, there’s a lot of work to do here. The reason why this bucket is so low is because we shifted most of the funds that were in this account into the house fund, given that we had more years to retirement. We also plan to fund this with the rental property proceeds after we sell it, so that should add another 5-8% to the bucket.
Our goal is to direct all new after-tax income to the brokerage account after we finish saving for a house in August of this year.
What we’re still trying to figure out is what kind of sub-allocation to have in this account. These will be the funds available without restrictions to fund our first five years of early retirement. We’re still leaning towards having one year in cash and be more aggressive with the rest of the funds. Our funds for this bucket will be tight for the first few years, so we’ll have to proceed with caution as far as spending it.
We don’t want to have too much money in bonds in brokerage because the interests gets taxed as ordinary income. We already have the NCF funds mostly in bonds, so we do have flexibility to use part of it to helps us in an emergency situation. That could help us avoid selling low. It helps to look at all the options available and remain flexible.
NCF (Nuestra Casa Fund)
House? Anyone? We’ve been updating you on this goal on a monthly basis. It’s been great so far and we’re still a little ahead of schedule. We’re kind of pausing during the first quarter to front-load the Roths and will resume shortly after. This goal is very close to completion as well.
Thoughts on our investment returns for the next two years
One thing for sure is that we don’t want to be blindsided by the tail end of the bull market. Everything is rosy now. And while stocks keep rising, we become more cautious. Jack Bogle rationalizes a 4% stock market returns for the upcoming decade. I know nothing about investing, but he knows a thing or two, or a thousand, about it.
As of this writing, I’m in the middle of reading his book: The Little Book of Common Sense Investing. The first edition came out in 2007, but this is a revised version from last year which I strongly recommend.
I’d rather follow Mr. Bogle’s advice, proceed with a nice dose of realistic expectations and continue working on wealth preservation.
That been said, we have lowered our expected total rate of returns on our investments for the next two years from 7% to 4%. We were a little conservative with the 7% and are now even more conservative with 4% since that includes the rental property returns as well.
If we were to get a 4% return on our investments and continue to work until our retirement month, we can expect to see 106% in our four buckets (see table from earlier). Most of that extra 6% would probably end up in our 401(k)s, since we’ll continue to plow money into the accounts until next year and we already met our target. So we’d surpass our target number with a 4% total return after inflation.
Freedom Fund Portfolio returns
Our Freedom Fund Portfolio of stocks and bonds total returns were 17.13% for 2017. That includes dividends. We had to calculate the total returns on our own since the Personal Capital app doesn’t add income return in the chart below. The portfolio now has about a 70/30 mix of stocks and bonds. We’re marching towards a 75/25 mix by retirement.
I was anxious to get more data about our portfolios since the beginning of time and dug a little a further to see how our portfolios have performed. Our portfolios returned a combined 10.22% over the last ten years. I started investing in 2006 and Mrs. Enchumbao the following year. Our portfolios combined also had an unrealized loss of about 37% in 2008 and gained back about 31% of it the following year. It pays to not panic and stay invested when everyone heads for the exit. 🙂
Since equities are up, they keep helping the stock ratio go up, so we aren’t buying as much and are in no rush to get to our target allocation during the first half of the year. They [equities] are working really hard to get us to our desired net worth, so we’re just getting out of the way now and will jump in when they need help.
Mi gente, the puzzle is finally coming together as we match the final pieces. It’s been really helpful to blog about our FIRE plans because the exercises that we go through to draft a post helps solidify our plans.
Things are looking great so far, but I guarantee you that we’ll not have all our ducks in a row. The last few duckies will be wondering around and that’s okay. There’ll be a few challenges here and there after retirement and that’s okay. What is not okay to me is to stay sitting in a cubicle day after day, when we have enough to be free. We need to let our creativity run wild and our bodies travel the world without time constraints. FIRE is a must as soon as we’re logistically ready. It’s coming, baby!
Now, it’s just a matter of continuing to stay focused and reaching milestone after milestone. Mrs. Enchumbao, my lovely type-A other half, loves to check off lists, so we now share a list in Google Keep that she can check off as we complete our annual financial goals. Front-load Roth 1 – checked! 😉
Let’s open the floor to you! What do you think of our plans? If you’re retiring soon, what keeps you up at night about the prospect of retirement?