Our 20-point Early Retirement Checklist and FI Milestones
Did you know that Financial Independence has a number associated with it? Rather, it has an equation associated with it. It's X * 25 = FI where X represents your expected yearly expenditures. That is, if Ms. C and I expect to live on $40,000 a year, which seems realistic based on THIS blog post when you consider the fact that we won't have a mortgage to pay (among other things) when we retire.
Where X = $40,000
$40,000 * 25 = $1,000,000
However, we don't want to stop at $1,000,000 - we want a bit of a buffer, so we're shooting for between $1.25 million and $1.5 million. However, for the sake of the example, let's use a cool $1 million. It implies that we can comfortably draw down 4% of our income each year (that $40,000 mentioned earlier) and let the rest sit, continuing to compound and make more money. The rest of our lives should then be about due diligence, prudent money moves, and continuing to do what we wish with our time. You can learn more about strategies on withdrawing retirement money here.
We're steadily on our way in our journey toward early retirement and we've got a lot of Financial Independence milestones we're trying to hit on our way there. We're ambitious and we hope you are, too! Below is a laundry list of items we hope to check off by the time we reach Financial Independence. What do you think?
Pay off all consumer debt + Along with credit card debt, this includes student loan debt. You don't want that hanging over your head. We avoid it like the plague.
Fund a 3-month Emergency Fund + This includes expenses such as medical emergencies, car emergencies, loss of income/job, and other emergencies you may think of. Expect the unexpected, as they say. An emergency fund has a lot to do with peace of mind and prudence with saving your money, so work hard for it. It's worth it!
Purchase a home + Consider purchasing a home within your budget. Don't make the same mistake I did! Purchasing a home is often a prudent move (not always), so let yourself dream about a house that can be a home, and work toward it. It's a big move!
Fund a 12-month Emergency Fund - This milestone can be a tricky one. Some people think that a 12-month Emergency Fund in your savings account is excessive, but let's take it in the context of the Great Recession of 2007 or the COVID-19 Pandemic of 2020 that is happening at the time of this writing. Some people have it worse off than others. There is a fine line here between financial prudence and paranoia. Personally, we probably won't ever have this FI milestone checked off, but maybe you will! We are more likely to give it away and/or put it in our retirement accounts. We don't really like money to sit in a savings account.
Accumulate $100,000 in net worth + This one is a huge milestone, for sure. They say that the first $100,000 is the hardest. Your net worth includes all your assets (minus your liabilities), which includes how much equity you have in your home, the equity you have in your car, the furniture you have, your retirement savings, your savings account, etc.
Reach $100,000 in Retirement portfolio - Just like your net worth, reaching $100,000 in a retirement portfolio can be incredibly exciting. We will continue to invest the same way we have been doing. The growth will be slow and steady, but we know that once $100,000 has been hit, it'll likely compound much faster.
Save for retirement: 5 years of yearly expenses - For us, this simply means about $200,000 based on the time of this writing, but it could easily be $250,000 if we decide to inflate our lifestyle in the future. That's what's so fun about having this based on "years" rather than a set number. We will likely change our numbers after we get married and have kids, but we'll know when we've hit this milestone after more thoughts and analysis in the future. But why 5 years of yearly expenses? For us, it's a gauge and a reminder to look back and see what the last 5 years have been like and see how realistic our projections are for 5 years into retirement. Have we been handling our budget well? What does it say about our future?
Max out allowable ROTH IRA contribution in a single year + In 2019, I was able to max out the $6,000 that was allowed by the IRS. You use after-tax dollars to contribute to your ROTH IRA. You can withdraw your contributions at any time, for any reason, without tax or penalty. What's even better is that earnings in this account grow tax-free, and qualified distributions are tax-free as well. I figured that's one of the best vehicles you can use to grow wealth. Why else would the government only allow you to contribute such a small amount each year?
Max out allowable 401k contribution in a single year - If you have access to a 401k (generally offered through your work benefits), you should take it, especially if there is an employer match. This milestone is tough for me since I don't make enough money, but I think it would be fun to max out my 401k contributions one year in the future. In 2020, the maximum is $19,500. There are tax advantages to strategically contributing to a 401k, but that's for another blog post!
Consistently max out allowable ROTH IRA contribution every year - I think Ms. C and I are well on our way to doing this consistently each year. We are focusing a lot of our energy on trying to do this consistently each year. Since 2019 was our first year to try it, it's hard to say how consistent we will be throughout our lives.
Consistently max out allowable 401k contribution every year - There is a small chance I will make enough money in the future to reach this milestone, but that's far off. It's quite possible we'll never make it, but hey, it's worth pursuing!
Purchase rental home(s) - Ms. C and I have talked about moving to Cincinnati in the future and buying a duplex or triplex. We could live in one part of the house and rent out the other(s)! You may have heard of this being called "house hacking" in the FI community. We love the idea and we hope to have it happen in the near future. Aside from that, it's a dream of ours to have steady income from rental homes. There are really two good ways to do it - purchase homes and maintain them yourself (more work and more income) or purchase homes and let a management property do the work for you (less work and less income). The more houses you are renting out, the more likely you are to take the management property route!
Pay off mortgage(s) - The house I currently own has a little under $200,000 on the mortgage and it's a goal of ours to be completely debt free. It's a great milestone to strive for and it will be a great feeling to have when we own our home outright. With our current plans, we'll likely have to delay this milestone when we move and start over, but hey, such is life!
Reach $500,000 in net worth - We're dealing with big-boy numbers, now! It's basically a great half-way point, even if your FI number isn't $1 million. The halfway point to $1 million is a nice number, for sure. The excitement is growing so much more at this point because the first half of your journey is so much longer than the second half. That's the magic of compounding returns.
Reach half-way point to early retirement - For us, this number is likely $750,000 because we like to be conservative with our FI number. We're confident we could live off of $1 million, but having $1.5 million in the retirement plan is a much safer bet.
Accumulate $1,000,000 in net worth - It's time to celebrate! We're almost there! With all the things in your possession combined with your retirement portfolio, your net worth being $1 million is a milestone to celebrate. How will you decide to celebrate this?
Reach $1,000,000 in Retirement portfolio - Wowza! What a fantastic accomplishment this will be one day. If you didn't celebrate $1 million in net worth, you should definitely celebrate this milestone. But don't go too crazy!
"Lean" FI - This means having enough money to stop working and cutting out the "luxuries" in life. This could also mean working part-time for the sake of insurance, and doing whatever else you want! This might be the perfect thing for Ms. C and I to consider since we have side-hustles. There are so many possibilities. This could also mean that "Lean" FI = $1 million. We'll figure it out when we get there!
True FINANCIAL INDEPENDENCE - If we hit $1.5 million, we're definitely going to retire. We want to spend more time volunteering for charities, volunteering with our church, doing more slow traveling, and so many more things that you can't really do when you're working. This is what we've been working for. This is the goal.
Consider "Fat" FI - This means having extra for the sake of safety. We don't think we'll ever do this, but hey, we might get lucky! But please, if we ever get to this point, please tell us to just give the extra away. We don't need the excess.
Take these milestones with a grain of salt because the fact of the matter is, Financial Independence doesn't just "happen" when you reach a certain number. In fact, we will have to see in the future what $1.5 million looks like in our society. However, I can say that true Financial Independence has a lot to do with how you live your life throughout the journey and the decisions you make when you feel you are no longer tied down to one particular job. It's the feeling of having the power to choose your next steps. I imagine it's a wonderful feeling!
You may have guessed what the + signs indicate on the checklist? They're the milestones Ms. C and I have achieved! We are blessed to be in the position we're currently in. We've worked hard for it and we promise you that we'll continue to work at it. Help us by keeping us accountable! Where are you in your journey? Is there anything we can do to help?
Reach out to us at FaithAndFI@gmail.com and let us know! We'd love to hear from you if you have any feedback for us.
Cheers,
Mr. K