In 2019, I paid off $60,000 of student and auto loan debt and reached a FIRE (financial independence, retire early) milestone called CoastFI. For those who aren’t familiar, CoastFI means that you have enough money saved in your retirement accounts that, if you never saved another penny, you would still have a comfortable retirement at a traditional retirement age, like 65.
My husband John and I reached this CoastFI money goal by the time we turned 25, and we aren’t stopping there. Our take is that everything we do from here on out is only an improvement. Every dollar we save buys us more freedom and flexibility in our lives in the form of time.
The more time we have, the more we can live our life on our own terms. Like last year, when I leveraged our financial position to quit my 9-to-5 job to turn my side hustle, my consulting business and the blog How to Fire, into a full-time gig. I went on to make six figures during my first year of self-employment.
Now, through a series of strategic money moves, we are on track to retire in 15 years, by the time we are 40. Here are the five steps John and I have taken to pursue financial independence and early retirement.
1. We live within our means
We have grown our income substantially since we graduated from college. In 2015, John and I made $73,000 combined while we were working and in school full time. But in 2020, we will earn over $200,000 combined. This is significant increase over the space of five years, but we have never allowed lifestyle creep to influence our money and spending habits.
When we got raises, they never resulted in unnecessary purchases or an inflated lifestyle. On the contrary, we always up our savings rate with an increase in income.
We live well below our means so that we can continue putting as much into savings as possible.
To make this easier, we budget only on John’s income so that all of mine can be saved. We pay ourselves first and monthly savings deposits are a line item on our budget just like any other bill. The deposits are automated into our accounts. That way, we aren’t tempted to splurge on unnecessary things.
2. We build up more liquid savings
Those familiar with Dave Ramsey’s Baby Steps might know that he recommends saving 3-6 months’ worth of expenses in an emergency fund that is not invested in the market. We started with this benchmark while we were still in college and have expanded upon it since.
Our plan is to have several years’ worth of expenses in a high-yield savings account that we can utilize when needed in early retirement. This also will allow us to control when we pull from our retirement accounts, so we’ll never have to sell when we’re not ready to.
We’ll be able to take money out of our retirement accounts before age 59-and-a-half through method called the Roth conversion ladder. We’ll move our money from tax-sheltered accounts like a 401(k) into our Roth IRAs. Then, after five years and before we turn 59-and-a-half, we can withdraw these funds, penalty-free.
3. We contribute the max to our retirement accounts
We are currently contributing the maximum amount to a 401(k) and i401(k), as well as two Roth IRAs and an HSA.
We contribute to a 529 for future children and put money away into a high-yield savings account for emergencies, sinking funds, and extra retirement savings as well. All together, this totals over $80,000 per year.
4. We use self-employment to our advantage
One thing that I have learned is in the last year is that there isn’t a limit to your earnings potential as a self-employed person. So much of side hustle success is predicated on the time you devote to it. And staying focused on our business goals has positively affected our personal financial goals.
I am always looking for ways to bring on new clients as well as expand the work we do with our current clients. The more we earn, the more we can save and invest, which in turn helps us reach our early retirement goals.
There isn’t a limit to your earnings potential as a self-employed person.
5. We grow passive income streams
Over the past couple of years, we have put our focus on building income streams, both active (our client-facing business) and passive (with the blog). How To FIRE is growing, and with that growth comes more passive income from ads, affiliate marketing, and product sales.
Right now, we are investing all of our earnings to grow the business in hopes that one day it can be a substantial income stream. In the future, we also plan to purchase rental properties to further our passive earnings.
We track our progress monthly, and these steps are getting us incrementally closer to early retirement. We’re confident that these money strategies will get us what we have always wanted: The freedom and flexibility to live life as we choose.
9 Ways to Generate Retirement Income
Are you getting closer to retirement? Here is a list of retirement income strategies to mix and match to create the cash flow you’ll need.
Certificates of Deposit and Other Safe Investments
A CD is a Certificate of Deposit issued by a bank. They are usually FDIC insured and the longer the term of your CD, the higher the interest rate you’ll receive.
Pros: Principal is safe.
Cons: This strategy will generate little current income. Income varies with interest rates as CD’s mature and are renewed. Income may not keep pace with inflation. Depending on interest rates, it may require a large amount of capital to generate the amount of retirement income you need. Interest from CDs is 100 percent taxable unless you own the CD inside of an IRA or Roth IRA.
When it comes to choosing between safer investment alternatives, take the time to learn how they could be used for part of your portfolio rather than for all of your portfolio. In this way, you could use other parts to invest in things that are more likely to deliver higher income amounts.
A bond, like a CD, has a maturity date. You can buy bonds (or CDs) now so that they mature at various future points when you are most likely to need the income. There are many types of bonds so you can choose safe government issued bonds, or higher yielding corporate issued bonds.
Pros: Bonds are likely to provide more income than a CD or other super safe option. You can match bond maturities with cash flow needs. If you’re at a high tax rate you can use municipal bonds which are likely to deliver tax-free income to you.
Cons: Income may not keep pace with inflation. Depending on interest rates, it may require a large amount of capital to generate the amount of retirement income you need.
Building a bond portfolio can be difficult to do on your own, so, it is important to understand how to invest in a bond ladder before buying bonds randomly.
Stock Dividend Income
Some stocks (called the Dividend Aristocrats) have a history of increasing dividends each year and some stock dividend mutual funds allow you to invest in a group of these stocks all at once.
Pros: Historically, capital will grow, and companies gradually increase dividends, providing a means for your income to rise with inflation. In addition, many companies pay out qualified dividends which are taxed at a lower rate than interest income.
Cons: Principal fluctuates in value with market moves. Companies may reduce or eliminate dividends during tough times.
It pays to understand how the dividend yield on a stock works before you go searching for yield.
High Yield Investments
Some investments pay out super-sized yields; it may be in the form of private lending programs, closed-end funds, or master-limited partnerships. Be cautious—often higher yields come with higher risks.
Pros: High amount of initial income generated.
Cons: Principal will fluctuate in value. High yield investments may reduce or eliminate their distributions during tough times. Higher yield investments are usually riskier than lower yielding alternatives.
High yield investing can be very risky. Sometimes the extra risk puts more income into your account.
Systematic Withdrawals From a Balanced Portfolio
A balanced portfolio owns both stocks and bonds (usually in the form of mutual funds). Systematic withdrawals provide an automated way of selling a proportional amount of what is in the account each year so you can withdraw from the account to meet your retirement income needs.
Pros: If done right, this approach is likely to generate a reasonable amount of inflation-adjusted lifetime income. The stock portion provides long-term growth; the bond portion adds stability.
Cons: Principal will fluctuate in value and you must be able to stick with your strategy during the down times. In addition, there may be years where you will need to reduce your withdrawals.
A balanced portfolio approach is relatively easy to follow and is flexible enough to withstand market volatility. Study the withdrawal rate rules you’ll want to use to give this approach the greatest likelihood of success.
Insurance companies issue contracts called annuities. With an immediate annuity in exchange for a lump sum deposit you receive income for life.
Pros: Guaranteed lifetime income—even if you live past 100.
Cons: Income will not keep pace with inflation unless you buy an inflation adjusted immediate annuity (which will have a much lower initial payout). If you want the highest payout you’ll have no access to principal, nor will any remaining principal pass along to heirs.
Immediate annuities can be a good way to secure life-long cash flow if you need the highest payout possible from your current principal. Learn the ins and outs immediate annuities before you buy.
The Income for Life Model
This approach uses something called time segmentation to match up your investments with the point in time they will be needed. It provides a logical process for how much to put in safe investments and how much to put in growth-oriented investments.
Pros: Easy to understand and has the potential to deliver great results.
Cons: In its purest form, this strategy entails taking on investment risk, but it could be modified so that you would use guaranteed income products.
The Income for Life Model is a preferred approach for delivering retirement income. This type of model is used to fill in the pieces with a bond ladder and growth index funds. The pieces could be filled in with other options like CDs, index funds, annuities, etc.
Variable Annuity With a Guaranteed Income Feature
A variable annuity is a contract issued by an insurance company—but inside the annuity they allow you to pick a portfolio of market-based investments. What the insurance company provides is a lifetime income benefit rider that insures if the investments don’t perform well you’ll still have retirement income.
Pros: Guaranteed lifetime income that may keep pace with inflation if the market rises. Principal remains available to pass along to heirs.
Cons: May have higher fees than other options—and the fees in some products can be so high that you are forced to rely on the guarantees as the investments are unlikely to be able to earn enough to overcome the costs.
Holistic Retirement Asset Allocation Plan
When you look at all the options available, most of the time the best option is a plan that uses many of the choices discussed. The goal of a holistic retirement asset allocation plan is not to maximize return—it is to maximize lifetime income. That is a different goal than the traditional asset allocation investing mantra of maximizing return per unit of risk.
Pros: A combination of several retirement income ideas named in this slide show is often what is needed to create the ideal income flow for your needs.
Cons: Takes a lot of work to put it together right, but the hours of planning can be worth the effort for months and years to come!
If you’re near retirement, the most important thing you should know is that retirement investing needs to be done differently. You need income for life—not a hot stock tip.
By now, you should be ready to use these techniques in a coordinated way. And always remember—planning is not a one-size-fits-all approach. Your unique circumstances and abilities need to be considered.
Success is the sum of small efforts, repeated day in and day out.
–Robert Collier (1885-1950), American self-help author
It does not matter how slowly you go so long as you do not stop.
–Confucius (551-479 BC), philosopher
Never confuse a single defeat with a final defeat.
–F. Scott Fitzgerald (1896-1940), American author
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