Updates: New Financial Status Bar & Goals
I’m making another step towards a more ratio-driven way to track our financial progress towards early retirement. This is just a quick recap/explanation of the new status bar.
Emergency Fund
Our goal is to always have a full year of expenses in cash equivalents as our “emergency fund”. (This is not the same as a year of income. Our expenses are much lower than our income.) This is a cushion for a variety of potential events including job loss or other unplanned costs, and allows us to take a more long-term view with our investment portfolio.
Since our emergency fund is relatively large, I try to maximize the yield. If we stuck it all in a money market fund, the yield would be barely above zero. With a bit of work, our cash earns a blended rate of over 2% annually without taking on extra risk. See here for our most recent breakdown of cash investments.
Home Equity
I don’t think everyone should buy a house. I don’t necessarily think it’s a very good investment over time. However, if you are geographically stable, I do think buying and eventually owning a house free and clear can be a solid component of an early retirement plan. My current forecast is to have our house paid off in 10-15 years. Housing is very expensive where I live, so once that mortgage payment is gone, the actual income my investments will have to produce will drop drastically.
There are many ways to define home equity, and I admit I am using a rather generous method of calculating home equity by taking 100% minus (outstanding mortgage balance / original home purchase price). I just enjoy having continuous progress without worrying about my home’s exact market value. See here for my most recent mortgage payoff calculations.
Investment Portfolio
The goal of my investment portfolio is allow withdrawals to support my expenses (minus the mortgage). Again, income and expenses are not the same thing. I expect our required expenses to be less than 25% of our current income. I like to assume a simple 4% safe withdrawal rate, which means for every $100,000 saved, I can generate $4,000 a year of inflation-adjusted income. This may be too optimistic, but again it does provide a quick estimate of progress. My target asset allocation remains pretty much the same as here.
(The actual implementation of my plan will probably require more flexibility. I plan on using some of my money and invest in an Immediate Annuity, as well as vary my exact withdrawal rates a bit with market conditions. Once I reach 67 or so, Social Security will kick in something. No, I don’t think it will disappear, and I don’t expect to be so rich as to not get anything. Finally, I expect to continue my low-demand freelance work and thus maintain a low level of income indefinitely.)
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once again, you deliver a thoughtful and practical snapshot for day to day awareness and ongoing motivation. Bravo! I’ve borrowed several of your methods for our own family’s financial snapshots that i maintain and I’m certain i’ll borrow from this update as well.
Keep up the good work.
Way to go. You guys are in very good shape.
If you are really planning to stay put, why do you care about home equity? Why not just track the amortization of your mortgage, since that seems to be your ultimate goal? That’s kind of what you are doing here anyway, by tracking the % of your purchase price you have paid off. You could use a % if you don’t want to disclose numbers.
Also, I know you have mentioned children in the past. They will probably push your expenditures up a bit from the 25% of your income. Have you given any thought to how that will effect your trajectory? Also, children come with their own significant liabilities, particularly a big one that lasts for four years from ages 18-21. Have you considered starting to defease those? The earlier you start the better, as you know. Once you start doing that you may want to split your Investment Portfolio into a Retirement Portfolio and a separate College Portfolio which has its own time horizon and goal(s).
Thanks for sharing.
Dude, your formatting is all messed up. The right-hand side bar stuff is for some reason now is sitting way at the bottom of the page. I use Chrome…