When I was a kid, I went to see the original GhostBusters in the movie theater. Looking back, it’s a combination utterly ridiculous and great movie. One thing you learned is never cross the streams:

“Try to imagine all life as you know it stopping instantaneously and every molecule in your body exploding at the speed of light.”
–Dr. Egon Spangler

“That’s bad. Okay. Alright, important safety tip, thanks Egon.”
–Dr. Peter Venkman

Here, we’re going to talk about crossing the streams, and much like the ultimate destruction of Gozer the Destructor (another geeky Ghostbusters reference), it’s good. In the last post we created curves for how much we might need to punch out of our jobs, and have enough to support our chosen lifestyle. Now for the fun part, figuring out when we can get there. We’ll look back at Bucket 1 first, life up to age 59.5.

Bucket 1. Again, this consists of three parts:

• Home Equity. This is the current value of your home (you can use zillow if you need an estimate) less your current mortgage. This will go up every year as you pay down the principal on your mortgage. Since we did not adjust our retirement home for inflation, do not adjust your home value either.
• College Savings. Hopefully in a 529 savings plan where it earns returns tax-free
• Regular Savings. All of your other accounts that are not specific retirement accounts (401k and IRAs are not part of this bucket)

We can project each of these out with time based on the amortization schedule of our mortgage, and an assumed rate of return of the college and other savings accounts. We then add them all together, this might look like the following:

Bucket 2 is addressed in a similar way, and includes 401k, IRA or other retirement only assets, yielding a rate of return appropriate for your asset allocation.

Once we have an idea of our asset growth with time, we can compare that to the needs curves and look at where we cross the streams:

In order to retire, we need to be above both curves. For this example, the most restrictive case is our Bucket 1 money, and indicates an expected early retirement at age 56. This is not guaranteed, in fact there is a LOT that will happen between age 32 and 56 that will change both curves as you get older and life happens. Also, we had to make reasonable guesses for things like rate of return of our investments. But I find this a really useful exercise to compare my current and future lifestyle choices with my current and future savings to see where these choices project. Don’t like the answer? Save more! Or learn to be happy with less in the future! Conversely, maybe the curves are showing a projected retirement well before when you’d like to stop working, possibly indicating that you are not living it up enough in your present. That is sub-optimal use of your assets allocated to your time also–but note, almost no one falls into this group. (Oh no, too much money! Gah!)

I’ve had some earlier posts on figuring out when you’ll be able to retire, taking the traditional route to 65. However, for many people, myself included, that seems like an awfully long time to spend doing something that isn’t first on your wish list when you get up in the morning. If your job does fit this category, fantastic, and the wish to retire early isn’t nearly as strong. But for most people, they’d really rather do something else, which is the allure of early retirement. People in the FIRE movement endorse the idea of retiring at 30 or even sooner! While I think much of this message gets confused and oversold, early retirement is a laudable and achievable goal. Let’s look at a strategy.

One magic number is 59.5. That’s the earliest you can start drawing on tax-deferred 401k and IRA savings. So, it makes sense to break up your assets into two buckets, 1) Money in taxable accounts for retirement life before 59.5–assuming a goal to retire before this age–and 2) Money for life after 59.5 (in tax advantaged accounts). Think of the first bucket as a bridge account since it bridges your retirement date to 59.5 when your true retirement assets become available. For simplicity, I assume Bucket 1 has to contain everything to get me started in retirement, meaning it covers my retirement (preferably without a mortgage), my kids college, and the money I need to live on until Bucket 2 kicks in at 59.5.

Bucket 1. Similarly to the earlier post on retirement, we first need figure out how much we need. This is a curve that represents our needs starting in the present (Retire Today!) and extends into the future, and is the sum of 3 elements:

• Retirement Home Cost. You can use today’s dollars if you are a current home owner since later in the calculation you’ll be offsetting this with your current home equity in today’s dollars. If you don’t currently own a home, you’ll have to calculate this using today’s dollars and inflation, I suggest 2.5%. If you want to rent in retirement, this number is zero, but remember you’ll have to figure the rent into your needed monthly income
• College Funds Needed. My earlier post had a rough calculation you can use for each of your kids, assuming you want to pay their way through school.
• Living costs, from now until 59.5. If retiring after 59.5, this is zero, but otherwise is a little more tricky than the other two. You’ll want to devise a retirement budget to your desired lifestyle, similar to the approach we took earlier. But remember, early retirement means you’ll be paying your own medical insurance without Medicare, not a low cost item. Also, I suggest tweaking this number up based on inflation to the rough date where you think you’ll actually retire. There are a number of ways to calculate the lump sum you need to support this budget, you can simply multiply your budget by 25 (the 4% rule we used earlier, assuming living off interest only) but that is probably a little too conservative for this bucket, knowing you have another bucket behind it. I use the Present Value equation in Excel, so my needs decrease with each year I get closer to 59.5. In total, your Bucket 1 curve will look something like this:

You can always play with the assumptions, but the curve in general gets lower as you age, simply because the time is decreasing from now until age 59.5, so you need less money to live.

Bucket 2. Bucket 2 is simpler, it only takes into account what you need live on, from age 59.5 until….whenever. Here I’m going back to the conservative rule of 4% withdrawal and assuming I have to live off the interest only. This is conservative, but if I don’t adjust my yearly budget for inflation, it kind of balances out. You can also use the Present Value approach used above in Bucket 1. The question we need to ask is how much do we need as a lump sum for any given year of retirement, such that the money will grow to the minimum amount we need at age 59.5? This is the amount saved at any moment in time that we assume will grow to our need at age 59.5 without the need for further contributions (which we aren’t making when retired!). This will increase each year, since each year there are fewer years to age 59.5 (and thus less time) for our money to grow. The bucket 2 curve will look something like this, this assumed an 8% return on assets:

When can you retire? If your Bucket 1 assets are above the needs line and Bucket 2 assets are above the needs line, you are in-line for retirement. (Ha! See what I did there? Graphing humor. Always kills).

But wait, those are some pretty big numbers, you mean if I want to retire at 40 I need nearly $2M in Bucket 1 and half a mil in Bucket 2? For the scenario above, yes, per our assumptions, at least that much. Are the FIRE people accumulating millions by the time they’re 40? Well, no, probably not. The FIRE people are (hopefully) doing these same kinds of calculations and saying “Whoa, those are some pretty big numbers!” and altering their needs way down to get them more reasonable. Maybe their kiddos will go to community college, maybe they’ll live on $30K a year (though I really don’t know how that would work with health insurance), maybe a $100K condo will do just fine. You can do the same if you like, its all about what kind of lifestyle you value, and what kind of time you’re willing to put in for it. That’s different for everyone, but I do have some future advice on how to strike that balance. (FYI, to give you an idea of this impact, changing to the assumptions I just listed is a need of ~$500K in Bucket 1 and ~$200K in Bucket 2, still a big nugget, but a little more reasonable for age 40).

In my next post, we’ll look at where we stand and projecting out when we’ll meet both criteria.