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!)