How to Create a Plan for Total Financial Freedom
If you’ve read anything on this site, then you’re probably familiar with the backstory of how we started our race to financial freedom. But for those of you that are new to the site, here’s a brief recap. Very brief.
Husband comes home from work, says he’s thinking about early retirement. Stay-at-home wife panics. Together, they look at current financial situation. Is there any way this family of 5 could possibly maintain their lifestyle without husband’s paycheck? Uh, no. Husband and wife both panic.
After a brief calm-down period, we began to look in earnest about the reality of my husband leaving the workforce. Here is the process in which we laid out our plan for our 6-year race to financial independence.
Step 1. Identify any current streams of income (other than the day job)
We had only one current source of income: the rental of our primary residence in the US. This rental was not by choice. We became accidental landlords when we couldn’t find a buyer for our home in the US before we moved to Canada. We were, however, fortunate to find excellent renters, a retired military couple, a.k.a. a landlord’s dream. They were meticulous house keepers, avid gardeners and they paid the rent on time. Our annual income (rent less expenses) totaled approximately $20K or $1700 per month. The amount varied from month to month due to some maintenance issues, but overall, it remained consistent.
Step 2. Estimate financial needs in retirement
IMO, this is probably the most challenging step, yet the most crucial to get right. At the time we were devising this plan, we had 2 teenage boys and a tween girl, so we knew college costs were coming. And if you’ve ever seen teenage boys consume food, then you know it’s costly. We also knew we would be increasing our automobile insurance costs due to again, teenage boys. Let me pause here to say that, at the time, we had no idea how much the insurance was going to increase. During the boys’ first year of driving, they each had an at-fault accident. We were so blessed that no one was injured in either wreck. Scratch that. I’m pretty sure that I damaged my vocal cords when I saw the insurance adjustment. Our automobile insurance went up to $6K per year. Yikes!
When all was said and done, we estimated that we would need approximately $100K per year in retirement. For details on the exact budget, see The Details of Our Retirement Budget. This amount would allow us to pay taxes, tithe, pay for college tuition and still maintain our current lifestyle. And it was a nice round 6-figure number.
Step 3. Identify any future streams of income
Since the goal was to retire early, any future payments from US Social Security (or Canada’s Pension Plan) were off the table. Ditto for any retirement assets, as we couldn’t touch those without penalty until we turned 59 ½.
We were fortunate to have a defined benefit pension plan from one of my husband’s previous employers. As I reviewed the benefits, it looked like we would be getting $48K per year or $4K per month beginning in June 2020. High fives all around! But on second thought, I decided to call the plan to discuss the benefits. It turns out that the $48K per year, was based on a single life annuity beginning in the summer of 2030! Bummer!
The actual amount of monthly payments varied from $2K to $4K depending on the options selected: single life, joint life with choice of percentage survivor annuity and joint life annuity with 10-year period certain. The payments also depended on the year we started taking benefits. The earliest we could begin was the summer of 2020, with payments increasing until we were fully vested in the summer of 2030.
Step 3. Determine a time frame to increase income streams and meet financial needs
For us, this was the easy step. Since my husband wanted to retire sooner rather than later, waiting until 2030 to reach the full vesting of the defined benefit pension plan was off the table. We decided to base our date on the earliest date we could be begin receiving pension payments: selecting the joint life with 100% survivor annuity option would pay $2K per month beginning in the summer of 2020.
The pension payment, plus the amount from rental income would total approximately $44K per year. Not a bad start since we’d be almost halfway to our goal of $100K per year.
So, we determined with hard work, determination and a bit of luck in the market that we could be completely financially independent by the summer of 2020. At the time, that was 6 years away and would give us the opportunity to strategically increase our monthly income streams to sufficiently meet our needs. That date also coincides with the year our youngest child graduates from high school and our oldest child graduates from college. We would be able to move back to the US, without relocating a kid before they finished high school.
Step 4. Periodically review the plan and make necessary adjustments
We’re now 3 years into the plan with 3 more years to go. So far, we’re on track, although there have been some modifications along the way. For example, we sold the rental property in the US because the timing was right and we wanted to start investing in dividend stocks. See my post on Running with the Dogs (of the Dow.) In an upcoming post, I’ll write about how we came to the decision to sell the property, despite being cash flow positive every month.
This post was intended to be an overall look at how we established our plan and what we’re doing to implement it. I’m looking forward to posting more precise details and providing updates as we get closer to the finish line. I hope you’ll join me on this race and maybe, pick up some knowledge and provide me with some advice along the way.