I slept last night so had some rather clarifying revelations this morning:
- I need some actual financial targets that are meaningful. They may be scary, but at least then I can actually feel like I’m making progress towards a real objective and financial security vs an arbitrary number.
- I need a career change. I know what I want to do. I’ve wanted to change into this career since I was 22. It will require a much lower salary for a while and some additional education… a master’s degree would be helpful but it’s also possible to get a certificate and spend time teaching myself. It means I need to plan for this as well to figure out how / when I can afford that pay cut and not mess with my retirement goal.
To start, and to make the career change palatable, I need to figure out that retirement goal number.
- Set a retirement goal: My (family) goal is to have 10k per month (inflation adjusted) in after-tax retirement income at age 65 (assuming my house is paid off or I use proceeds from my house to buy another lower-cost home in cash.)
- Determine 4% rule amount: how much do I need for withdrawals of my accounts at age 65 through age 100? So I’ve read you need 2.5M today to afford 100k/yr expenses in retirement. With inflation of 3% for 35 years, that is a total of 7M needed to retire (when I’m 65.)
- Calculate my current totals:
- IRA Pre-Tax: 523.9 (366.7 post tax)
- IRA Post-Tax: 96.9
- Total 2020: 463.6
- Total 2055 @ 5% Returns = 2.5M
- GAP: 4.5M
- (I need about 1.3M today w/ 35 years to grow 5% / yr to hit goal if I never touch it) or about 836k in additional savings today in my retirement accounts
Now, do we really need 10k a month of retirement spending (in today’s dollars?) I don’t know. Maybe we could live on less. Assuming we want to retire in a HCOL area and travel and pay for my kids to travel with us and pass on some inheritance, I’d like to at least aim for that. I have 35 years to make it happen. If I can make it happen WITH a career change, that’s even better. If the career change will get in the way of that 7M at age 65 goal, then I just want to understand what that means for expectations when I retire. (*Note I’m not including social security because who knows if it will exist in 35 years.)
Right now, we can save about 100k per year in retirement accounts. Some of this is actually going to be Roth, but for the sake of simplicity I am going to count this as all pre-tax (70% of value) to figure out what we will have in retirement when. Once I change jobs, or if my husband gets a FT job, we may have less opportunity to invest in retirement accounts. (*Note, at the moment I’m not including my taxable accounts in this calculation — only retirement accounts. The taxable accounts do change the picture substantially, but the moment I am not counting those as they are basically my house payment put into the markets vs into paying off house.)
- Calculate my future totals (2022):
- IRA Pre-Tax: 723.9 (506.73 post tax)
- IRA Post-Tax: 96.9
- Total 2022: 603.6
- Total 2055 @ 5% Returns = 3M
- GAP: 4M
I need to spend some more time with these numbers because right now, even with the ability to put 100k to retirement accounts for the next 2 years (which is also unlikely as I’m probably going to change jobs in early 2022 and/or go to school so will have a gap in savings) then I don’t see how we’re going to hit the 7M goal at 5% per year return.
The picture looks very different if we can secure 8% YoY return with dividends reinvested as well. With 603k invested at 8% YoY for 33 years (assuming after 2022 we don’t invest a dollar more in retirement) we would have 7.6M(!!!) when we retire (and it would be more because a chunk of that is pre-tax.)
This tells me that it’s very important to hit goal of having 603k in my total retirement accounts by 2022. It also tells me I need to then hire a good CFP/CPA to figure out a strategy for future investments and conversions–because too much of my retirement money is tied up in pre-tax. I want to work it out where if I go to get a master’s degree for 2 years I can do some conversions then (when we have very low income) so that at the end of the day we actually are cancelling out the loss of income through low-tax conversions.
That said, I do want a third kid, so chances are I will be working in my same career (although a different company) through the birth of my third child and at least the first year of their life. Then school? I don’t know. That’s going to be a while. But it also means the opportunity to continue to contribute to my retirement accounts. Phew, this is looking a bit better if 8% is realistic (is it?)
- 2020/36: 436k
- 2021/37: 506k (baby 2)
- 2022/38: 603.5k
- 2023/39: 633k (baby 3)
- 2024/40: 660k
At 40 or before, I do a major career change and feel like I’m in a good place for retirement, right? Or not. 660k with 25 years left to retirement is just 4.5M in retirement. I guess that’s because I’m not including actual gains on the account over five years, only contributions. The initial 436k should gain 200k at 8k. Which would put me at 880k at age 40 (including total family contributions) which still only gets me to 6M at age 65. Ugh I wish I was better at math! Well, 6M at 65 sounds pretty good too, considering I’m not counting social security or any of my taxable savings, which should also be substantial at that point. I feel pretty ok with the plan above, assuming growth to 880k of these accounts (or something like that) by the time I turn 40.
Since I’m going that post tax, let’s say I need 1M in my retirement accounts before I feel like I’m “safe” for retirement (i.e. money I’m not going to touch until I’m 65) and then I’m in a really good place for a career change. Or I pull the plug earlier, but I do think getting through my third and last child while having good insurance and a stable career (if you can call my career stable lol) is a lot smarter than switching now. That doesn’t mean I have to wait until then to take a class or two or prep for my career change. It just means I have a real goal to save for retirement. Once I get to that safety net in my retirement accounts — aiming for 6M-7M when I’m 65 without adding another dollar to my retirement accounts — then I’ll feel a lot better. Then all I need to do is be able to afford my expenses between “now” and age 65. I can do that with my taxable investments/savings and income. My family’s lifestyle will be dependent on my ability to move up in my new field as well as gains on my taxable investments (which are 757k today and should be about 1M by the end of next year if I can hang on to this job for dear life and the stock market doesn’t crash. Knock on all the wood.)
Perhaps I should splurge and buy a new computer with a functional “4” key (yes this is why I am not using the dollar sign in any of my posts… I have “4” as my clipboard paste item but I can’t have that and the dollar sign. I should probably reprogram some key I don’t use to the the “4” — or I should buy a new computer? Hah.
Ok, this makes me feel a little better. I do want to figure out the “37-65” annual income vs living off savings and where I can dip into savings for a career change without having to take a major lifestyle cut. And I like to spend money, so I’d like to be able spend as well… especially on fixing up my house (a major addition, at some point, or moving to a nicer place in an area I want to live) and travel while paying for my sister to come with us. And helping my mom out when she runs out of money because she probably will.
In any case, once I have enough in “retirement” accounts I’m just going to feel a lot better. I have to catch up since I didn’t have access to a 401k in my 20s and my husband started his retirement contributions in his 30s as well.
Shorter term, since 2022 seems SO far away, here are some realistic goals for the end of next year:
Calculate my future totals (2021 End):
- IRA Pre-Tax: 623.9 (436k post tax) + 5% = 654k
- IRA Post-Tax: 96.9 = 101.7k
- Total 2021 (Pre Tax): ~750k
Total End 2021 Goals:
- Home Debt: -900k (300k equity + 1.2M loan)
- Taxable Accounts: 1M
- 529 Kid 1 = 75k
- 529 Kid 2 = 75k
- 529 future Kid 3 (my account) = 50k
- Retirement (Mostly Pre Tax) = 750k
Actual Earnings 2021 Goals:
- Income: 250,000
- Vested Stock (Sold Pre Tax Value): 500k
- Other Benefits: 30k (ESPP growth), 4k (401k match)
- Total Income: 784k (very approx)
This would be an incredibly positive total income next year and end to 2021. That’s only 13 months away. It’s going to be a crazy 13 months with a lot in the air. If I can get the above set by end of 2021 (leading into getting pregnant with my third kid) I think I’ll be in good shape.
I need to do a better job of running these numbers. If I can hit the above goals, I’m going to hire a good CFP to help me figure out my strategy for the years ahead.