Tuesday, March 22, 2016

How much do I need to retire?

Recently I was reading a post by Dividend Life regarding his expenses.  There was one sentence in particular that caught my eye and finally got me thinking about how much I really need to save if I am ever to become FIRE. 

I have been blogging about my FIRE approach through dividend growth investing and frugal living for a couple of years.  I even claim I want to retire by age 55.  What I never really did was figure out what I need to do to get there.

Let's start with what Dividend Life said.

"Note that based on my $3,900 budget, one Work Freedom Day requires about $128 of dividend income which in turn requires about $4,000 of capital."

So based on that if there are 365 days in a year that would amount to total capital (including reinvested dividends) of a mere $1,460,000.  Wow that is a lot of money I need to save!  Currently I can't even support the family on $4000 a month.  My base 2016 budget is $4975 a month.  Sure I could squeeze TV, Internet and phone out of it and not take a shower.  That might get it down to $4k.  The other big item to get it down to $4k would be to not have a house payment.

The house is not going to be paid off for another 24 years or when I am 66 years old.  That fact really depressed me and is probably why I never really thought about it.  I have 2 options.  One would be to refinance to a 15  year loan.  Then I have a shot of early retirement.  The other option is to sell my house for a profit and by a fixer upper with the cash proceeds.  Then live out my life in a not so nice home with less stuff (and probably be happier).

So what do I need to get to FIRE by age 55?  First would be to have no mortgage.  Second I would need to be generating roughly $4000 per month in dividends.  I have a spreadsheet I think I got from Dividend Life as well but couldn't find the post to link it.  This spreadsheet allows me to punch in yield and dividend increase.  It then calculates out your income per month as you reinvest those dividends over the years.

What I did was take the average yield (2.76%) and dividend increase (6.3%) from the list of Dividend Champions by Dave Fish and used that in the spreadsheet.  I picked the champions because they are the most stable dividend payers and are likely to be around until I retire.

The results were shocking and got me a bit worried.

It will take me investing $7100/month to get to $4020 of dividend income monthly by the age of 55.
It will take me investing $2300/month to get to $4082 of dividend income monthly by the age of 66.

If I tweak it and only buy companies with 3% yield it will drop it slightly to $2000/month until I am 66.

Keep in mind these numbers don't account for inflation.  I have never been laid off in my 18 years of the rat race but the numbers show you are more likely to get let go the higher your salary and the older you get.

Any advice from the community on what I should do?

For now I will look into my house options and see if I can get up to $2000 a month invested through my 401k, IRA and personal investment accounts.)

Thanks for reading,

DFG

6 comments:

  1. It's good to run the numbers and think about what you can do to get there! It's also however not worth over-scrimping in order to retire early. Seems you're on the right track.

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    1. Thanks Jenna, I try to balance long (retirement) and short (vacation) term goals.
      Cheers,
      DFG

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  2. Get started! And teach your kids the valuable lesson of starting early so their path is easier than yours, aided by immense compounding.

    You've completed the first steps, now it's time to execute slowly but surely with strong dividend growing companies.

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    1. Your right. Time is the key to FIRE. Thanks for stopping by DKC.
      Regards,
      DFG

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  3. Hi DFG,

    My projections are typically very conservative as I prefer to under-promise and over-deliver. Note: my calculations are based on income as a yield percentage (3.5%) of portfolio value, not $xx dividends increasing at y% a year...I think the dividend growth calculation gives higher income. I'm also not especially frugal - if it means that I need to work a bit longer then so be it. I mainly try not to waste money.

    I agree with the above comments. Just want to add a couple of points:

    It's impossible to really predict in the long-term. But you've set up the framework to know where you are, where you're headed and an idea of how long it'll take. You're doing the right thing, and if you weren't saving / investing the money you are, you'd be even further away.

    When you reach FIRE, your expenses will typically be less - would you really need 2 cars when you're not working for example? Your children will leave the house eventually (or should at least pay you something for upkeep) which will help. Healthcare costs is always an unknown (which is why I personally don't show a decrease in my budget).

    Other sources of income will become available to you later too, e.g. Social Security, your 401k / Roth IRA etc - these can all supplement your investment income.

    So don't be depressed about this - be glad that you're facing this with your eyes open and making plans accordingly. You're in a better position than many people out there.

    Best wishes,
    -DL

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    1. Thanks DL for the points reminding me why I am doing all of this. In general Americans need to learn to live on less. Even in my world there are more ways to reduce my expenses. I am glad I finally did this and now can set realistic goals.
      Later,
      DFG

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