Before we get started this entire article is going to fall under a few assumptions which will become obvious as you continue to read along. All numbers are simply figurative and you may find yourself needing more, or able to get along just fine with less. The nest egg figure discussed throughout this writing is assumed to be invested in stocks and producing dividends. You’re also assumed to be in relatively good health and not dependant on medical insurance to get through life, at least not yet. Assuming an above average amount of $40k per year total spending just to live, everything we talk about is assumed to be post retirement and without any additional income rolling in. Oh, and the final thing that’s assumed is that you’re planning to retire early, perhaps around the age of 35.
How Much Are We Working With?
Without factoring in other typicals such as social security income, possible side-hustles, money obtained from the sale of a property or home and any other number of things, we’re going to estimate a $1 million nest egg, all of which is producing dividends do to investments.
Sure, you might be able to get away with a couple hundred thousand less at around $800k in which case you probably won’t run out of money during the rest of your life, but you’ll definitely want to be mindful of your spending habits and necessities.
Alternatively, if you happen to tack on a few extra hundred grand into those long term investments then you would probably stand a much higher chance of doing just fine without the risk of running out of money.
It must be made clear that everything discussed here still falls into the realm of what’s possible and not necessarily something you should do. However, if you happen to have investments already lined up in a portfolio then you could stand a fair chance of making your money work for you in the extended long-term. Provided society keeps doing it’s thing, corporations you’re invested in stick around and some financial altering event doesn’t take place for the globe as a whole. (Jokes aside) relying on investments to get you through retirement can be risky if you don’t know what you’re doing so keep that in mind.
Which Investments To Go With?
Here’s another assumption, that you’re working with low-fee index funds. You can even do this with just a single index fund, think Vanguard’s VTI or the total stock market exchange traded fund. It doesn’t matter how you own these funds so long as you do. Through a companies 401(k) or some brokerage account of your choosing, a vanguard or some automatic management service such as betterment.com.
What happens now is that nest egg is divided into two parts, the taxable half which falls into your Vanguard, Betterment, Checking & Savings accounts and the retirement accounts such as your 401(k), IRA, Pension and so on.
Once retired you’re going to dip into your taxable accounts first until they’re basically depleted. After that runs out, which would take long enough to allow for your retirement funds to kick in then the rest of your money which has been growing over time will come in handy. Looking at a VTI fund of around 1.89% annual dividend, half of a million would pay you around $9000 annually. You can subtract that from your goal of having a $40k annual spending limit which means $31k still needs to be covered. That would be withdrawn from your savings each month as each of these things combined will work to cover your cost of living after an early retirement.
Won’t You Run Out Of Money?
Probably not, provided you do have the initial things in place and enough money to fund it all from the start. Sure, every monthly withdraw will reduce your savings kick-back but we’re counting on the slack to be picked up elsewhere.
Stock market growth for instance. Thanks to the long term nature of this plan you’re not going to be as concerned about those short term losses and gains but instead looking at the longevity. Typically as time goes on each share held will be worth more than the day you invested. This will help your money to last longer as you’re having to withdraw on a monthly basis. Don’t forget that we are talking about only half of your entire lump sum. The other half which is sitting pretty in a retirement fund won’t even be touched for years upon years and is growing over the course of that time.
Let’s Talk Health Insurance
If you’re stuck footing the bill for your own insurance then it can be factored into your expenses. Aside from doing your best to live a healthy lifestyle, eat well and get plenty enough rest, you’re still going to have to account for those miscellaneous things. Assuming you’re in the United States, you can head over to the healthcare.gov website and browse plans as you await open enrolment.
Okay, What If Stocks Fall?
This is a very long term strategy which means that your investments would have literally years to recover from a fall which is much more commonplace than you’re often lead to believe. A typical crash event is almost never a permanent thing unless a particular company goes under in which case it’s time to look elsewhere but still remain in the market.
Do to the nature of how these investments work your cost of living isn’t bound to go up quicker than your dividends and that means you’re covered. In any case, don’t be scared to adjust your spending habits, move to a new location or tweak your plans either through your own financial savvy or with the help of a professional.