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The 7 Phases of Retirement

by retirebyforty on July 24, 2013 · 69 comments

in cash flow, early retirement, goals and milestones

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For many of us, retirement comes on suddenly. One day you’re working and the next day you’re lounging at home. However, here at Retire by 40, we advocate a different way to retire. Instead of a sudden transition, why not take it in phases and enjoy the journey?

One of the biggest criticisms for my exit strategy is this – you are not really retired if your wife is working. This is a bit baffling to me, as to why people think this, so let’s look at retirement as a household journey then.

My main criterion for retirement is to stop working for the heartless corporations, but let’s expand it more.  The assumption is that this is a two-person (plus kids) household.

The 7 Phases of Retirement

The 7 phases of retirementPhase 1 – Both people working. This is the time of your greatest earning power. We were a DINK team for 13 years and we were able to save and invest a big portion of our income.

Phase 2 – Both people working and have extra income. The extra income could come from many sources. You can work a side job, invest in stocks and bonds, or become a landlord. All the extra income should be channeled into making more extra income.

For us, we started with renting out our old home. After that, I moved much of our taxable investment to dividend stocks. I also started making a little money online.

Phase 3 – One person’s paycheck and the side income are enough to pay the household’s monthly expense. There are many ways to achieve this. One person could advance in his/her career and make enough money to cover all the bills. Another way is to reduce expenses so these bills are easier to deal with.

By 2011, we were able to live on only one paycheck. We live a modest lifestyle and our extra income helped cover the monthly expenses.

Phase 4 – One person stops working their primary job. This is where we are right now. I quit working for a corporation a year ago. Phase 4 is very optional. If you like your job, there is no reason to stop working.

Phase 5 – The extra income is enough to pay monthly expenses. Again, there are many ways to accomplish this. Both people can work a side job or two to generate a little bit of income. This is significant because both people don’t need their primary jobs to survive anymore. This is very close to financial independence.

Phase 6 – Passive income can pay monthly expenses. To me this is true financial independence. You don’t have to work at all if you don’t want to.

Phase 7Full retirement! Everyone quits their jobs and lives happily ever after. :)

I’m sure your table is different from mine. I made the table this way to support my exit strategy. Of course, you don’t have to go through every phase. The traditional retirement skips right from Phase 1 to Phase 7. This works well for some people, but for me I like to take things a step at a time.

Getting to the next level

As mentioned earlier, we are in Phase 4 and we are striving to reach Phase 5.

Let’s crank some numbers to see if we are near our goal. We’ll use the income and expense from the first half of 2013.

Expense = $4,000

Income = $5,800

Mrs. RB40’s income = $2,600

All right so if we take Mrs. RB40’s income out of the equation, we’d have a monthly income of $3,200. This is $800/month short of our $4,000 expense.

So where can we generate an extra $800? There is one big resource that we haven’t drawn upon in our monthly cash flow statement. It is our retirement fund. If you saw our net worth breakdown last week, you’d see that our retirement fund is around 40% of our total net worth.

I could withdraw the dividend payment from our retirement accounts and use it for monthly expenses if we really needed to. I checked our dividend payout and it amounts to about $14,200/year.

Let’s say we’ll have to pay 25% tax and 10% extra withdrawal penalty. We’d be left with $769 in cash after all that.

So we are actually only $31/month away from phase 5 ($800 – $769). If Mrs. RB40 can come up with $31/month, then the option to quit her job suddenly becomes a real possibility.

I really don’t want to withdraw from our retirement accounts until we’re 60. However, if we had to do it, we could. Mrs. RB40 likes being a part of a bigger organization, so she probably won’t stop working for at least another 10 years, but soon she would be able to choose to not work as well.

Anyway, I’d rather figure out a way to generate $800/month without touching our retirement accounts. My target is to reach phase 5 without using the retirement accounts in 5 years – July 2018. Stay tune to see if we can do it.

Do you like the way I break down retirement into phases? Where are you in this break down? 

If you need help keeping track of your finances, try using Personal Capital to manage your budget and net worth. It can help you keep track of your income, expenses, and net worth, all in one place. Personal Capital is geared for investors and has many great tools. See my review of Personal Capital and how they helped me reduce what I’m paying in investment fees.

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{ 69 comments… read them below or add one }

sendaiben July 24, 2013 at 1:30 am

I like your model.

We’re in phase 3, but have no real desire to advance any further :)

We’re planning to save/reinvest as much as possible to deal with unforseen problems for the conceivable future, but other than that happily on course.

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retirebyforty July 24, 2013 at 9:34 am

You can skip straight from Phase 3 to 7. :) It sounds like you like your job now, but it’s good to have a backup plan too.

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Michael | The Student Loan Sherpa July 25, 2013 at 8:26 pm

Jumping from Phase 3 to 7 sounds great! But the first step is making it out of Phase 1…

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retirebyforty July 26, 2013 at 8:49 am

I guess I should add phase 0 where you just have to pay off debts.

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Marissa @ Thirty Six Months July 27, 2013 at 4:11 am

You should have, because I think that’s the phase I’m in right now.

The Passive Income Earner August 29, 2013 at 7:54 am

I agree. A debt paid off phase would be good. Also, the assumption that there are two income is a little odd (although the norm). Who works isn’t really what matters but where assets are at each stages which is what you are conveying when I read between the lines. A saving rate would be interesting for each phases. My saving rate is about 25% of my gross at the moment.

The Passive Income Earner August 29, 2013 at 7:50 am

I have always been in Phase 4. Phase 1 and 2 never existed for our family. We had our first child at 26. It’s one reason why we are really good at controlling our expenses because we’ve always had to.

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Thomas | Your Daily Finance July 24, 2013 at 5:27 am

I like the phases and mostly it comes down to planning. My wifey loves working and would get bored out of her mind if she had to stay home. She is a people person and work fulfills that for her. We are in phase 4. I am currently building up enough income to double our expenses. This way we save a year as each year goes by. At some point we will have enough to not even worry about passive income as we will have enough years saved. Then the passive income is just icing on the cake.

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retirebyforty July 24, 2013 at 9:35 am

That’s great. Mrs. RB40 likes to be a part of a bigger organization. I don’t think she’d do well being retired or even self employed. Maybe she’ll change her mind in 10 years or so.

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Roger @ The Chicago Financial Planner July 24, 2013 at 5:32 am

Interesting approach. I think the biggest point here is planning for the freedom to retire on your own terms, when one does actually retire is then up to them. Much better to be working because you want to not because your have to.

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retirebyforty July 24, 2013 at 9:36 am

That’s true. When you don’t have to worry about money, you can choose to keep working or try something else. It’s liberating.

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JC @ Passive-Income-Pursuit July 24, 2013 at 5:46 am

Phase 2 for us. Being a DINK sure is nice for the monthly cash flow. We’re hopefully going to be at Phase 4 in the next few years, but I’m still not sure if I’ll stop working. I won’t be keeping my current job once we get to Phase 4 but another job isn’t out of the question. And there’s always side hustles with all the new found time. My wife loves teaching and I don’t see her stopping that anytime soon.

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retirebyforty July 24, 2013 at 9:37 am

It’s great that your wife like teaching. Some people like working and I don’t see why they need to quit if they still enjoy it. Good luck!

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Michelle July 24, 2013 at 6:19 am

We are in Phase 3. I like your phases! It’s a great way to think about it. Although, I don’t see myself ever fully not working, but pursuing my passions. So I guess I will be in Phase 4 soon? :)

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retirebyforty July 24, 2013 at 9:40 am

Good luck with Phase 4! I like working part time too. I don’t think I’ll enjoy life without a little work.

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Jamie July 24, 2013 at 6:20 am

We’re in Phase 1 (or Phase 0?) where we are trying to start paying off huge amounts of debt so that we can eventually start to save a bunch. I originally wanted us to max out both our Roth IRA’s and increase our 401(K) contributions by a percent in 2014, but he has some debts that make my eyes pop halfway out of my skull when I see the statements. I figure by eliminating all those balances with high interest rates, our return would be in the 15-25% range, which is better than nothing (if I am thinking about it correctly)! Then we can really start putting cash where it will work for us. Phase 2 in 2015? :)

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retirebyforty July 24, 2013 at 9:41 am

Good luck paying off the debt. Once that’s done, you’ll be able to invest a huge amount. Keep at it!

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cj July 24, 2013 at 6:43 am

RB40! Great article in that breaking it down like this certainly makes it far more accessible to readers. We are both in phase 4 because we quit our full time gigs years ago and run a guitar/tutoring studio. We are doing and planning some passive stuff now and plan to get onto phase 5 simultaneously in a few years (or fewer). $4000 is a great monthly expense. We need to knock off 2 loans and we’ll be pretty damn close to that. Have a fuzzy Wednesday, RB40!!!

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retirebyforty July 24, 2013 at 9:42 am

That’s great! I love it. It sounds like a ton of fun to have music in your life all the time.

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No Waste July 24, 2013 at 7:03 am

Phase 4 here, although my Wife works quite hard chasing our two little ones.

It feels like the learning curve really steepens when getting to Phase 5 though. That’s where you really break out of the mold of full-time employment and start to pursue personal interests that support your monthly expenses.

And if you’re in Phase 4 like me, but not a professional athlete, the pace of investment growth slows a bit.

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retirebyforty July 24, 2013 at 9:46 am

Being a stay at home parent is NOT easy.
You’re right. Our saving rate dropped off a lot when I quit work. We are still making progress though so I’m happy about that.

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Taynia @ The Fiscal Flamingo July 24, 2013 at 7:23 am

I am in a non-phase now. My situation is a bit unique as I took a 12-month break from my career for a family sabbatical. I get a similar comment regarding my sabbatical, in that I am blogging and I started The Fiscal Flamingo so technically, I’m working. But I considered myself “retired” for the year because my life is much different as a blogger and entrepreneur than a Corporate CPA. When I return to work at the end of the year, we will be in Phase III with my income. It will take 5 years and our mortgage will be paid. At that time, I will retire from Corporate and my husband will take a job. So, while we will still be in Phase III it will be on substantially less income. From there we will work our way to Phase 7 in short order.

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retirebyforty July 24, 2013 at 9:46 am

That’s how I look at it too. :) Good luck with the mortgage. Just keep working at it and you’ll get there.

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Financial Samurai July 24, 2013 at 9:05 am

I guess in in phase 6! But gosh darnit, I just love to write and write and write so it doesn’t feel like work at all.

I so wonder when my desire to write will fade.

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retirebyforty July 24, 2013 at 9:47 am

I’m keeping an eye on you. :) Writing doesn’t seem like work most of the time. Sometime I get burnout though and then it’s really tough.

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Financial Samurai July 25, 2013 at 10:26 am

I have a feeling plenty of folks are keeping an eye on me. Better not fail! haha

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Mr. Utopia July 24, 2013 at 9:36 am

That must be a nice feeling – being in Phase 4 and knowing you have the power to move to Phase 5 if really necessary.

I got a chuckle out of this statement: “If Mrs. RB40 can come up with $31/month, then the option to quit her job suddenly becomes a real possibility.”

Couldn’t you come up with the $31/month as well so that your wife can quit?!? I’d probably think the same way though…”if she wants to quit, then it’s her task to find the extra money.” I think that’s natural husband logic!

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retirebyforty July 24, 2013 at 1:36 pm

I’m already using all my resources so I can’t come up with the $31/month. Maybe in a year or two, I’d make more money online and it would be easier. :)

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what's next July 25, 2013 at 7:20 am

What if you looked at it the other way…can you spend $31 less a month?

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retirebyforty July 25, 2013 at 9:12 am

We probably could spend less, but it would cramp Mrs. RB40′s style. I think once she is really ready to quit, then she could make a little sacrifice.

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krantcents July 24, 2013 at 11:38 am

Very interesting approach! It seems pretty accurate, however everyone goes through the phases at different times. I am starting to think about accelerating my retirement date. I am 4 years away, but 3 sounds better. I think I will review it again in a year. If I accelerate it, I must pay my mortgage and car loan off sooner. Going directly to phase 7, will be easy, but it is a matter of when. My only concern is going from a lifetime of saving to spending!

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retirebyforty July 24, 2013 at 1:36 pm

That is a big concern, but another concern is being able to enjoy the fruit of your labor. You never know what can happen in 4 years….

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MoneyNing July 24, 2013 at 12:02 pm

I’m sure you are in phase 5 already. You can just as easily take a tiny bit of capital out of your taxable accounts to supplement the dividends. If you account for taxes, it’s just mental accounting by leaving that same dollar figure in the retirement accounts. The beauty is that you don’t have to take the 10% penalty, which I’m guessing is more than the $31 a month that you need :)

And what happens when you hit phase 7? Sell retireby40.org and start a blog called enjoyphase7.com? Then again, you’d be back to phase6 so maybe phase64ever.com would work better!

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retirebyforty July 24, 2013 at 1:38 pm

You’re right, but I hate drawing down capital though. If we have to do it, we’d probably do it that way.
Phase 7 will be in 25 years for me so I’ll worry about it later. :)
At that point, I’d probably be interested in something else. Thanks for dropping by.

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MoneyNing July 24, 2013 at 2:50 pm

I’m sure you would just draw from the taxable account, since that’s the most reasonable route to take.

But the uncomfortableness is purely psychological right? Ignoring tax differences (which you can adjust independently), getting $X from dividends in taxable + $Y from dividends in IRA versus getting $X from dividends in taxable + selling $Y from drawdown is the same as long as you reinvest the $Y in dividends from IRA back into capturing that lost # of shares on the taxable side.

You never know, you might hit it big and be in phase 7 in 2.5 years instead of 25! Sometimes plan B could be the dream alternative! :)

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Pretired Nick July 24, 2013 at 3:19 pm

A very astute take, Joe! I’m probably between Phase 5 and 6 right now (we’ll see where the dust settles once I clean up this real estate mess). Since for us we never had the concept of living off of the others’ paycheck, although we could have done that long ago, so maybe that counts. Even though I’ve stopped working full-time, she’s never helped pay for my bills.
It is interesting reading this and thinking about the “one more year” syndrome. Once you reach phase 4 or 5 you could rapidly reach the final stage if you keep working. But working when you don’t “have” to might just be one of the hardest things to do in the world.

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retirebyforty July 25, 2013 at 8:59 am

That’s true. You can always work one more year to shore up the finances. At that point you’d have a choice though and you can do whatever is right for you.
I’m waiting to see what happens after your 4 plex sale too.

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Jon_Snow July 24, 2013 at 3:25 pm

I am a insatiable consumer of all the ER related blogs, and I quite like this one. I missed my own early retirement at 40 – alas, I am now 41 and still working. But for not much longer I am thinking.

Monthly expenses – $2500 (we are DINKS with no debt whatsoever, paid for home etc.)
Wife’s income – $5200 monthly
Dividend income – $2500

So if I quit tomorrow (and it IS tempting) we are still able to save around $5000 every month, largely due to the fact that my wife is quite well compensated. But the dividend income should slowly catch up. Seeing as though I am sure I detest my job every bit as much as Retireby40 did his, I am perplexed as to why I still get into my truck a 5am and endure a hellish commute and an equally hellish 8 hour shift. 2014 looks like the year I am going to pull off my “retireby41″. :)

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Pretired Nick July 25, 2013 at 7:34 am

Do it, Jon!

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retirebyforty July 25, 2013 at 9:01 am

Your expenses is quite low. Great job!
Thanks for dropping by. I hope you stick around. I would love to hear if you did it. :)
Ugh. 5am for a hellish commute. That sounds terrible.

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insourcelife July 24, 2013 at 6:19 pm

We will probably move into phase 4 after we have our second child. With the expensive child care it might make sense for DW to just stay home rather than continue working for a big corp that’s just a paycheck without any further attachments on her part.

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retirebyforty July 25, 2013 at 9:03 am

Daycare is another huge problem in the US. Why pay so much to have other people raise your kid? It’s hard for moms to get back into the workforce though. Good luck.

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Nate July 24, 2013 at 8:16 pm

I really like the layout of these stages RB40!! Great article; well done!!

@ 28 years old my wife and I are 12 months shy of stage 6/7. I have found a couple rental properties that we are planning to purchase with cash (sitting in a trusty savings account doing nothing right now) directly from the builder (he needs to fund a larger more profitable project ASAP). The rental income will be about $2500 a month after expenses. That income, in addition to a low 6 figure 401k account will give me enough confidence to “step away” for a little bit… My wife is a teacher (another $2500 net a month). She probably would like to teach other 3 or 4 years before we have children.

Interestingly enough – even though we now have an income approaching 250K gross a year – we have really kept out lifestyle in check since graduating. Our monthly expenses hover around $2500 a month. That includes dry cleaning and several other expenses that would go away. Our current primary residence mortgage is only $500 a month. We have one other rental property currently that makes several hundred a month (but I just put that in escrow for future repairs – so we have never touched that. I am not even sure how much is in there now that I think about it). We have no other debt right now at all. 2 cars are fully paid for etc.

We are saving 80-90% of our income every month right now (depending on the month).

I am a highly driven person – so I know I will find many additional side businesses to engage in once I walk away from the big j.o.b. in ~ 12 months. Although I know it will be hard to walk away from my >200K a year job in IT/management consulting, but honestly I am so freekn’ tired. I looked @ my invoices the other day and realized I have worked almost every day for the last 5 years since graduating with $5 to my name and a paid for 1989 Honda Civic with no AC. Yeah :-/ My moss used to think I was on “overachiever” coming in to work @ 6AM when in reality I was just trying to beat the South Carolina heat (100+ degree summers are common) so I didn’t come in to the office all sweaty :-D

The funny thing to me as I am writing this – I always remember hearing people talk about having passive income to cover their expenses in their 40s and 50s and thinking, “that just seems impossible, I will never be able to do that”. I am not a special person by any stretch of the imagination. I scored something like a 950 on my SAT (1600 scale) – I started out in community college. I ultimately transferred and graduated from a state school with -(55K) in student loans. I was 100 pounds overweight. I had no advantage in the world (my family is pretty screwed up).

I chose to “put the controller down” (I was damn good at Halo 1 though…). I worked my ass off. I lost all the weight (running stairs in my apartment building). I increased my income from 38K a year to >200K a year (5 systematic jumps / career advancements). I read 3 – 4 books a week now (have for over 3 years). I changed my habits and behaviors one step at a time. I read Dave Ramsey’s books and got out of debt as fast as I could (1.5 years student loans were gone).

I used to think FI was reserved for the “super elite”. Anyone can do it. So I dedicated this unnecessarily long comment to the gal/guy who thinks they too will ALWAYS have to trade their time for money doing something they hate. You can break free. Start by getting out of debt (consumer) and saving money like crazy. We started with a coin jar. Buy yourself options. Don’t listen to people telling you to put ALL your money to work – put some in savings. Let it sit there to provide you confidence to take the “scary job” that pays more and requires a move. Let the money sit their when everyone else is “upgrading their house”. Break free my friend!!!!!! :-)

First time commenter RB40 – thanks for all you do brother!!

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retirebyforty July 24, 2013 at 10:34 pm

Wow, great job! What an inspiration! Good luck in your last 12 months. I agree that FI is for anyone who put their mind to it. Some people can make a lot of money and build up a big nest egg and some people can go the frugal route. Reading 3-4 books a week is a great way to grow.

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Rich July 25, 2013 at 2:50 am

Hmmm, I like it, but of course it pivots around how many people are working. If a family has always operated on a single income, as mine has, it’s perhaps misleading to say we started at Phase 4. There could be other useful defining elements of the phases which dictate, for instance, how to think about financial objections and where the extra money goes in each phase. For instance:

Phase 1: Financial consolidation–assuming many earners enter the workforce, as I did, burdened with considerable student and other debt, the primary objective of spending in this phase is to eliminate all debts charging more than 5% interest. Student loans and mortgages can stick around if they meet this threshold

Phase 2: Baselining–achieve a positive net worth, continuing to focus on highest interest debts first.

Phase 3: Growth–establish a strong positive net worth (e.g., $200k), including continued debt reduction, establishment of emergency funds ($50k), and maxing out qualified retirement accounts.

Phase 4: Diversification–branch out to a range of assets to reduce risks, including non-retirement equities, precious metals, real estate, etc.

Phase 5: Income generation–once a certain threshold for net worth has been reached ($5-600k), begin shifting assets toward income generation, just to diversify your income sources and gain experience thinking this way

Phase 6: Challenge employment model–once assets are capable of self-generating a core income ($4-5000/month), it’s possible to be bold about challenging the existing social templates for work. Over the years, for instance, I can see doing any and all of the following: a) switch which spouse works, b) take a much lower paying job in exchange for better lifestyle, or some cause I’m passionate about, etc. c) work “for the man” only sporadically on short-term contracts, or d) spend time on independent income opportunities (such as the internet stuff)

Phase 7: Full retirement–nobody works, ever.

Obviously all the benchmarks and figures are subjective and can be adapted, and the phases can be interchanged/overlapped a bit, but that’s roughly how I’ve ordered my life. At 36, I’m in Phase 5 and trying to resist the temptation to prematurely jump into Phase 6. I don’t really ever want to get to Phase 7. My wife is highly interested in teaching (and I’m highly interested in spending more time with the 4 kids, working in my yard, and getting our 2 houses rent-worthy), so I could see us trading places. We are also big international travellers, so I would love to be free to take a job leading a charity in some 3rd world country, etc. Not really a retirement per se, but certainly feel like one relative to my current job.

Anyhow, just some thoughts.

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retirebyforty July 25, 2013 at 9:11 am

That’s great. Thanks for sharing your model. Can I use this as a guest post?
I’m in your phase 6 now and I’m very happy about it.
Phase 7 is always tricky. What if you like working? Why quit when you enjoy it?
It sounds like you would enjoy being a stay at home dad. Perhaps you can take a 3 months sabbatical to try it out.
Good luck!

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Rich July 25, 2013 at 10:43 pm

Yeah, I spent about 8 months off last year in between jobs, and that’s when I started seriously re-thinking the employment model which society has designed for us. It’s quite unnatural. I’m happy to do a guest blog, but let me put some thought into it and make it a bit cleaner first. Is there an email I can send it to?

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retirebyforty July 26, 2013 at 8:51 am

Sure, let me know. It’s joe at retireby40.org.

Brittany July 25, 2013 at 9:21 am

I like the breakdown! Technically, we are in Phase 3 right now and are living off about 50% of total income into our household; HOWEVER, 80% of my side hustle money is going toward paying for my Antarctica trip. I split the other 20% into 10% for our joint savings and 10% into my Vanguard stocks. I’m still debating what I want to do income-wise next year. I think I want to quit working Saturday Market because it usually takes up my entire weekend and my friend works me quite a bit there. If I didn’t do that, I would be primarily house-sitting, which is easy and pretty passive. I think the house-sitting and other odd jobs would still leave me with free time and also money to put into savings and for traveling. This is something I’ve been thinking about of a lot lately!

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retirebyforty July 26, 2013 at 8:46 am

50% is great! As for traveling, enjoy it while you can. You gotta live a little right? :)
Good luck next year. If you can get steady house sitting gigs, then it’s probably the way to go.

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Tortoise Banker July 25, 2013 at 9:52 am

The idea of paying a 10% penalty always irkes me… Would someone seeking to retire by 40 be better off saving in a taxable account vs. a 401k or traditional ira? I know a roth is after tax dollars, so that’s a great tool.

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CityGirlCountryBloke July 25, 2013 at 10:58 am

I’m digging the phases of retirement. Should shut the “Internet Retirement Police” up. I think hubby and I are phase 3, fast approaching phase 4, on track to be phase 5 in about 7 years with phase 6 happening shortly thereafter. I think I will always have my finger in a pie of some sort so I don’t know if I will ever reach phase 7!

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retirebyforty July 26, 2013 at 8:48 am

Hahaha, Thanks. I’m tired of the IRP. They are just jealous. :)
Good luck!

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GamingYourFinances July 25, 2013 at 11:30 pm

Nice and simple! I like it! We’re working on phase 5 at the moment. We’re planning to make phase 5 a bit longer by quitting our corporate jobs before our passive income can totally support our expenses. But the idea is to only spend 10-20% of our time on side income to support our expenses and the rest is free time!

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retirebyforty July 26, 2013 at 8:52 am

That’s great. Corporate jobs are just too draining. 10-20% working sounds good to me. I’m spending more time that I planned, but at least I’m enjoying it.

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C. the Romanian July 26, 2013 at 5:53 am

Nice way to put it! I managed to convince my wife to quit her job and join me in blogging, but she only had time to do it for about three months before having to stop as she gave birth to our son. But during this time the average she made was $350, which is pretty solid (as you know, in blogging you can’t earn a full paycheck instantly). We have plans that after 6 months or 1 year maximum, she’ll restart blogging and hopefully all will be OK and we’ll be in Phase 5. However, Phase 6 still sounds a looong distance away. We’re close to 30, though, so we still have some time :)

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retirebyforty July 26, 2013 at 8:58 am

Good luck getting back to blogging. Romania sounds quite affordable though. We haven’t been to that part of the world, but would love to visit someday.

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Little House July 26, 2013 at 10:47 am

I’d really like to get to phase 3, but I think we’d really have to reduce our expenses to get there. For now, we’re sort of stuck in phase 2.

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retirebyforty July 26, 2013 at 1:58 pm

I feel like you guys are still young and are just starting out. Keep working at it and I’m sure you’ll get there soon. Have a great weekend.

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KC July 27, 2013 at 1:13 am

I like to think that I am in Phase 6 in your model, where the passive income cover the expenses, although I would add, to sustain our present lifestyle. Financial independence is a good feeling — not having to worry about money, but I am still a bit troubled.
What if our expenses did change, and drastically increase over time, while our passive income may not? One major expense looming on the horizon for us is our kids’ education. My wife and I believe that we should pay for our kids’ education until they finish college, and not have them saddled with college loans before they start earning their first dollar. My kids are 6 and 11, so we are looking at $80K to $100K possibly more per child in future dollars for their education.
I have been grappling with this for a while, and here is how I plan to work around it using your example:

Expenses: $3,000
Passive Income: $3,800
Surplus: $800

We live a moderate lifestyle and $3,000 is sufficient to cover our monthly expenses. In our house, surplus money is fun money and the kids get a say in how we use it — a trip to the theme park, movies, Baskin Robins, more books, something nice for the wife and maybe a new putter for me.

So, in order to defray future expenses, we have decided to provide some money for it. In the example below, the “fun money” has now been trimmed down to $400 resulting from a $400 provision. This provision of $400 will then be reinvested into income generating assets and we will allow compounding interest to work its magic over time.

After
Expenses: $3,000
Provision for future expenses: $400
Passive Income: $3,800
Surplus: $400

Of course the same result can be attained by increasing the passive income. But it was good for me to be cognizant that the cost to sustain our present lifestyle can change over time, and that we don’t have as much “fun money” as I had thought.

Which brings us to the last phase – financial abundance. Where our passive income covers all the expenses, and also sustain the lifestyle that we desire, not just our present lifestyle. I am not sure if we will get there, but I love the concept.

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retirebyforty July 27, 2013 at 3:12 pm

I like financial abundance. I’ll have to borrow that. :)
I worry a bit about college too. I front loaded our kid’s 529 funds with about $30k and hopefully it will grow over the next 15 years.
We’ll keep adding to it as we can.
Another thing we worry about is healthcare cost. Do you have any plan for that?
Once Mrs. RB40 retire from her job, we’d probably move to a country with public healthcare/affordable healthcare for a few years until Medicare kicks in.

Thanks for sharing!

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Reva July 30, 2013 at 6:03 pm

Bit in the butt by the real estate bust, my husband and I are going (mid 50′s) to get enough passive income generated to stop the rat race. He works for a big govt contractor and has for 30+ years but there is a big penalty for early retirement withdrawal, so he needs to retire but not take the pension for at least 10 years. So, the challenge to to pay off our commercial rental properties (total debt about 365K) so we have 6K+ per month income. We are saving max in Roth now ($13,500 total) and also in his matching 6% 401(k) and trying to pay off properties. We have one at less than 37K, another at 77K (both big name lenders). The other two are private. One might negotiate down for a cash pay off. The other will not. I have around $700 per month in retirement income now and another private mortgage that pays 7.5% interest for another 2 years 8 months for a total of $500 per month. Need assistance thinking though the best plan for retirement for my corporate husband. I am a real estate broker that does about 100k per year net. We have been paying off debt (none now but mortgages), saving, and improving/repairing properties. We have great long term tenants now and see the light. Just not sure how to get there the fastest way. We do not live where we live (and that is important now at our age (mid 50′s) and want to buy (maybe finance) a home that we can rent now while we figure out the best way out. Ideas please???

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retirebyforty July 30, 2013 at 11:55 pm

Sorry to hear that. That’s one reason why I like to be diversified. Perhaps get rid of some properties to diversify into stocks? How long have you been in rental properties? From what I hear, it takes a while to turn around. Good luck!

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Justin Goodbread July 31, 2013 at 8:31 am

you know. 72T would prevent you from paying the 10% tax penalty on the pre-591/2 retirement account withdrawal.

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Reva July 31, 2013 at 8:59 am

I had 8 properties in the boom and am down to my best 4. I did some short sales and sold others for what I owed. In total, the properties are worth about 1 million with 365K of debt. All is good condition and have great tenants, and they cash flow, so I am in no rush to sell in this market. We have about 200K in the stocks/bonds and are investing more every month.

To exit the rat race, we were focusing on paying off the income-producing properties, so we have more cash flow. We have Blue Chip stocks that pay dividends that are reinvested for now. International bonds. So, we are saving about 50K per year in retirement funds and everything else has gone into mortgage debt repayment – paying the smallest debt first. Keeping a 40K reserve fund for emergency in low paying saving accounts.

Our plan is to have at least 4K in passive income, then work part time or in temporary full time, seasonal jobs – something fun and low stress.

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retirebyforty July 31, 2013 at 9:12 am

I see. I think you are doing very well and you’re on your way to retirement.
The only thing that I can think of is to cut your expenses a little bit. It sounds like you will reach 4k/month very soon with 4 good rental properties.
Do you know how long it will take?

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thepotatohead August 5, 2013 at 2:51 pm

“stop working for the heartless corporations”, that’s the key part right there. If you can “retire” from your full time super despised corporate job and take a smaller part time gig that you enjoy, then that would be a good way to do it. You enjoy blogging and its starting to pull in some real income for you, so I’d certainly say good trade even if some internet users always argue with you over “true retirement”.

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MMD September 11, 2013 at 2:52 pm

I think you’ve done a fine job here laying out the road map and plugging in numbers to see how your progress is coming along. I have a similar approach that focuses more on building up bins of income by age group.

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retirebyforty September 12, 2013 at 4:49 pm

That sounds interesting. How about sending me a guest post on that. :)

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