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
Phase 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 7 – Full 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?
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