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2012 Updated Exit Strategy and Cash Flow Goals

by retirebyforty on March 26, 2012 · 60 comments

in cash flow, early retirement

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exit strategy from corporate job

flickr – jeroen_bennink

*See the 2014 update at the end of the article*

Exit Strategy

I haven’t updated my Exit Strategy for a while and I thought it best to go back and review them. I will be 40 in 2013 and time is running short. Overall, my exit strategy hasn’t changed much.

  • up to age 40 – Work and build up net worth as much as we can and live a somewhat frugal lifestyle. See my How to Retire By 40 post to see what I’ve done so far.
  • age 40 to 60s – Execute my exit strategy and become a stay-at-home dad. I’ll explore part time self employment options and finds opportunities that generate some income. Mrs. RB40 will keep working for now. She likes her job and isn’t cut out to be a stay-at-home mom. She might explore other employment options if there is a good opportunity. I wouldn’t mind moving if she got accepted to the foreign service program or something like that. Do not draw on the nest egg at this time. Put off withdrawal is one of the key in my exit strategy.
  • age 60s to 100 – Both retire at some point and start to draw on nest egg.

Cash Flow Goals

Expense: Less than $4,000/month. I kept track of our expenses over the last year and we went over $4,000 quite a few times. Most of those were related to refinancing and we’re pretty much set now. I think we should be able to maintain the $4,000/month budget most of the time this year.

Income: My target is about $5,000/month.

  • Mrs. RB40’s income – $2,900/month after taxes and 401k contribution.
  • Rental income – $800/month. The 4 plex rental has been doing well and we are mostly done with the repairs. It needs a new coat of paint this year, and I think that’s the only major expense.
  • Dividend and interest income – $550/month. Recently, I took profit on some equities and beefed up our Dividend Portfolio, so now we’re on target.
  • P2P lending – $100/month. Currently I’m only making about $15/month on prosper.com, but I am planning to increase the P2P lending investment until I generate about $100/month.
  • Online Income – $200/month. I’m reducing my online income estimate to $200/month. Retire By 40 can make about $100 on pay-per-click programs like Media.net and Adsense. I’ll work on affiliate income and hope to reach $100/month at some point.

All of these income streams add up to about $4,550/month. This is a bit short of my target, but we still have a $550 cushion. I’ll have to explore other online options and raise a few more hundred dollars/month that way.

Back up Plan

Always have a back up plan before you jump into any new situation. Here are some of our options if we have a  cash flow problem.

Taxes – Reduce Mrs. RB40’s 401k contribution. She is maxing out her 401k contribution right now and we can reduce that a bit if we need extra income. We can also increase her W4 tax withholding so she’ll get more take-home pay. I think she only has 1 withholding right now.

Savings – We can draw from our $50,000 savings account  at ING Direct.

Part time work – I can take up part time work if we really need some cash. Perhaps I can baby sit other babies a few times/week. Hopefully, we won’t have to do this.

In a few years, baby RB40 will go off to school and then I’ll have more time to do part time work or grow my online business.

What do you think of my exit strategy? What are some other ways that I can make money while being a stay-at-home dad? I’ll probably try online surveying and see if I can make any income from that source. I’m sure I’ll find other ways to make a few bucks online once I have more time.

*2014 update*

I raised our expense target to $4,500/month due to preschool and inflation. Our income is also quite a bit different than I pictured.

  • Mrs. RB40’s income – $2,900/month after taxes and 401k contribution.
  • Rental income – $100/month. The rentals are just not generating much positive cash flow. There are more repairs and maintenance than I thought. At least the real estate price has gone up so they are padding our net worth.
  • Dividend and interest income – $750/month. The dividend portfolio is doing quite well. We should be making about $9,000 in 2014 and it should slowly increase every year.
  • P2P lending – target is still $100/month. Currently I’m making about $75/month with P2P lending, but I reinvest everything so at some point it will reach $100/month.
  • Online Income – $2,000/month. We did quite well in 2013 and I think we can maintain at least $2,000/month.

So from all sources, we are bringing home about $6,000/month. We will invest any surplus in our retirement accounts and dividend portfolio. I’m still optimistic with our rentals. I’m hoping to make $2,000 to $3,000 in 2014. That’s not much, but it will be a step in the right direction.

 

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{ 57 comments… read them below or add one }

SavvyFinancialLatina March 26, 2012 at 12:21 am

Nice! I’m glad you are still continuing with your dream. It gives us young people hope! :) When did you start contributing to your retirement?

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retirebyforty March 26, 2012 at 9:37 am

I started with my 401k contribution as soon as I started my first job and maxed out a couple of years afterward. Mrs. RB40 maxed out as soon as she started her first job.

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Money Infant March 26, 2012 at 12:42 am

Sounds like a pretty solid exit strategy to me. Very diversified income and little left to chance. Probably 10x more solid than my exit strategy was :)

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retirebyforty March 26, 2012 at 1:12 pm

Thanks Steve. I think it could be better, but we can’t keep preparing forever.

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Another Reader March 26, 2012 at 5:40 am

In my opinion you are nowhere near prepared to execute your strategy. In your shoes I would work two to five years longer to accomplish the following.

1. Pay off the house or reduce the principal enough to refinance to a minimal payment. Yep, there is nothing like a paid off house to reduce the income you need.

2. Maximize cash savings. You need at least $100,000 to cover your expenses for a couple of years in the event of a stock market crash, your wife’s disability, an unexpected disaster in one of the rentals, or something similar. As I have said before, your reserves are underfunded.

3. Develop a business that replaces at least half your income. Interested in lending money? Get out of the high-risk P2P business, and look to affiliate with an experienced and reputable hard money lender. Secured loans make more sense. Look for some consulting work that does not conflict with your current job. Boost your blogging income. Do what it takes to consistently produce at least half your income monthly with a combination of businesses.

4. Continue to maximize your retirement contributions. Two to five more years of that will dramatically improve your position in the 15 to 18 years until you can start drawing on those accounts.

Since you are in engineering, you have probably seen that engineers in their mid-40’s are not that valuable. You move into management or you are replaced by younger and cheaper recent graduates with fresh educations. Being prepared to get out at 42 to 45 is the sensible approach, even if early retirement is not your goal.

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retirebyforty March 26, 2012 at 9:36 am

I see your point. It’s always better to have more saving shored up.
– How much do you think we need in the retirement account given that we don’t plan to draw on them for about 20 years? It will have time to grow.

I think we are doing better than most people who are planning to have one parent stay at home. There are millions of stay-at-home mom/dad in the US. They make it work somehow right?

Thanks for your input. They are very helpful.

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Another Reader March 27, 2012 at 8:50 am

I would have to see all your numbers – the balance sheets and the income and expense statements – before I would want to tell you how much more I think you need. Based on what you are saying about how you will create income and some of the assumptions you are making about things like health insurance and your wife’s future employment, I don’t think you are safe from a lot of the possible changes in your life – employment, the stock market, your rentals, or your relationships.

A lot of folks that thought they were making one income work found out after a job loss, disability, or the stock market crash the one income base was not very solid. Crossing your fingers and hoping nothing bad happens is not a plan. Better to spend a couple more years working than to have to go back to a much less friendly job market when you have been out for 5 or 10 years.

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Modest Money March 26, 2012 at 6:01 am

While retiring from your daytime job by 40 sounds like an awesome goal, I’d be leaning towards agreeing with the comment above. While you are making good money, you might as well stretch it out a bit longer to get more financial stability. If you do take the plunge, just work hard and I’m sure you’ll find some kind of work to reach the $5k/month target. Consulting or freelance work may be your best option there. You can definitely monetize this blog a lot more too. Good luck.

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retirebyforty March 26, 2012 at 9:41 am

It will be tough to do much part time work with baby RB40 at this age. I think we can increase the online income too and I’m working on it.
I think it’s a trap to say I’ll work 2 more years. Before I know it, I’ll be 60. :)

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Well Heeled Blog March 26, 2012 at 7:06 am

What will you be doing for health insurance? Will Mrs. RB40 cover you and Baby RB40? I always wonder this in early retirement scenarios, because I don’t think it’s a topic that’s discussed that thoroughly in personal finance world. I’d like the option to leave full-time corporate work in my 50s and do some consulting, but healthcare is a biggie. I know that at my company, COBRA costs $550 per person. And that’s only for 18 months.

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retirebyforty March 26, 2012 at 7:15 am

We will jump on Mrs. RB40’s insurance. I think the cost increase is minimal – only about a hundred a month or so. I need to check her plan.
When she leaves her job, it will be more difficult. We can use a high deductible plan to cover the high expense emergencies and probably a pay per service clinic for small things.

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Dollar D @ The Dollar Disciple March 26, 2012 at 8:17 am

You should definitely double check that. It ended up being a LOT more than expected to add my wife to my plan after she left.

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Miss T @ Prairie Eco-Thrifter March 26, 2012 at 7:09 am

Modest Money has a good point. You could push it a few more years for that extra boost. However, part time work is always an option like you mentioned if you need it down the road.
My advice would be to not rush things. Take your time and make sure things are right.

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retirebyforty March 26, 2012 at 1:13 pm

If I have a choice, I’d rather pick up part time work in the future than putting off quitting my job. It’s getting unbearable. ;)

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Miss T @ Prairie Eco-Thrifter March 27, 2012 at 6:55 am

Well in that case, go for it. Misery is not a way to live.

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Me2 March 6, 2014 at 12:55 pm

That’s kind of the boat I’m in.. I’m 42 and have been here 17 years. My boss sucks and has been impossible since I had to go in for emergency surgery last year.

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RichUncle EL March 26, 2012 at 8:42 am

Hello,

I would wait until you can boost your rental income to 1K monthly and dividend income to 1K monthly, and I would do the Misses w4 withholding asap as your giving the government a free loan. Invest 18K of savings in your portfolio of dividend stocks as diversified as possible and only keep 32K in your ING account as that covers 8 months of your expenses in case your wife gets downsized. Hope this helps you. Good Luck.

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retirebyforty March 26, 2012 at 1:15 pm

We owe the IRS every year. My higher withholding cancels out her 1 on the W4.
It will be very difficult to double the dividend income to 1k. I’d need an additional 200k in the portfolio…
Thanks for your input.

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Marianne March 26, 2012 at 9:24 am

I go over the numbers in our scenario like you’ve done above constantly. The math in our case is not so kind. :)
Favourite quote: ‘Perhaps I can baby sit other babies a few times/week. Hopefully, we won’t have to do this.’ Ha ha! Yeah, for your sanity, hopefully. :)
While the posters above have a good point regarding working longer to build up a larger safety net etc., how can one know when they have enough of a safety net? At some point, people just have to move forward with something and make it work. Obviously, it is best to mitigate risks to the best of one’s abilities but we can’t ever safeguard ourselves completely. Also, maybe if RB40 retires next year, some great opportunity will present itself that he would have otherwise missed out on.. I think that if he has his bases covered (income > expenses + savings for retirement after 60) he will be able to work out the rest. If his wife loses her job, they will figure it out like they have all along. Will he have to work at McDonald’s? Maybe. Is that risk worth it to him? It seems like it.

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retirebyforty March 26, 2012 at 1:17 pm

You can always put off doing something. I can say, I’ll work a few more years and before I know it, I’ll be 60. I can always find another way to make some money, right?

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BusyExecutiveMoneyBlog March 26, 2012 at 11:33 am

RB40, yours is one of the best PF blogs out here bar none! You are doing so very well. However, there’s a lot of good common sense in the above posts. The main concern I would have is “the taxable nest egg” (not your 401K), but cash, stocks, bonds, etc. I keep looking at this picture for myself and agree that if one can make it to 60, they’ve got a reasonable shot with the solid pre-tax retirement kitty piled up and having a chance to grow. What at about the 20 years between now and that time. I am 40 this year and I want to have at leave 25x my annual expenses to be sure. For you that’s $1.2M. I would be cautious getting out before that point. They key is to enjoy retirement, not struggle to make it work. Plus, and this is just reality. Whats about a surprise RB40 and god forbid, what about a divorce? There’s a reason the divorce rate is 50% in the US. Every bit of cushion counts.

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retirebyforty March 26, 2012 at 12:32 pm

Does your spouse work? We are not planning on another kid and our marriage is doing very well. We’ve been married for 10+ years and I don’t think divorce is in the card. Let’s forget that for now and assume we’ll do fine as a couple.
If we do that and consider the difference between expense – Mrs. RB40’s paycheck = around $12,000/year, then yes I have 20x that amount in the non retirement accounts. I don’t have $1.2M, unfortunately.

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Financial Samurai March 26, 2012 at 8:14 pm

Joe might have close to $1.2 mil, we don’t know.

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Thomas - Ways to Invest Money March 26, 2012 at 11:39 am

Really like the exit strategy. Seems to have all points covered and realistic. It not you are looking to purchase a new car or something but cant it general and having backup plans.

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Leigh March 26, 2012 at 12:58 pm

I like Marianne’s comment above – you can *always* save more money and you would always be better off with more, but you can’t buy more time, especially with your son growing up (if that’s what you want).

I agree with you that there are plenty of stay-at-home parents out there and you are doing way more math about it than I’m sure the majority of the other SAHPs do. You have 10 months of emergency reserves saved and your expenses are less than your wife’s income. I think you guys will be just fine :)

I think my biggest concern is the health insurance, but that’s not so bad if you’re not planning on having another child.

Good luck!! I, too, would love to retire early and I definitely think it’s possible. My current projections show that being fully retired by 50 is possible, just by myself!

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retirebyforty March 26, 2012 at 1:19 pm

We’ll jump on Mrs. RB40’s insurance when I quit. Her job is very secure, but if she loses her job, we’ll have to figure something out. Maybe we can move to Thailand and take advantage of universal healthcare. Health insurance is a huge problem if you don’t have an employer plan.

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krantcents March 26, 2012 at 1:07 pm

Financially, I think you have most of the bases covered. I think you will miss the intellectual stimulation of a professional career. You should think about that aspect because in a ffew months, you start to miss that.

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retirebyforty March 26, 2012 at 1:20 pm

I don’t know. I really need an extensive break from the intellectual stimulants. It’s too much pressure and I think a few years off will refresh me.

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Hunter - Financially Consumed March 26, 2012 at 2:01 pm

I like your part-time-work strategy in your exit plan. I’m considering a few options right now to re-enter the workforce part-time. It can only help to keep my brain engaged and top up my skills with something new and exciting.

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retirebyforty March 26, 2012 at 8:48 pm

What part-time jobs are you thinking about? It will have to be somewhat mobile right?

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Hunter - Financially Consumed March 27, 2012 at 4:55 pm

Not exactly sure. Mobile (maybe), flexible hours, close to home and schools. I miss the personal interactions that the workplace offers, so I would like something that creates more interaction.

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retirebyforty March 28, 2012 at 8:57 pm

Hope you find something good.

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20's Finances March 26, 2012 at 3:13 pm

You know where I stand. It sounds pretty legitimate to me. I think our culture pushes the importance of extra financial security over true happiness. Enjoy time now with little RB40 while you have it. Since Mrs. RB40 still wants to work, the worst case is that you sacrifice a vacation or some other expense to make ends meet. It sounds like you are well diversified enough. This is something I need to work on. ;)

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retirebyforty March 27, 2012 at 4:03 pm

Thanks Corey. I’m sure I can pick up some work once the little dude goes off to school. With our passive income, I don’t need to make a lot to make ends meet. I can find a job I enjoy that just helps with the bills.

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Frugal Portland March 26, 2012 at 4:28 pm

What good’s a safety net if you don’t ever jump?

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Financial Samurai March 26, 2012 at 8:14 pm

Sounds like a good plan to me. I know you’ve got hundreds of thousands saved up over the years, and with the Mrs. working until 60, you guys have nothing to worry about!

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Evan March 26, 2012 at 9:45 pm

Couple questions:
1) The dividend income – is that a steady 550 a month currently? or is that the hopeful average each month? Are you going to have budget for quarterly?

2) Have you given any thoughts to 72(t) distributions of your qualified accounts?

3) Any thoughts to annuities?

4) Is your health insurance under the wife?

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retirebyforty March 27, 2012 at 4:01 pm

1) dividend income is not steady $550/month. It’s annual/12. I don’t think it’s a big deal because we have a big cash cushion.
2) No. I don’t want to touch the retirement accounts for at least 20 years. This will give it time to grow.
3) I don’t like annuities because I always think I can do better. I just checked and the yield is around 4.5%. I guess that’s not bad.
4) I will jump on my wife’s plan when I quit my job. I need to check how much extra it will cost.

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Roshawn @ Watson Inc March 26, 2012 at 11:23 pm

I love to see the progress. I think you are doing well. I can see subtle changes, but nothing is deterring you from your goal. 1.5 years is not long at all, but you’re almost there.

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Little House March 27, 2012 at 7:06 am

Your exit strategy is pretty solid. Does Mrs. RB40 have one as well? I’m just curious. Though she may love her job and career, she may get a little envious a few years after you “retire” and want to join you! ;) Is there a plan?

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retirebyforty March 27, 2012 at 3:57 pm

I don’t think she has an exit strategy. She likes her work and I guess she is similar to many Americans and live in the moment. She is maxing out her 401(k) contribution. Perhaps one of these days, I’ll get her to write a guest post on her exit strategy. :)

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Jeff @ Sustainable Life Blog March 27, 2012 at 8:55 am

This sounds like a pretty sound strategy joe, instead of focusing on total assets you’re focusing on cash flow. One question – are you totally debt free (personally, not talking rental properties). You could reduce your expenses that way, that would decrease the amount of cash you need and increase your monthly left over.

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retirebyforty March 27, 2012 at 3:56 pm

No, we still have a mortgage. :(
If there are any changes in Mrs. RB40’s employment, we can sell the primary resident and move to a cheaper area. This will reduce our housing cost drastically.

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Aloysa March 27, 2012 at 11:46 am

Seems like you got it all covered! I will be watching you closely. And cheering for you, my friend! :)

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retirebyforty March 27, 2012 at 3:54 pm

Thanks! I’ll need to adjust my advertising strategy to accommodate Google.

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CultOfMoney March 27, 2012 at 2:41 pm

Any thoughts on what the tax law changes to dividends would do? If you’re currently getting a 15% rate on dividends, and that moves to the ordinary income levels of 25%, 28%, or more, it makes it a bit harder to keep that portfolio income without a bunch more cash.

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retirebyforty March 27, 2012 at 3:28 pm

Once I stop working, our earned income will drop quite a bit. It might be possible to get into the 15% tax bracket. If I make good money being self employed, I can put most of that in the solo 401(k) to avoid the 25% tax bracket. We’ll see how it goes.

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Broke Professionals March 27, 2012 at 3:55 pm

I am sure you’ll be able to supplement your income once you start staying at home – probably by becoming a staff writer for PF blogs!!!

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YFS March 27, 2012 at 4:19 pm

4k expenses with 4.5k in income is a bit too close for my taste. What percentage of your income would be saved?

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retirebyforty March 28, 2012 at 8:59 pm

Mrs. RB40 will continue to max out her 401(k) contribution. If I make more money with my online business, I’ll probably contribute to the solo 401(k).
Anyway, I think I’ve saved enough for retirement.

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Wayne @ Young Family Finance March 27, 2012 at 6:46 pm

You could always get Mrs. RB40 a promotion?

How about taking on another 4 plex? It would boost monthly income and also aid in the long-term retirement plans.

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retirebyforty March 28, 2012 at 8:57 pm

I’m sure she will get raises since she is a good worker.
I don’t want to take on another 4 plex because we already have so much mortgage debt…

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101 Centavos March 27, 2012 at 6:54 pm

Sounds like a good plan. I’ll lay bets though that you’ll be consulting soon enough.

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Jen @ Master the Art of Saving March 28, 2012 at 2:48 pm

It sounds like you’re right on track to retire by 40. :-) I think having back-ups is a great plan, because you never know what will happen.

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retirebyforty March 28, 2012 at 9:12 pm

Thanks! Yeah, a backup plan is always needed.

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RichUncle EL April 3, 2012 at 6:40 am

I was running some numbers, and if you put in another $30 grand into three dividend paying stocks, two safe bets and a risky bet with a high yield, you will get an additional $130-150 per month in additional dividend income. Making you a step closer to the achieving Financial freedom.

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cashflowmantra April 4, 2012 at 9:49 am

Well, I think focusing on cash flow is the most important part. You want to make sure that the cash flow can keep pace with 20 years of inflation as well. You are very mathematical and analytic by nature so if anyone can make it work, you can.

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