The Hole in the Plan

Occasionally I sit down and reflect on plan to retire at 45 and wonder if I’m going about it all wrong.  Why?  I know there is a significantly hole in my plan.  I assume during my calculations that I never earn a dime of money again after I retire despite the fact I do intend to do some work.  I even found out the other day that my wife is toying with the idea of continuing to do some work once we are financially independent.  So the question becomes am I doing this all wrong because of a false assumption?

Perhaps the way I should be looking at my savings if the liberation from having my day job (but not all work) and treat the money as a giant version of an income stabilization fund.  That way my savings would have just two phases: money for actual retirement around 60 and then backup money for the years that we don’t earn enough to cover all of our expenses.

So in that case let’s say I need about $200,000 for actual retirement (I’m picking round numbers out of thin air here so don’t take the value seriously).  Then if my expenses are about $25,000 a year, an additional $250,000 would provide a giant income stabilization fund.  So that fund would be 10 years of completely not working or 20 years of just earning $12,500 between my wife and I.  The advantage about thinking in these terms is you only need your ‘income stabilization’ money to keep pace with inflation since you don’t have to rely on the income generated from that money.

Also because you only need that ‘actual retirement’ money at 60 you don’t need to save the full $200,000 before you quit your current job.  A portion of that can be gained from compound interest over the next 20 years.  Obviously you don’t to pick too high of a rate of return in your plan if you don’t save all the money upfront, as that could set you up for failure later on.  Yet a modest rate could likely take care of some of your savings for you.  So in reality if you earned a 4% real return on your money for 20 years you only need to save about $100,000 before quitting the day job.

So in theory I could get by with a ‘retirement’ savings target of $350,000 rather than double that for full financial independence at about $700,000 in savings.   If that were the case I could potentially hit the lower target in about five years.  It’s a tempting line of thought to explore.

Yet temptation also exists on keeping working the day job just a year or two more beyond the $350,000 mark.  Why? Because at that point every year worked plus compounding interest gains approximately another $100,000 in savings which continues to reduce your reliance on income from a job.

So where is that line in the sand if you choose semi-retirement?  On hand you can leave earlier by relying on your ‘work’ more in semi-retirement and the other hand you can reduce your dependence on any work.  Which freedom do you want more: freedom from your day job or freedom from all work.

13 thoughts on “The Hole in the Plan”

  1. My goal is freedom from my full time day job. At this point we’ve saved enough for retirement from 65 onward when combined with a small pension and government benefits.

    Now we’re focussed on the savings we’ll need to be able to retire before that point. We intend to be in a position to fully retire in December 2020, IF we want to. By then it’s possible I’ll be doing a job I love and won’t run screaming for the door as soon as we hit our magic number. Unlikely, but possible. Instead I figure I’ll quit my full time job and alternate long travel or leisure periods with some contract work. Rather than an ongoing PT job I think I’d prefer to take a 3 month FT contract and then take off on another trip, or go camping for the whole summer. We have a $10k/yr travel budget built into our planning, but the contract work would fund the more extensive travel I’d like to do.

  2. We’re treating our financial independence plan similarly…we have the ‘real retirement fund’ which is intended to fund a traditional retirement post-65 (and is completely off limits prior to that) and an ‘early independence fund’ which can buy us years off or a reduction in hours prior to that. Our thought is that if our financial assumptions/projections are wrong and we have to go back to work after ‘retirement’ doing so between the ages of 45 and 65 isn’t a disaster–running short of funds at 70+ kinda is!!

  3. Freedom from all work. Extreme security.

    When I’ve run the numbers in the past, I find that going 1/2 or 3/4 of the way means you’ll likely be filling the remaining income needs forever with no opportunity for future retirement.

    To have a future retirement, part-time work has to be excess income, not just filling the void. It is very tough to find employers willing to hire part-timers at a rate as high as full-time employees… usually the rate for part-timers is 50-60% the rate of full-time, so you’re only making 1/4 the salary you expected.

  4. On the other hand, even having only 25% of the full early retirement amount does provide you with the freedom to not worry about the job market for at least a couple years.

  5. I plan to have my retirement nest egg 3/4 complete within 2 years, at that point I can reduce my savings rate and embark on my second career in a different country without the burden of having to earn X dollars in order to maintain my current (very high) savings rate. I have every intention of working until I am 65-70, but have been saving hard so that my nest egg is squared away earlier rather than later, so I have the freedom to change careers and take a more interesting but lower paying job if I choose to.

  6. I probably worked part-time for more years than I really needed to. I worked P/T from 2001-2008 but I reduced my weekly hours from 20 to 12 in 2007 in anticiaption of a likely retirement by the end of 2008.

    I have a large, non-retirement account whose dividends I use to more than cover my expenses. But I also have a retirement account which is growing nicely and will (hopefully) continue to grow until I may need to tap into it when I turn 60 in 13 years from now. I consider this one of my “reinforcements” waiting for me when the time comes. Because of this big blob of money (and other reinforcement such as Social Security and a frozen pension), I don’t care if I run some annual deficits while in my late 50s as long as I don’t go broke (fat chance!) before I turn 60.

    It seems to me that you are trying to set up one of these separate “reinforcements” you can tap into years after your early retirement at 45(?). As you might expect, I think it is a good idea for you, too.

    Another thing I put into my current ER budget is to build in a surplus in the early years because it is likely that my expenses will rise more quickly than my dividend income. This provides me with a nice safety cushion so I won’t be tapping into too much principal later on.

    This made working a few extra years part-time well worth it although there were some other factors in play in my particular situation. First was the growth of my company’s ESOP (which I cashed out at favorable tax rates to invest in an account whose dividends cover my expenses). Simply being employed allowed me to take full advantage of that rapid growth in 2006-2008 (before it declined at the end of 2008 along with everything else). Until I switched from working 20 hours per week to 12, I was still eligible for company matching funds in my 401(k), so that boosted the aforementioned “reinforcement.” My actual wage income was low (especially in 2007-08) but it was still enough to cover my expenses so I was at least able to reinvest all my dividends and cap gains (but not contribute anything more to my 401(k)).

    So my advice to you is to establish a cushion, or surplus, in the early years of your ER while creating/retaining a “reinforcement” (i.e. retirement) account you will be able to access later on. That account can grow tax-free for at least 10 years until you need it.

  7. Idk,

    I think you nailed the major issue with this plan you want your ‘full retirement’ money to be rock solid before you even think about doing this.


    That is an interesting way to approach the problem. Save to change careers rather than semi-retirement. Thanks for the idea.


    Well that is another way to view the issue, building ‘reinforcements.’

    Thanks for the ideas everyone. I’m still not sure what to do myself, but I’ve got a few years to mull the issue over.


  8. I saved enough for a fairly frugal (to me) retirement – somewhere around your figures, just a little higher. With the intention now of being semi-retired. Summers off would be nice – along with a month around Christmas! 😉

    My concern also is that it seems like many people find it difficult to find employment at a good wage once they get a bit older. 45 is fine, 55 or so seems to be a point where age discrimination starts. I’ve semi-unconsciously done it myself when hiring (thinking ‘oh man, I’m going to have to teach this person computer skills’…) That’s why I don’t think it’s a really good idea to stay out of the job market TOO long if you know you want to work / be semi-retired.

    I know it’s so tempting to plan, plan, plan. But that also assumes that you’ll be the same person with the same considerations 5 years from now. Stuff happens, you could get a sucky boss, you could have a great opportunity come up, etc. etc. Going middle of the road is best – which I think you’re doing, is great!

  9. I’m trying to understand how the ‘dream’ can work. Accepting, for the moment, the 4% rule and hence a need to have $1,000,000 (in 2010 dollars) for retirement we then read:

    “I am 32 years old, make less than $80,000 a year…. I also have a mortgage, but I still plan to retire in 13 years.”

    Presumably that means near-zero assets currently? Real return bonds are paying 1.2% per year real according to the last graph at

    So interest helps not much, and you would need to save about all of your $80,000 annual income for 13 years. Am I missing something?

  10. Keith,

    For a list of my current net worth click on the ‘Net Worth’ category in the first sidebar on the right.

    As for hard numbers read the ‘Retirement Calculations’ series in the Popular Post sidebar (also first sidebar to your right). That should provide the majority of the information you are looking for.

    Hope that helps,

  11. Tim,
    Thanks. Ok – you have done a lot of careful thinking – but your assumed annual yield of 5 percent above inflation might be less than used by some exuberant folks but looks very optimistic compared with that 1.2 percent on real return bonds. The Bank of Canada site (two posts back) shows that 5 percent real was indeed the safe real yield on real return bonds in the mid-1990s. But we’ve sobered up since then.

  12. Keith,

    Oh, I don’t deny the 5% total real return isn’t a challenge to get, but it is doable. Also you have to consider risk profile. Real return bonds have almost no risk (and a low return) meanwhile I’ve got considerable amount of money in equities which to date has boosted my return to that 5% real level (or higher in some cases). Yet the trade off is I do have a lot of risk right now and as I age I will be shifting over more to bonds. The 5% real return is meant as an average over the total time span.

    I will admit there is a risk that I won’t hit the required return and will have to push off early retirement. Yet even in a worst case I still should easily hit retirement at 50.


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