It’s great to be back from vacation. My kids have their first day of school today, and I am almost getting into a steady routine.
Almost. I’m headed to a financial conference (FinCon) tomorrow and will be there until the end of the week. In the meantime, it’s good to dip my toes back in the waters of writing about personal finance.
Traditional personal finance advice says you should save a certain amount (15% or so) in a retirement account. When you reach age 65 (or 67), you retire from your job and start withdrawing from that retirement account. You can supplement your income with Social Security.
It’s excellent advice. It’s as good as anything that can be generalized in a few sentences. It’s also a lot more than most people do.
However, if you are here reading this article, you are likely looking for more specific ideas and planning for more specific scenarios. Maybe you want to retire early as I did in 2006*. Perhaps you are looking for more from your money than just a normal retirement in your mid-to-late 60s.
I saved money in retirement accounts for years. I often maxed them out. My wife had done the same, even before we met. Now that we are in our mid-40s, we realize we’ve built a nice nest egg. If the markets continue to do their thing for the next 20 years, it will likely quadruple. To understand why I’m using a quick rule of 72 calculation to estimate that the money doubles every ten years at 7% growth. Twenty years would be doubling twice or a quadruple.
We’re in a good position to follow the traditional path of drawing down from that nest egg in retirement. As Hannibal on the A-Team used to say, “I love it when a plan comes together”.
There’s just one “thing”. If we save too much money, we’ll have to pay taxes at our regular income rate. That could be high since we saved so much. We’d also be forced to withdraw from some accounts due to the evil RMDs (Required Minimum Distributions). It’s a great situation, but it’s not optimal. Not only that, but we’re putting all our money into the future. As we used to say in the tech world, what would happen if you got hit by a bus? It’s not always great to plan for the future.
Build a Runway
A better plan may have been to build a runway. I’m
stealing borrowing this from my friend who used to be a personal finance blogger.
The idea of building a runway is simply just growing the money you have outside of retirement accounts and extending how long they cover your expenses. If your expenses are $50,000 a year and you have an investment portfolio of $25,000, then you have a runway of six months. I don’t view it as the same as an emergency fund, so I’m allowing myself to invest it at risk. Maybe you want much less risk and want to treat it as an emergency fund. That’s fine too. It’ll take longer to build the runway if you are investing conservatively or not at all. I’m too impatient for that.
For the longest time, we had no runway. I had tried to build passive income streams like this blog. We have some real estate investments, but it doesn’t generate cash flow since we still have mortgages on them. I had also tried to cut down on our future expenses – getting solar panels, paying down the 15-year mortgage, etc. My wife’s military pension is a built-in runway.
It wasn’t until recently that we started to build this runway. One of the properties was getting difficult to manage from far away, and the tenants’ lease expired when the seller’s market was at its peak. It was extremely difficult working with the tenant, but at least the timing was perfect. I had thought about doing a 1031 exchange, where you quickly buy a new investment property and avoid taxes, but it didn’t make sense to me to buy at the height of the market again.
So we have a little runway now. It’s good for about two years. If we had a genuine financial emergency, we could probably extend it to four or five years by cutting back on luxuries like the kids’ private school and refinancing the last few years of our mortgage over another 15 years. Neither one of those are an ideal situation, but I think it’s essential to plan for what a worst case looks like.
It would be ideal for us to grow this to be 13 years long and reach age 59.5 when we can start withdrawing from our retirement nest eggs. It looks like investment growth over the next 6-7 years (at 7%) would make it big enough to carry us through the last six years of a stretch run.
Have you started building a financial runway outside of your retirement accounts? If so, how long can it last for you?
* Nowadays, I’m unsure if I ever want to “retire” as I imagined in 2006. I just got back from two and a half weeks of traveling, and while it was fun, I needed to get back to creating, helping people, or doing something productive.