I'm sure the recent steady rise of stock prices has a lot of people feeling richer -- myself included. Although I've been reluctant to make many new additions to our FI Portfolio recently, the reality of our finances is that most of our investments are held in long-term retirement accounts which have benefited greatly from the return of markets to record highs.
In a classic case of counting chickens before they hatch, I projected the future performance of our retirement savings over 25 years (the length of time between the average age of my wife and me  and 59.5 years old [when current US laws would allow us to start to withdraw money from these accounts without penalty]). I used the sum of the most recent market values of our retirement accounts (as of last Friday's close) and assumed several different average rates of return to see a possible range of outcomes.
As you can see in the image below, assuming a conservative 3% annual return, we would have a million dollars in our retirement accounts in 25 years. Each 1% increase in the average rate of return above 3% would significantly add to our nest egg when we reach the government-approved retirement age. At a 5% annual return, we'd have $1.6 million. If we can somehow manage to see 8% returns on average, our retirement assets would swell to $3.3 million.
Of course, our investments are not guaranteed to go up. As an extreme example, we could see a 30% drop in value next week, meaning the starting amount in year 0 of the table would be significantly less, and the numbers in year 25 wouldn't be as impressive. However, even in that more pessimistic scenario, after 25 years the end result should allow us a modest lifestyle in our golden years.
One thing my table doesn't show is any new contributions we will make to our retirement accounts. We both get matches from our employers on contributions to our workplace savings plans. We also expect to continue adding the max amount to our Roth IRAs every year we are earning a paycheck. So it's possible that the year 25 row values are on the conservative side.
The point of this exercise for me was to confirm my suspicion that we have oversaved for our retirement up to this point in our lives, and undersaved for the 25 -year span between the present and when we are 59.5 years old. When you also consider that we should get something in the form of Social Security benefits in our 60s, the possibility that we've oversaved for retirement becomes even more likely.
The reality of our current situation is that we have 25 years to bridge, but I don't see us getting our FI portfolio to a point where it would produce enough income to allow us to quit full-time work any earlier than 10 years from now -- given our current savings rate and lifestyle. By that point we'd only need to cover 15 years until we could tap our retirement savings. And by then we could probably afford to spend some of the principal of our FI portfolio (along with the income) in order to get ourselves to age 59.5.
I've been trying
to come up with creative ways to access our retirement savings early so
that we can make a smoother transition to part-time work or early
retirement. Unfortunately the current US tax laws don't have many
loopholes to aid people in our situation.
If we happened to see a new bull market in the near future and had several years of significant gains (similar to what happened in the 1995-1999 timeframe), I wouldn't necessarily be opposed to pulling some money out of the retirement accounts early and paying the 10% penalty. I think this would be an extremely fortunate and unlikely scenario though.
We can withdraw our Roth IRA contributions at any time without penalty. I think this would be helpful making a final push to get our FI portfolio where we wanted to be. For example, if in the future we had $500K in our FI account and our goal was to have $600K in income-producing assets, we could take $100K of contributions out of our Roth IRAs and move it over to the FI account to reach our goal. This won't make a huge difference in the near term, however. This would likely be a shortcut we could use several years down the road.
We could always
stop contributing to our retirement accounts. This would allow
us to divert more income to our FI portfolio. But since we get matching
contributions from our employers, it seems like we would be neglecting
an opportunity for free money by making that choice. Even if we decided later to withdraw from the accounts early and pay the penalty, our employers are matching at a rate higher than the 10% penalty -- so we would still come out ahead in the end. And as I said before, any contributions we make to the Roth IRAs can be withdrawn penalty-free later, so it makes more sense to me to contribute to the Roths now to allow an opportunity for some income/appreciation to occur in the tax-sheltered account until we are ready to pull the contributions back out. So stopping retirement contributions seems like a bad choice to me.
My wife has also talked about making lifestyle changes that would help us reach our goal sooner. For example we could sell our current house and downsize to a very inexpensive location (a trailer in the middle of nowhere) and pinch our pennies while waiting for our investments to compound over time. This sounds sort of romantic, but it would be a major change and would require us to give up a lot of things we currently enjoy. I think there is probably a middle ground to be found here, but it would require a lot of planning and discussion so we can agree on what we want from life over the next 25 years.
We could also try harder to change from full-time to part-time work. However as I've mentioned before, it doesn't seem like there are many opportunities for us to work part-time in our current fields -- employers seem to want to hire professionals for full-time positions only these days. (As an example, my employer has all but eliminated part-time positions across the firm. Current part-time employees are "grandfathered" in but no new part-time positions are being offered.) In order to shift to part-time, we'd need to find new types of employment, and the most common part-time work is found in very low-wage jobs. It might be possible for us to create our own higher-paying part-time jobs, but it seems to me that getting to a point where one can work in a part-time consulting or entrepreneurial role requires a large amount of up-front effort (in hours, stress, money, education/licensing, etc). I really don't want to take on a huge commitment for something meant to last only 5-10 years. I'm not looking to embark on a new 25-year career. I'm looking for the path of least resistance.
I keep hoping I'll stumble across something new that I haven't considered (or didn't know about) which would help us in our situation. Until then we'll continue to work our jobs and save as much as we can.