I wish I was writing this post ten or even twenty years ago. Unfortunately, since I started working, I never sat down to think about my retirement plan. It pains me to think at how different my life would have been had I started thinking about frugal living and retirement back when I was in my late 20’s or early 30’s.
As it is, I’m a “late starter” as they say in the personal finance world. Not in the sense that I don’t have any money saved, but from the standpoint that if I had saved and invested my money more wisely over the past 20 years I could have retired years ago.
I went back and pulled my tax returns from as far back as 2010 and found that the least amount I’ve made (on an annual basis) from then to now was $81,000. While the most I made in a single year was $219,000, my average income was around $128,000. This does not include my Wife’s earnings, which is what makes me feel even sicker about the whole situation.
I know people who have earned far less, are my age or even younger than me, and retired early years ago…
So before we get into how I plan to change things drastically and retire in the next 5 years, let’s talk about how we got here.
As I posted about recently, my Wife and I recently became millionaires (on paper at least). But this euphoria is short-lived, as we are now circulating legal documents that will split those assets in half, saddling me with all the marital debt, a promissory note to buy her out of our home, and a monthly child support figure.
There are three primary reasons that we (well, I) am not already retired. (I don’t mean to put all the blame on my wife. It takes two to tango. So I’m equally responsible. If I had been more forceful in our early years, we probably would have ended the marriage a long time ago.)
- We never took our finances seriously, and we definitely weren’t intentional with planning out how we would spend our money.
- We sent all our children to an expensive private school from age 2 until 5th grade. Conservatively, I suspect we spent at least half a million dollars on that education, not to mention running up credit card debts when we couldn’t afford our household bills because of the monthly tuition bill.
- While I love my children dearly, many financial bloggers will say that choosing the right spouse can have a profound impact on your finances. I am proof of that. Not only did my marriage cost me money in terms of lost earnings, but because I did not have a spouse that shared my frugal vision we did not save nearly as much money as we should have during the past 15 years.
My Retirement Plan – A Financial Crossroads
So as I sit here writing this post, I am at a crossroads in my life. By all accounts, to my friends and family I’m seen as a relatively successful adult with a loving family and a good career. I’m in my peak earning years, and this should be a time when I’m celebrating my success and enjoying my family, not thinking about starting all over.
But alas, here we are.
And after 17 years of marriage, and over 20 years together with my spouse, we are choosing a different path for one another.
As my Wife told me on the day we decided that a separation was imminent, our relationship is like an old pair of shoes. At first, they looked good and fit perfectly. But now they are worn out, have some holes in the sole, and are no longer comfortable.
In other words it’s time to move on.
Luckily for us, our separation has been amicable up to this point and we both intend to keep in that way. Although we have different views on money, raising kids, and even our diets, we will remain good friends.
Year 1 – Take inventory of what I have, cut back on spending and pay off debt!
As I start my life as a single, middle-aged man with a graying beard and even grayer hair, here is where I will stand financially (and my thoughts on each asset/liability):
A couple quick notes on this chart:
- Real Estate: This is the valuation from Zillow/Redfin. We are actually in the process of hiring a professional appraiser to give us an actual value. So this could (and probably will) change. This also does not factor in an estimated 5% fees and commissions that I will have to pay when I sell the house.
- Retirement: As much as it pains me, I will not be able to contribute to my retirement accounts this year unless there is a drastic increase in my income allowing me to pay off debt sooner.
- Investment/Savings: I will be using the bulk of this money to pay off credit cards, but have to wait until after we sign our separation agreement to do so.
- Checking Accounts: As noted, I only keep enough in checking to pay the bills that are auto-deducted each month and a little in a spending account for incidentals.
- Car: Many people in in the FIRE community will likely blast this expense as too much, and they would probably be right. But this is a pre-owned 2021 Honda, and I had to purchase a vehicle that was commensurate with what my Wife purchased for legal reasons. I may sell it, but more likely I will just pay it off as quickly as I can and have a reliable vehicle for the next 10-15 years.
- Mortgage: Our mortgage is super low at 2.8%. We have a tenant until August of 2025. The rent is more than enough to cover the mortgage payment and the HELOC. I will likely put the extra towards the mortgage principal after we separate. If you haven’t figured out, a lot of financial decisions are on hold until the ink is dry on my separation agreement.
- Promissory Note: Honestly, this really pisses me off. But I have no choice. The only retirement funds my Wife has are funds that I invested for her, or forced her to invest at her job (seriously, I literally asked for her password and had to login to make her payroll deductions for her). Because I have substantially more retirement than her, now I have to give her a huge chunk of the equity in the house.
- HELOC: $40,000 of this was used to pay for private school tuition. Yeah. And the other $35k was wasted on poor financial decisions. But no excuses. It is what it is.
- Auto Loan: Payment is $600/month and I will accelerate the payoff after the credit cards and personal loan are paid off.
- Personal loan: Another stinker. I took this out to pay off $36,000 in credit card debt and made my Wife promise that we wouldn’t use the credit card again. You can guess how that turned out. 🤬
- Credit Card Debt: We have made too many bad financial decisions to count, but this debt is probably the biggest. Since I met my Wife, I can’t ever recall a time when I wasn’t juggling credit card payments each month. Not only has this cost us with poor credit, but we haven’t been able to travel hack (because we can’t qualify for the cards that will allow us to do so), and have likely paid higher interest and premiums that equaled tens of thousands of dollars over the years.
- Student Loans: I started with $140,000 in loans when I finished law school in 2003. I can finally see the light at the end of the tunnel with only 7.5 payments left!
Now that we have talked about the net worth, lets talk about my spending and expenses. This has always been a moving target with me and not something I could control, because I couldn’t control what my Wife spent money on.
Again, I don’t want to throw her under the bus, but needless to say spending money has always been a source of conflict and fights. We both readily admit this. She wants to spend her money freely without anyone judging her and I want to save and invest every last penny I earn.
Something had to give.
Now that I have signed a lease on my own townhome, and we have a basic idea of how the child support and asset/debt distribution is going to look, I can start to make some basic projections about my expenses.
So here goes:
There are a LOT of big assumptions with this chart. This is true pretty much anytime anyone prepare a pro-rate financial statement (that’s a fancy way to say we are projecting financials out into the future). I recognize this.
Here are just a few of the unknowns:
- Will my wife agree to not take a payment on the promissory note until I sell our house after the tenant moves out? (I think she will, but we haven’t agreed to that just yet.)
- Will my income tank or rise more than anticipated? I’m going to have a lot of free time while the kids are with my with 50% of the time, so I’m guessing I will earn more (I own my own business), but who knows?
- What if I have a major health emergency that taps my savings?
- I didn’t account for doctor visits and trips to the dentist, but I’m assuming the costs will be minimal.
- My wife may want to revisit child support next year. If my income goes up or her’s goes down, that could have an effect.
- I have no idea is $500 a month is enough for me and 3 kids 50% of the time for groceries. I plan to use Costco and Sam’s Club a LOT. I will say that when I am out of money for food, I only buy the basics. My wife would spend as if we had the entire budget – another source of contention for us.
- My “rent” in August 2025 switched to my current mortgage payment. I have no idea if that is accurate.
- As much as I would love to pay off my home and continue to live there, I haven’t decided whether it makes more financial sense to pay off my mortgage (thus drastically reducing my monthly expenses) or use the cash to invest in my retirement accounts and sell the house (becoming a perpetual renter). More on this later.
Year 2 – Optimize My Lifestyle and Spending plus Tax Hacking
One of the first major decisions I will need to make in Year 2 is what to do with our house. Here are my options:
- Sell the house.
- Keep the house and aggressively pay down the mortgage.
- Keep the house for now and defer the decision for another year.
There are a few factors that will help me come to a decision.
First, I currently live in an extremely high cost of living area. If I want to truly “optimize” my spending, cutting back on housing costs is going to be one of the fastest ways to do this.
Which invites an interesting dilemma.
My monthly mortgage payment is only $1,392 (principal and interest only) – far less than I would pay if I bought a comparable house on the market today. But my escrow payment is an additional $681 for taxes and insurance, as well as an additional $100/month that I pay to the HOA. That’s over $9,000 of my annual budget for real estate taxes and insurance on a house that is frankly, bigger than I will ever need.
Even if I were to pay off the house, I would still have taxes, insurance, HOA dues, upkeep and maintenance to contend with for this property. According to Nerdwallet, you should be setting aside anywhere from 1-2% of your home’s value per year for upkeep and emergency repairs. This would amount to between $4,250 to $8,500 using my original purchase price of $425,000. With a current value of over $700,000 we are looking at $7,000 to $14,000 or more that we must budget per year for upkeep and repairs. I know that my A/C is aging and will go out one of these days, I should probably err on the high side of this number.
This means that even with no mortgage, I’m looking at approximately $17,200 per year in taxes, insurance, repairs and upkeep to maintain the home – or $1,400 per month.
In addition, I am locking in a bunch of equity that I can’t use for income (unless I were to use a reverse mortgage to generate extra income) AND I would be living in a geographic area where the cost of housing is 84% higher than the national average, and I don’t see it decreasing anytime soon.
As I work this through in my brain, selling the house, paying off my Wife, and getting rid of my last debt payments seems like the best option for me. I haven’t even gone through the emotional expenses of continuing to own this home, i.e. 1) I don’t LOVE the home, 2) I don’t love the neighborhood, and 3) it is a constant reminder of where I raised my kids.
So selling may be the best option. I’ll update this post if that changes.
Tax Hacking My Way to Financial Freedom
One of the little known secrets of optimizing your savings each year is that by doing so you can significantly decrease your overall income tax bill. If you need help understanding how or why this is possible, you should read this excellent post by GoCurryCracker.
The general idea is that by contributing to pre-tax retirement plans and related accounts, you can lower your taxable income to a level where you will pay little to no income tax.
If you are a married couple filing a joint tax return, it is pretty amazing to learn how much you can earn (and save) without paying any taxes.
Since we are in the middle of 2024, consider the following:
- You can claim a standard deduction of $29,200. This means that the first almost $30,000 you earn as a married couple is not taxed. (If you are single, you get a free pass on the first $14,600).
- You and your spouse may each contribute up to $23,000 to an employer sponsored 401(k) plan, shielding another $46,000 from tax.
- If you have a high deductible health plan, you may contribute $4,150 per person up to $8,300 for your family to an HSA tax free.
- If you earn less than $123,000 as a married couple (or $77,000 as a single filer), and you are covered by an employer sponsored retirement plan, you may contribute an additional $7,000 per person ($14,000 total) to a traditional IRA.
- if you have children, you may claim a $2,000 per child tax credit to offset any taxes you may owe.
- The first
To understand how this works in practice, consider the following:
You and your spouse earn a combined $123,000 in salary in 2024. You have two kids and can live off about $4,000 per month, or $48,000 per year.
Total Income: $123,000
Less: 401k contributions ($46,000)
Less: Deductible IRA ($14,000)
Less: HSA deduction ($8,300)
TOTAL DEDUCTIONS: $68,300
ADJUSTED GROSS INCOME: $54,700
By subtracting the standard deduction from your adjusted gross income, the taxable income would be $25,500.
Using the 2024 tax tables, tour total tax on this income would be $2,595.88.
BUT, since you have two children you are entitled to a $4,000 tax credit, leaving your effective tax as $0!
But What if I’m not Married?
Ok, as you know by now, I will very likely be divorced by the end of 2025, which means I will be filing as a single person. (My Wife will file as Head of Household).
So what does this look like as a single filer?
Let’s run the numbers…
According to my budget shown above, I estimate I will earn about $123,000 as a single filer and will use the tax information from 2024 (since we don’t know the numbers from 2025 yet) to run these numbers. If I earn more I will save the surplus. Also, because I am self-employed, I have access to some special deductions that were not listed above.
Total Income: $123,000 ($40,000 salary and $83,000 owner distributions)
LESS: 401k Contribution ($30,500) (for most single filers, the limit is $23,000, but I turn 50 in 2025 so I can contribute more)
LESS: HSA contribution ($4,150)
LESS: QBI Deduction ($16,600)
I would also contribute $8,000 to a Roth IRA which is NON-deductible.
TOTAL DEDUCTIONS: $51,250
ADJUSTED GROSS INCOME: $71,750
By subtracting the standard deduction from my adjusted gross income, the taxable income would be $57,150.
My total tax as a single filer would be: $7,626, an effective tax rate of 6.2%! (And these numbers are likely to be more favorable to me when the 2025 contribution limits, standard deduction and updated tax brackets are published).
My wife and I are still negotiating the child tax credits, so I will receive and additional $2,000 or $4,000 credit against that tax bill, leaving my final estimated tax at either $3,600 or $5,600.
Years 3-4 – Increase my Income and Savings Rate and Rinse and Repeat
I’ve written this post to not only help me plan my future retirement savings and hold myself accountable, but also so that I can go back and update this post with what actually happens.
Here is how I project my net worth for the next 5 years. In making these projections, I made the following assumptions:
- Real Estate will grow at 5% per year
- Retirement and Investment savings will grow at 11% per year (I’m mostly invested in index funds, but am also overweighted in AAPL, which is why I think my portfolio will return slightly higher than the 9-10% average return of a broad market index).
- Beginning in Year 2, I will maximize my 401(k), Roth IRA, HSA each year.
It will be fun to save this spreadsheet and track how I actually perform (i.e. can I hit my Fire number even sooner??)
If I am able to save $1.4 million within 5 years, this exceeds the FIRE number I referenced earlier. Using the 4% rule, I should be able to withdraw about $56,000 per year to live fund my retirement, travel, etc. It’s a little lower than I would like, (I’d much rather have closer to $2,000,000 for peace of mind).
Year 5 – Hit my retirement number and plan for the Future
So there you have it. My plan to retire in 5 years. I don’t know how this will play out in reality, but it’s a start.
And it gives me a goal to work (no pun intended) towards, as well as a light at the end of the tunnel.
