Dreamweaver
Dryer sheet aficionado
- Joined
- Nov 5, 2008
- Messages
- 37
I read the book Your Money or Your Life in response to this Forum’s recommendation. Found it quite interesting and appreciate the recommendation. One suggestion for early retirement strategy the author made struck a question with me and wanted to get your thoughts.
The author suggested graphing what he calls the crossover point, which contains the following two streams of data points:
1. Monthly expenses
2. Investment savings at a long-term bond yield on a monthly basis.
Once data 2 = data 1, you have reached the crossover point and reached FI.
This suggestion raises the concept of not spending down your savings, but instead utilizing it as capital and living off the interest income stream. Let me suggest an example:
1. $5,000 monthly expenses
2. $1.2 million savings invested in long-term tax-exempt muni’s with an interest rate of 5% would yield $5,000 on a monthly basis.
You might need an extra few hundred thousand or so invested in stocks to keep up with inflation, but the idea seems like a good concept. With this concept, you never “run out” of money as long as there is no default. The most prominent risk here is that your interest income doesn’t keep up with inflation, but nevertheless you are nearly guaranteed a stream of income for life much like an annuity.
So my question is, of the amount people save, do people apply their savings toward one or a combination of the following:
1. After tax savings to use as capital for early retirement
2. IRA to use after 59 ½
3. Paying down the mortgage early to reduce expenses in retirement
For me, my total savings goes toward:
1. After tax savings: 67%
2. IRA: 27%
3. Paying down the mortgage early: 7%
If you can save capital for early retirement which can generate an income stream to cover monthly expenses, it almost begs the question why bother with an IRA and paying down the mortgage early? It almost seems as if 100% of savings should be devoted to capital, and the income stream from the capital would live on past age 59 ½ (no need for an IRA) and would cover the mortgage (no need to pay it down early). What do other people think? Thanks!
The author suggested graphing what he calls the crossover point, which contains the following two streams of data points:
1. Monthly expenses
2. Investment savings at a long-term bond yield on a monthly basis.
Once data 2 = data 1, you have reached the crossover point and reached FI.
This suggestion raises the concept of not spending down your savings, but instead utilizing it as capital and living off the interest income stream. Let me suggest an example:
1. $5,000 monthly expenses
2. $1.2 million savings invested in long-term tax-exempt muni’s with an interest rate of 5% would yield $5,000 on a monthly basis.
You might need an extra few hundred thousand or so invested in stocks to keep up with inflation, but the idea seems like a good concept. With this concept, you never “run out” of money as long as there is no default. The most prominent risk here is that your interest income doesn’t keep up with inflation, but nevertheless you are nearly guaranteed a stream of income for life much like an annuity.
So my question is, of the amount people save, do people apply their savings toward one or a combination of the following:
1. After tax savings to use as capital for early retirement
2. IRA to use after 59 ½
3. Paying down the mortgage early to reduce expenses in retirement
For me, my total savings goes toward:
1. After tax savings: 67%
2. IRA: 27%
3. Paying down the mortgage early: 7%
If you can save capital for early retirement which can generate an income stream to cover monthly expenses, it almost begs the question why bother with an IRA and paying down the mortgage early? It almost seems as if 100% of savings should be devoted to capital, and the income stream from the capital would live on past age 59 ½ (no need for an IRA) and would cover the mortgage (no need to pay it down early). What do other people think? Thanks!
