Pieces of our Financial Freedom Plan Falling Into Place

One thing I have been pretty vague so far is how we are going to fund our financial freedom. Just because we have a goal to reach a net worth of $2million doesn't automatically mean we will be anywhere close to our goal of financial freedom. We have to make sure we have the proper mix of assets to produce a sustainable income to maintain a reasonable standard of living so we can call ourselves financially free.

Things are beginning to take a little more shape in how we might sustain ourselves post my career. Since our goal to is to be able to retire or become financially free in roughly 10 years from now (at the age of 45) we will need a plan to sustain ourselves for 20+ years (until retirement age of 65) and then hopefully for another 30-40+ years in typical retirement fashion ;-).

So here are the major components I currently see to maintain a sustainable income as part of our financial freedom strategy :

Rentals - We've just purchased our 3rd rental property. These properties are going to be a critical part of providing the cash flow needed to sustain ourselves. If we pay off the remaining mortgages and other expenses are subtracted they could be providing us with nearly $30k in rental income per year (in today's dollars). That will likely be a significant part of the cash flow we will need to cover our ongoing expenses. [Projected Annual Income: $20,000 - $30,000]
Stock Dividends - Today we roughly get $2,800 in stock dividends per year. We have placed a lot of focus on growing these dividends year over year, so far without too much success. We will want to continue to grow these assets as much as possible in the next few years and then begin to taper off our investments a bit as we focus on others.[Projected Annual Income: $5,000 - $6,000]
Interest - Mainly through bonds, this is an asset we have largely ignored as I've shyed away from bond funds and treasuries. However I suspect this will be an asset type that we will invest in significantly over the coming years. We'll want to get at a lot more income per year than we do today from interest likely in individual corporate bonds and muni bonds. Our primary bond investments to date have been in Markel corporate debt with our current total annual interest earnings at about $1,000 per year. [Projected Annual Income: $10,000 - $20,000+]
Side Income: One might argue your not financially free if your still working. However I don't want to wait till we have enough assets not to work at all before I leave my career. I'm planning for part time income that my wife and I will make once we are financially free and I end my career job. It won't be a question of survival forcing us to work, rather than pursing what we are interested in or find rewarding driving our side income. Could be as simple as focusing on growing web income or enjoyable as working on a golf course.[Projected Annual Income: $5,000 - $10,000+]
Retirement Assets: Ideally we wouldn't touch any of these assets until we hit retirement age (65+). However we have a number of ways to extract cash flow from our retirement accounts before 65 if we need to. If we needed to draw on these accounts at this point I would assume we could only draw down less than 3% per year to sustain ourselves long term without consuming our retirement assets. We could potentially drawn down these assets via a couple techniques including withdrwaing Roth IRA contributions before 65, withdrawing post-tax 401k contributions, and substantially equal annual payments from our 401k account.[Projected Annual Income: $0-$10,000]

Based on this rough assessment I would project our annual income at this point in the range of $40,000 - $76,000 assuming we continue to grow our net worth inline with our $2 million net worth goal and continue to allocate a sizable portion of that growth to bonds, stocks, retirement accounts, and mortgage debt paydown on the rentals. There is a lot of assumptions built into this so its just a stake in the ground at this point. I'll need to fine tune this projection and get more specifics nailed down over time.

The good news is this rough assessment of our annual income levels once we are financial free is inline with our current cash flow requirements. We have a typical run rate of about $5,000/mo of expenses. Obviously these expenses will change over time and once we are financially free (reduction in job related expense, and possible increases in recreational expenses, etc). The biggest unknown right now to me is going to be health insurance/health care costs. I do not yet have a good sense of how we are going to handle these expenses and keep costs down to a reasonable level.

Related in Financial Goals:

Financial Freedom Plan - 2015 Update (Apr 30, 2015) I finally sat down to get an updated view of our progress towards our financial freedom plan that I laid out a few years go in terms of asset allocation. Some notes: Our asset allocation to fixed income (interest) will...

Financial Freedom Plan (Aug 25, 2013) Almost two years ago I laid out a plan for the net asset allocation I thought we needed for our financial freedom plan. It was a rough guide for asset allocation that I believe could generate enough income to cover...

2012 Passive Income: Dividends (Jan 27, 2013) Here is a summary of our 2012 dividend income. All this income comes from our taxable stock portfolio that is included in our monthly investment review. All retirement investment holdings are excluded from this dividend income summary. This passive income...

Comments (11)

Thanks for putting this together. It's great to see others achieving their goals!

Posted by James GIbson | August 31, 2011 10:34 AM

Great post and solid plan. Because inflation impacts the continued worth of every dollar saved, real estate rentals and dividend paying stocks that keep pace are great ways to go. Am doing what I can to become financially free also, but focusing more on monthly cash flow than total net worth (though I want both to be high!). Love the details and glad to know that others are out there moving toward the same goals.

Posted by Neiuw | August 31, 2011 10:51 AM

How does college savings / expenses figure into this? That will be a very large expense 8-10 years after your target "retirement"

Posted by HP | August 31, 2011 12:57 PM

My dad is a federal employee, and with pension/SS and income from ~$500k in bonds, his income is about $6000/month.

If you put 2M in bonds (not suggesting this) at ~6% your annual income would be $120k - [too much in taxes]. But there are a quite a few bonds with super tax advantages also. Also insured bonds. I only know this from going through my dad's portfolio with his financial advisor, but there are certainly advantages for retirement, mainly that you don't have to worry much and you have a steady income stream at fairly low risk. Just FWIW

Posted by Anne | August 31, 2011 2:12 PM

HP,
We have multiple 529 plans setup for our child now and are contributing to them monthly - these contributions have been included in our cash flow reports I've considered that part of our $5k/mo in expenses. If the college expenses go beyond the value of 529 plans then your right we'll need to refigure - that should become clearer as our daughter gets closer to college age and I'll suspect we will "course correct" our 529 contributions rate somehow then.

Anne,
Agree I think bonds will be a much bigger asset for us as we get closer to this stage than they are now. That said, bonds are the only asset listed above that aren't inflation indexed, so that interest will be the same now and 30yrs in the future unless we invest more which is why Im looking for a more diversified mix of income streams.

Posted by 2million | August 31, 2011 2:52 PM

Interesting topic. I've been thinking about this one quite a bit lately as well.

The one thing in your favor might be the SEPP rates migrating upwards. With interest rates at a near record low, it is safe to assume that in 10 years they will be higher. The fed mandated maximum rate should be well above 3% by then and historically has been near 4%. Your portfolio is far more diversified than mine but like you I am banking on that rate being higher. I've even modeled the effect of taking an extra $10k/yr from the 401k and just paying the tax penalties. It's not that big of a difference and it may add years to your retirement.

Posted by Chris | September 1, 2011 1:15 PM

Money can be extracted from stock ownership through dividends and/or realized gains, not sure why you're focusing on dividends only

Posted by Koala | September 2, 2011 3:43 PM

It is inspiring to see this overview. Thanks for publishing it. Do you keep track what your return on investment is for each of the different type of assets? I mean, would it make sense to aim to get more from dividends and less from rentals, or the opposite, for example?

Posted by Van Beek - Trend Investing | September 5, 2011 1:20 AM

I have thought about investing in rental properties but I have family members who rent homes and they charge less for the rent than the mortgage payments on the houses. How is the rental income currently working for you?

Posted by Katie | September 6, 2011 8:29 PM

Hey there, I greatly enjoy your blog! Is there any way you could do a writeup with your overall impression of your rental properties? I know they are vital to your long term goal of financial freedom. Just curious if you have had any tenant issues, huge unexpected costs, etc.

Posted by SoonerCPA | September 11, 2011 2:45 PM

I would be very much interest to learn how much did you invest in the properties to get $30,000 a year before the taxes.

I have recently invested myself about $240,000 to get just $4,000 after all the taxes, maintenance fee, etc.. So this s about 1,5% year. Albeit it is inflation protected income, more or less.

Posted by Financial Independence | January 17, 2012 7:13 AM