The Epiphany was partly that I was looking at the question from the wrong perspective. It's not just how much you need to save, it's also how much you need to spend. What are your needs? Reflecting on my earlier life I knew my needs weren't many.
Through the help of the Early Retirement Extreme blog I was able to get a better perspective on some of the financial issues I was considering. I read through the blog and comments, applying what I could to my situation. As you will recall, I had been putting the majority of my investments in retirement accounts, which normally can't be withdrawn without penalty or taxes. So I needed to figure out how to get at that money.
In some ways I wish I had discovered this information earlier. I could have made a better go at it and avoided some unprofitable actions. In other ways I think it is better that I didn't know. It might have made it more difficult to work and I might have left without having as much savings. I probably left too early as it is.
Bonus Point: Maximize Savings Through Reduced Spending
The premise of maximizing savings is that it is much easier to decrease spending than to increase income. This was certainly true for me. The more you save means:
- Obviously, you will have more money to live on.
- Because you will need less to live on, your savings will go farther.
- You will get to financial independence quicker.
Something that I was trying to figure out as I was planning my long term financial security was how much money I needed. The problem is that almost all financial advice available is so random as to be useless. The advice usually says you need some percentage of your income (ex. 80% of your salary) in retirement. The ERE blog introduces several equations that are useful in determining The Number. However, I think the most important point is the change of perspective to what you need (as opposed to want). The less you need, the lower The Number. Once you figure out what you really need then you will have the basis for The Number.
- Figure out how little you need to live on. Really challenge your assumptions. Even if you don't change anything based on the discovery it will give you better perspective on how you live.
- Historical research has shown that you can live reasonably safely off your investments forever by withdrawing only 3 or 4% of your assets.
- That means you should have savings worth 25 or 33 times your annual expenses in order to stop working.
The other revolutionary idea that came to me was that the money I was hiding away in my tax sheltered retirement accounts could potentially be withdrawn now without penalty or taxes. Yay! I did extensive research and it should work. At least until the tax laws are changed.
- Investment profits in retirement accounts aren't taxed until you take them out as ordinary income.
- Just like with earned income, the amount below the combined federal personal exemption and standard deduction isn't taxed at the federal level (you would still need to pay sales tax if you bought things and state tax depending on your state).
- If you can plan ahead or wait five years before using your money, you can get it without penalty also. You would need to convert a portion of your Traditional IRA to a Roth IRA each year. Then you can withdraw the amount you need to live on from the Roth IRA. (Read the tax laws, it's complicated.)
These two discoveries together opened a new avenue for me.
