Today’s question comes from Ben. He asks:
I stumbled upon your site from Yahoo Finance. Very inspiring! I like your investment style, because it’s so much more relevant to where I am in my life. Most of the stuff I find is focused on folks about to go into retirement.
Am I on the path for financial freedom? I think so, but I always like good advice. I’m working in a career that I love, my wife not so much, but she makes good money. Ideally I would like to create financial freedom for her so she can quit whenever she would like, while maintaining our current lifestyle.
Our Financial Scenario: We live in Northern CA, have two kids, a 2.5 yr old, and 6 months. My wife and I are 30, we have a house with a 15 year loan that will be paid off by the time I’m 43, and a car payment that will be paid off when I’m 34. I’m not a fan of racking up our credit cards, so we pay them off every month and collect the points. The savings account has about 6 months of reserve in case of emergency.
We do like to spend, but I have a pension plan at my job, and so does my wife with a 403B where she contributes about 15% of her income. I do not have a 403B or 401K, but I have started setting aside a portion of my paycheck around $800 per month into an investment account at TD Ameritrade.
Here’s the deal, I haven’t started investing it yet. I haven’t felt completely comfortable finding a spot to put the money. I like the idea of the low cost index funds at Vanguard. What would you recommend? Should I reach out to someone at Vanguard to see what they would recommend?
There is another option — my wife and I have an Edward Jones account where we receive an inheritance check every year from her grandmother (SUPER GRATEFUL FOR THIS) that we invest annually in American Funds — Class A shares. The mutual fund charges a 3.5% fee, but has returned about 13% over its lifetime, with a dividend of 3.5%, not too shabby. Should I further invest my paycheck into the Edward Jones account? Or diversify and go with a Vanguard low index fund?
Edward Jones Account: ~$112,000 invested w/an average return of 13% & 3.5% dividend, $28,000 in cash. With a $28,000 per year deposit.
Ameritrade Account: ~$10,000 not invested, with $800/month deposit.
Ultimate Goal: Grow the investment accounts to 1 million by age 40, then to 2-2.5 million by age 50 with a 3.5-4% dividend.
Goal #1 Give my wife the freedom to quit when she wants at ~age 40
Goal #2 Give me the option to retire before I would withdraw from retirement accounts ~age 45-50
Maybe I’m asking too many specific questions? Or possibly I need help seeing the math to get our family to those goals. Either way I appreciate you writing your experiences on your site. It’s really helpful!
What’s most important for you is staying disciplined and persistent. And the key to staying disciplined and persistent is having a “story” you tell yourself.
Think about it like this. Say you’re overweight and you want to lose 20 pounds. That’s great you want to lose 20 pounds, but what’s the story behind losing the weight? You have to dig deep.
Is it because you want to take the stairs without losing your breath? To be there for your kids as they grow up? To love what you see in the mirror?
It doesn’t matter your story, the only thing that matters is that your story matters to you. And the more powerful the story the easier it will be to stay disciplined and persistent.
That’s how I was able to retire in my 30s. I didn’t want to look back on my life and realize I wasted it doing things I didn’t want to do. That was what I told myself every day that kept me disciplined and persistent.
You have a good story, so now you need your number.
And the math for this is easy. You take how much you spend and multiply it by 25. For example, if you spend $40,000 you need $1 million.
This is the “4% rule”. It means you can safely withdraw 4% from your investment accounts each year, adjust your withdrawal for inflation, and never run out of money.
So, if we plug your numbers into an investing calculator we discover you need to invest $4,000 a month to get to $1 million in 10 years. That’s based on a 7% return. Invest $2,700 a month and you get to $2 million in 20 years.
To say that another way, you need to be investing somewhere between $32,400 and $48,000 a year.
With your $28,000 a year inheritance you only need to make up the difference, and the $800 a month you’re setting aside puts you in that ballpark.
As far as investments, most people can do just fine investing monthly into low-cost broad-based index funds. Both Fidelity and Vanguard work well for this.
Of course, when you’re investing in the market you don’t get a neat and tidy 7% return every year. The markets go up and down, making it impossible for anyone to tell you exactly when you’re going to reach your goal.
But if you have your story so that you stay disciplined and persistent you’ll get there. It’s just a matter of time. And that goes for pretty much any goal in life.
If you’d like to get my help personally you can book a 1:1 coaching session.