Reaching Financial Freedom: A Path Forward
As a 30-year-old with a substantial nest egg, you’re wondering if you can afford to live a little more in the moment while still securing your financial future. With $950,000 in Roth IRAs, $900,000 in mutual funds and five-year CDs, and a debt-free home worth $600,000, you’re off to a great start. Your goal is to stop working when your youngest child graduates high school, about 18 to 20 years from now.
Projecting Your Savings Growth
To determine if you can afford to live more comfortably now, let’s project your savings growth. Assuming an investment return of 5%, 7%, or 9% per year, your current $1.85 million could grow to:
- $4,908,601 at 5% per year
- $7,158,916 at 7% per year
- $10,368,160 at 9% per year
Accounting for Inflation
To get a more accurate picture, let’s adjust these projections for inflation. Assuming a 3% inflation rate, your “real” balances become:
- $2,749,003 at 5% (2% real)
- $4,053,578 at 7% (4% real)
- $5,933,201 at 9% (6% real)
Estimating Retirement Expenses
Next, you’ll need to estimate your retirement expenses. While some costs, like healthcare, may increase, others, like supporting your children, will decrease. Consider how you’ll withdraw your money over time, using strategies like the 4% rule as a starting point.
Portfolio Income Projections
Using the 4% rule, your projected portfolio income could be:
- $109,960 at 5% annual rate of return (2% real)
- $164,143 at 7% annual rate of return (4% real)
- $237,328 at 9% annual rate of return (6% real)
Tax-Efficient Withdrawals
Keep in mind that your retirement withdrawals will likely be more tax-efficient than your current income, thanks to tax-free Roth principal withdrawals and favorable tax treatment of long-term capital gains.
Finding a Balance
You don’t have to choose between saving aggressively and living in the moment. Consider finding a middle ground, where you save a little less and spend a little more. For example, if you currently save $24,000 a year, you could aim to save $12,000 and spend the remaining $12,000.
Additional Considerations
Remember to factor in Social Security benefits and your wife’s potential earnings if she returns to work. Also, plan for required minimum distributions (RMDs) from pre-tax retirement accounts and maintain an emergency fund to cover 3-6 months of living expenses.
By carefully considering these factors, you can create a balanced approach to saving and spending that sets you up for a secure financial future.
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