Originally posted on http://www.itsakatelife.com on October 14, 2015
Happy Birthday to me! I’m another year older and that means it’s time to reflect.
This year marks my 39th birthday. Growing up, I always thought people in their 30s were so old….hard to believe that I’m now almost 40. I certainly don’t feel this “old” and you’re only as old as you feel, right?
I’m so fortunate to have wonderful friends and family, a great job, and a house that I own outright. With this amazing support system, I’m able to focus on my financial goals without being burdened. Not many people can say that, so I know just how privileged I am.
I’m still focused on working towards the option of retirement when I’m 50. One of the tools that I’m using to track my progress is a spreadsheet that I found on J. Money’s website, which I tweaked slightly so I could see how the distributions would look given various scenarios. Here is the template:
The first tab lists your investments and how much money is needed each month, which calculates your annual income required to maintain your lifestyle. By entering how much you’re contributing to each account annually, as well as the expected rate of return, the spreadsheet calculates the ending balance each year. To reach financial independence, you need to have at least 25 times your annual expenses.
If I do retire at 50, I’ll need to make sure I have money outside of my 401(k) and rollover IRA, since any distributions before 59 ½ will incur a penalty. Because of this, I’ve been maxing out my Roth, which allows me to take out any contributions without penalty at any time. I also have a brokerage account, since the annual contribution limit for a Roth is only $5,500. Between my brokerage account and Roth contributions, I’ll need enough to last approximately 10 years.
I added a couple tabs to the file, which act as simulations. It assumes that I would first withdraw funds from my brokerage account, then my Roth, then my 401(k) and IRA (deferred accounts). You’ll also notice a column for a Roth conversion. By slowly converting funds from my tax deferred accounts to my Roth, I can then use the money at any time since it’s considered a contribution and not earnings. Since the money converted is subject to regular income tax, the best way to go about this is to only convert up to the amount of the standard deduction and personal exemption. This effectively nets to zero so no tax is due on those funds. For more about how a Roth conversion works, check out the Root of Good website. You’ll notice that I didn’t include Social Security or the Required Mandatory Distribution (RMD) that starts when you’re 70 1/2. At some point I may try to add these into the file.
This second tab allows me to play with the numbers a little bit, to see what various scenarios look like. It’s possible that I’ll reach financial independence at 47, but would I have enough in my Roth and brokerage accounts to last until I can take money out of my tax deferred accounts? Most likely no, and that pushes early retirement back to 50.
Since the file is set up by age, my birthday is a great time to input updated numbers and see if I’m on track in meeting my goals. I’ll admit that the template is flawed, mainly due to the fact that it assumes a constant positive rate of return on my investments year after year. Since we don’t know what will happen in the stock market, the best option is to be conservative when populating the rate.
Input your numbers and see how the file looks. Are you where you want to be to reach your financial goals?
It's a Kate Life 
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